When they do estate planning, many Americans focus on the positive side of the estate equation: the assets you leave behind for heirs. But what about your debts? How will debts affect your heirs? Should you make specific arrangements for debts? And how can you minimize the loss of assets to pay your debts? Here's what you need to know.
Does Your Estate Pay Debts?
When a person passes away, their valid debts are generally the responsibility of their estate. Creditors submit claims against the estate during the allowed time, and the executor must determine what should and can be paid.
Do Heirs Have to Pay Your Debts?
The good news is that unless they are contractually obligated to pay a debt (such as joint borrowers or co-signers), your heirs generally do not have to satisfy your debts. However, the debts you leave behind to the estate reduce the amount passed on to heirs since debts are settled before general distributions are finalized.
Should You Address Debts in Your Will?
If you expect to leave any significant debts behind, you may opt to address how they should be paid upon your passing. For instance, you could list the specific bank accounts from which you wish payment for certain debts to be made first.
However, you generally don't need to list all your debts in the will. Debts come and go, so trying to keep the documents current could be difficult. And if debts are fairly minor and can be easily paid with liquid assets, the executor doesn't generally need more direction.
Can You Protect Assets From Debts?
Can you protect the assets in your estate from being liquidated? Yes, to some degree. You have a few options to accomplish this.
First, you may make specific bequests within your estate planning documents. If you state that your engagement ring is to be given to your granddaughter, that ring will generally not be sold to pay debts. A second method to protect assets is to use a trust. Many trusts are separate entities from the estate, so their assets are not liquidated to pay the estate's debts.
Finally, some people take out specific life insurance policies earmarked to provide the funds to pay off their debts without liquidating assets. The estate would be the beneficiary and the executor should be given instructions on what to do with the proceeds.
Where Can You Learn More?
Do you have more questions about how debts are managed in an estate? Want to take steps to protect certain items within your own? Start by meeting with an estate planning attorney in your state today.