Last updated March 29, 2018.
When a family member dies, there are often many tasks that need to be performed to put all of the deceased’s affairs in order. There may be a will to file with a probate court; there may be property to dispose of, bank accounts and charitable donations to take care of; and finally, there may be debts left by the deceased.
The first priority is to take care of yourself and your family in a time of grief. Unfortunately, financial issues will eventually have to be dealt with. If the deceased was in debt, do the survivors have to pay?
Can you inherit debt? The Probate Process
While there may be some variations in different states, in Ohio and most states, the debts left behind by the deceased typically only have to be paid to the extent of the non-exempt assets of the estate. The estate of a person would include his or her house, bank accounts, cars, furniture, and anything tangible or on deposit with a financial institution.
When a person dies, the probate process governs how her estate passes to her heirs. If she owed debts, those debts will be paid before any inheritance is passed on. Debts that are a lien on the assets in the estate, such as a mortgage on a house or a car loan, will be paid first. If there wasn’t enough cash in the estate to cover the debts, the property of the deceased would be sold to pay those liens.
As part of the probate process, creditors will be notified of the death. After they receive that notice, creditors must file a claim against the estate in order to receive payment. Without a claim, they’re not entitled to anything.
Exempt Property of the Estate
Some property is protected from creditors regardless of the debts owed by the deceased. Life insurance and retirement accounts are typically the two most important exempt assets.
Quite often, the bulk of what one leaves behind is the proceeds of life insurance policies. The estate includes proceeds of life insurance policies that the deceased owned at the time of death.
Typically, when one buys life insurance, the person whose life is insured becomes the owner of the policy. However, this does not have to be the case. A wife can buy a policy insuring her husband’s life, and vice versa. In such a case, the owner of the policy is not the insured. If the wife is the owner of the policy and the husband dies, the proceeds of this policy are not part of the estate and would not have to be used to pay any debts.
Where the deceased was the owner of the policy and the policy was for the benefit of the spouse or children, or the proceeds were payable to a charitable institution, these proceeds also do not have to be used to pay the debts of the deceased.
For example, if a man were to die, leaving behind a house, his personal belongings, some money in the bank, and a life insurance policy payable to his wife or children, the proceeds of the sale of the property would be used to pay his debts, but the proceeds of the life insurance policy would not have to be used to pay his debts. If there were debts that remained unpaid after the proceeds of the sale of his property were used up, the wife or children would still not have to use any of the money from the life insurance to pay those debts.
Your retirement accounts are almost always protected from debt. They’re exempt when you file for bankruptcy and they’re exempt when you pass away. Your heirs will get the full benefit of your retirement account and creditors won’t be able to touch it.
Do you get your parents’ debt when they die?
In short, the answer is “no.” Your children won’t have to pay out of pocket for your debts. However, creditors will get to collect from your estate before your children get anything. Even if your assets are insufficient to cover your debts, no one else will have to pay the remainder.
While you’re not responsible for the debts of another person after they pass away, you are responsible if your name is on the account. If you cosigned a loan or credit card and the other party passed away, you’re on the hook for the debt.
Beware Debt Collectors and Inherited Debt
Finally, a note about bill collectors. They know the law, and know the survivors do not have to pay, but often will call the survivors and ask them to pay the decedent’s debts. They may ask you whether you want to voluntarily pay the debts, asking such questions as “Don’t you feel you have a moral obligation to pay?”
There is no legal obligation to pay except as set forth earlier in this article, and you should feel free to tell the collector a resounding “no” and tell them not to call again.
If you are being harassed by collectors or are a parent hoping to get out of debt as part of preparing for retirement, contact us today to see how we can help.