Do I have to Pay the Estate’s Debt?

People often have debts when they pass away such as credit cards and medical bills, but family shouldn’t pay those debts themselves outside of the estate.

When a family is grieving after the death of a loved one, the last thing any of them wants to deal with is unpaid debts and debt collectors.  But, sooner or later creditors must be dealt with, and one of the first questions clients ask is whether they have to pay the estate’s debt.

nj.com’s recent article asks “Is mom liable for my dead father’s credit card debt?” The answer: generally, any unpaid debts are paid from the deceased person’s estate, which means from the estate’s assets only.  In fact, fair collection laws require debt collectors to let you know that you aren’t responsible for that debt.

In many states, family members, including the surviving spouse, typically aren’t required to pay the debts from their own assets, unless they co-signed on the account or loan.  In other words, if they would have been liable for the debt themselves, they are still responsible.  If the debt belongs to the decedent, such as a creditor card they used, then only the estate is responsible to pay the debt.  There are a few potential exceptions, such as the IRS collecting estate income from anyone who benefits from the estate, but not many.

All the stuff that a person owns at the time of death, including everything from money in the bank to their possessions to debts they owe, is called an estate. When the deceased person has debt, the executor of the estate will go through the probate process.  There is a lot more to this process, see here for a fuller description.  https://galligan-law.com/probate-dissolving-the-mystery/

During the probate process, all the deceased’s debts are paid off from the estate’s assets. Some assets—like retirement accounts, IRAs and life insurance proceeds—may pass outside of probate and aren’t included in the probate process. As a result, these assets may not be available to pay creditors. Other estate assets can be sold to pay off outstanding debts.

Now, this portion is very state specific sometimes with very specific requirements, so you should do it at the advice of an attorney.  A relative or the estate executor will typically notify any creditors, like credit card companies, when that person passes away. The creditor will then contact the executor about any balances due. Note: the creditor can’t add any additional fees, while the estate is being settled.  At this point, assuming there is enough money, the executor will pay the estate’s debt from estate assets.

If there’s not enough money in the estate to pay the estate’s debts, then the executor has a very important task.  Every state has an order of priority to satisfy debts such as administrative debts (attorney’s fees, accountant’s fees, court costs), priority debts and then general creditors.  Different states also have different rules about whether you have to satisfy one creditor to the exclusion of the other.  The executor, with the assistance of an attorney, should pay the estate’s debt according to that order of priority.  The executor and the heirs aren’t responsible for these debts and shouldn’t pay them. Unlike some debts, like a mortgage or a car loan, most debts aren’t secured. Therefore, the credit card company may need to write off that debt as a loss.  As an aside, there might be an opportunity to settle or negotiate debts on this basis, though there are tax implications to the estate for writing off the debt.

If your loved one passes away with debt, don’t pay it.  Talk with an attorney about opening an estate for that deceased loved one and discuss how or whether to pay the estate’s debts.

Reference: nj.com (Jan. 15, 2020) “Is mom liable for my dead father’s credit card debt?”

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Five Estate Planning Mistakes to Avoid

Five common estate planning mistakes are easy to avoid with the right information and support, as well as a little creativity.

While it’s true that no estate is completely bulletproof, there are mistakes that people make that are big enough to walk through, while others are more like a slow drip, making things harder in a slow but steady process. There are common estate planning mistakes that can be easily avoided, reports Comstock Magazine in the article “Five Mistakes to Avoid When Planning Your Estate.”

  1. Misunderstanding Estate Law. Some people are so thrown by the idea of an estate plan, that they can’t get past the word “estate.” You don’t need a mansion to have an estate. An “estate” does not mean extreme wealth.  The term is actually used to refer to any and all property that a person owns, regardless of debts. Even people with modest estates need a plan to help beneficiaries avoid unnecessary costs and stress, and typically estate planning is even more critical for such individuals. Talk with an estate planning attorney to learn what your needs are, from a will to trusts to incapacity planning. Make sure that this is the attorney’s key practice area.  A real estate attorney, family law attorney or the friend or family member who is a lawyer won’t have the same knowledge and experience.
  2. Getting Bad or Incomplete Advice. It takes a team to create a strong estate plan. That means an estate planning attorney, a financial advisor and an accountant. Look for a firm that will tailor an estate plan specifically to your goals. The is no one size fits all approach, and many tools are needed for a complete estate plan. Buying an insurance policy or an annuity is not an estate plan, but may helps achieve those goals.
  3. Naming Yourself as a Sole Trustee without a Back-up. Naming yourself as a sole trustee puts you and your estate in a precarious position. What if you develop Alzheimer’s or are injured in an accident? A trusted individual, a family member, a longstanding friend or even a professional trustee, needs to be named to protect your interests, if you should become incapacitated.  This is also why you should have Durable Financial Powers of Attorney and Healthcare Powers of Attorney, among other documents, to ensure someone you trust may act on your behalf if you cannot.
  4. Losing Track of Assets. Without a complete list of all assets, it’s nearly impossible for someone to know what you own and who your heirs may be. Some assets, including retirement funds, life insurance policies, or investment accounts, have named beneficiaries. Those people will inherit these assets, regardless of what is in your estate plan. If your heirs can’t find the assets, they may be lost or there may be a long delay in obtaining them. If you don’t update your beneficiaries, they may go to unintended heirs—like children of prior relationships, someone other than your spouse and so on.
  5. Deciding on Options Without Being Fully Informed. When it comes to estate planning, the natural tendency is to go with what we think is the right thing. For example, people often say “I just need a will,” but learn later that the will requires probate, or doesn’t address the disability of a child.  However, unless you are an estate planning attorney, chances are you don’t know what the right thing is. For tax reasons, for instance, it may make sense to transfer assets, while you are still living. However, that might also be a terrible idea, if you choose the wrong person to hold your assets or don’t put them in the right kind of trust.  It may also make sense to leave income taxable assets to charities, and non-income taxable assets such as life insurance, to individuals.  You don’t know what you don’t know, so it is important to work with an estate planning attorney to craft the plan that’s right for you.   See here for some estate planning frequently asked questions to get you started.  https://galligan-law.com/estate-planning-questions/

Estate planning is still a highly personal process that depends upon every person’s unique experience. Your family situation is different than anyone else’s. An experienced estate planning attorney will be able to create a plan and help you to avoid the big, most commonly made mistakes.  Please contact our office to discuss how your plan can avoid these estate planning mistakes.

Reference: Comstock Magazine (Dec. 2019) “Five Mistakes to Avoid When Planning Your Estate”

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The Biggest Estate Planning Mistakes to Avoid

Some of the biggest estate planning mistakes are easy to avoid, including having an up-to-date will, checking beneficiary designations and planning younger.

Nobody likes to plan for events like aging, incapacity, or death. However, failing to do so can cause families burdens and grief, thousands of dollars and hundreds of hours.

Fox Business’ recent article, “Here are the top estate planning mistakes to avoid,” says that planning for life’s unexpected events is critical. However, it can often be a hard process to navigate. Let’s look at the top estate planning mistakes to avoid, according to industry experts:

  1. Failing to sign a will (or one that can be located). The biggest mistake is simply not having a will. I’ve written on this often (see here for example https://galligan-law.com/everyone-needs-an-estate-plan/), but unfortunately clients consistently say they didn’t think they needed a will. Estate planning is critically important to protect you, your family and your hard-earned assets—during your lifetime, in the event of your incapacity, and upon your death.  In addition to having a will, it needs to be findable. The Wall Street Journal says that the biggest estate planning error is simply losing a will. Make sure your family has access to your estate planning documents.
  2. Failing to name and update beneficiaries. An asset with a beneficiary designation supersedes any terms in a will. Review your 401(k), IRA, life insurance, and any other accounts with beneficiaries after any significant life event. If you don’t have the proper beneficiary designations, income tax on retirement accounts may have to be paid sooner. This may lead to increased income tax liability, and the designation of a beneficiary on a life insurance policy can affect whether the proceeds are subject to creditors’ claims.  In many cases where clients tried to avoid probate, one broken beneficiary designation becomes the sole reason to probate the will.

There’s another mistake that impacts people with minor children, which is naming a guardian for minor children and then naming that person as beneficiary of their life insurance, instead of leaving it to a trust for the child. A minor child can’t receive that money. It also exposes the money to the beneficiary’s creditors and spouse.

  1. Failing to consider powers of attorney for adult children. When your children reach age 18, they’re adults in the eyes of the law. If something unfortunate happens to them, you may be left without any say in their treatment. In the event that an 18-year-old becomes ill or has an accident, a hospital won’t consult with their parents if a power of attorney for health care isn’t in place. Unless a power of attorney for property is signed, a parent may not be able to take care of bills, make investment decisions and pay taxes without the child’s signature. This could create an issue when your child is in college—especially if he or she is attending school abroad. It is very important that when your child turns 18 that you have powers of attorney put into place.

If you have any of these estate planning mistakes in your plan, please contact us for a consultation to fix these mistakes for you and your family.

Reference: Fox Business (October 15, 2019) “Here are the top estate planning mistakes to avoid”

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