Ideally, a person who lives a long life will get to a place where they are no longer burdened by debt such as mortgages, credit card debt, student loan debt, or other types of debt. But more and more Americans are followed by debt throughout their life, and there is of course always the possibility that you might have an unexpected demise at any age, which brings up the question of whether your named beneficiaries (or even intestate beneficiaries) such as your spouse and children will have to answer for your debts. Comprehensive answers to these questions often involve a mix of state and federal laws applying to trusts, mortgage law, laws affecting retirement funds, and so on, and so you will want to speak with an estate planning attorney for specific answers applying to your situation, but a few basic principles relating to these issues are below.
Mortgages and Other Secured Interests Will Survive Your Death
There is a basic distinction between secured and unsecured debt, which is that, with secured debt, the lender retains a security interest in certain property, oftentimes the property that was purchased with a loan. The terms of that security interest will be explained in the agreement you had with the lender, but by and large such security interests remain on the property no matter who holds it, regardless of a sale or transfer in ownership due to death.
Thus, if there is a mortgage on your house, and you transfer the house to your daughter, the mortgage will still have to be paid by someone or else the lender can foreclose. While your daughter might not be personally responsible to pay the loan, if she or someone else does not pay the mortgage, then the lender can foreclose. The same goes with vehicles for which payments are still owed; your beneficiary is not necessarily responsible to make payments but may have to do so to avoid repossession.
Some Unsecured Debts Will Survive Your Death
Again, the specific types of debts that might remain after you die are going to be a matter of specific state and federal laws affecting your situation, but know that there are indeed certain types of debt that will remain after you die. For example, federal student loans are discharged upon a lender’s death, but most private student loans and credit card debt are not.
So what happens to this debt and who pays it? If you are married and live in a community property state such as California, then your spouse may well be responsible for paying it. Furthermore, co-signers on loans may be responsible for the debt if it is not discharged.
But in many cases, it will be your estate that is responsible for paying the remaining debt. What this means is that, after you die, the representative in charge of administering your estate (e.g. the trustee) will have to pay your remaining debts before funds can be distributed to your beneficiaries, which will of course lessen the amount available to those beneficiaries, if not completely extinguish those amounts if your total debt is larger than your assets.
Estate Planning Options Are Available to Protect Your Beneficiaries
There are a number of estate planning strategies, however, that you can employ which will provide protection for your beneficiaries from having their inheritance eaten up by your creditors. Oftentimes, these strategies involve avoiding probate administration (e.g. life insurance) and/or making an inter vivos (within your lifetime) transfer of property to an entity on behalf of your beneficiaries, for example an irrevocable trust, even if those funds will not be made available to the beneficiaries until after you die. An experienced estate planning attorney can provide further details and guide you through the strategies that will be most helpful for you and your family.
Work with a Pasadena Estate Planning Attorney
Estate planning and probate attorney Christopher B. Johnson, located in Pasadena, California, has years of experience in all aspects of estate planning, and works with clients from all walks of life to create estate planning solutions that reflect their needs and those of their beneficiaries. To request an immediate consultation, contact him today at (877) 755-9178.