Not everyone stops to think about their own death and all it entails. However, more should. Each year, most deceased individuals leave behind debts that often overwhelm their loved ones, sometimes to the point of bankruptcy.
The prevailing myth is that when you die all of your debt just evaporates. This is not the case. While life insurance policies often take care of the debts as well as the funeral expenses, sometimes it is not enough coverage.
However, not everyone has life insurance policies. In these cases, the debts are subtracted from your estate’s assets (your belongings). This can include your home, car, property and anything of any worth. If you plan to pass along certain items to family members, then you should take precautions to make sure your debts are covered. The following gives you an idea of what creditors are forbidden by law to take and what they are legally entitled to. Use this information to formulate your own plan so your family does not grieve more than your loss.
Keep in mind that there are certain states considered community property states, which means that if you are married all property and debt is owned by both, whether both have their name on the policies or not. Each state has its own rules applying to estates left insolvent. Additionally, most debts are paid out through the estate’s assets, and if there is not enough to cover the debts, then they are written off and not passed along. However, there are exceptions.
Your mortgage could pass along if someone inherits the house or if there is a surviving spouse. However, it is against federal law for a mortgage company to force a spouse to pay off the total amount after the death of their loved one. If there is not anyone listed as a joint homeowner, then whoever is taking care of the legal aspects for your family can pay the mortgage out of estate finances if there are any.
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The life insurance policy, if there is one, can lower the mortgage payments for a short while. However, keep in mind that if your home is not paid off by the time you retire, then you must leave your spouse a way to make the mortgage payments, otherwise, he or she may be forced to sell the home. Unfortunately, federal law does not prohibit lenders who have made a home equity loan to you or your spouse from asking for the full amount upon a spouse’s death.
Any credit card debt passes along to your surviving heirs. However, it is common practice to use money from the estate and insurance policies to pay credit card debt. After this, the debt passes along to the surviving spouse first, then anyone who is a joint account holder and then heirs. Those listed as authorized users are not responsible for the debt.
Any car payments owed by the deceased pass along to whoever assumes ownership of the car. The estate pays off the car if there is money to do so. However, if no one steps forward to claim the car and there is no surviving spouse, then repossession is likely.
Student loans, if they are private, can pass along to your heirs or surviving spouse. However, federal student loans discharge upon your death. Some private student loan lenders do also waive repayment upon death, although not required. Make sure your surviving family members know which type of loan you have and whether your loan servicer discharges the loan after your death.
If you were receiving Medicaid to pay for long-term care in a nursing home, then the government can come after your surviving spouse’s assets to repay the amount utilized. This is only if the surviving spouse has “significant assets”. Often, the government waits until the remaining spouse has passed away and then passes along this debt to the surviving children.
Each state has its own laws concerning this, but if you die and leave behind significant medical bills, then your estate must cover those bills first before your heirs are given any inheritance. Additionally, if the debts exceed the money available from the estate, then at least 30 states require the heirs to pay a certain percentage of the debt.
Creditors are not able, by law, to go after any retirement accounts left by the deceased. The money left in the account goes to the named beneficiaries and do not count as part of the estate. The same holds true for life insurance policies of any type (term or whole life).
Life insurance payouts are not taxable and are a good way to make sure your family members have enough money to cover any debts you may leave behind. However, the exception is if your beneficiaries pre-decease you, then the money becomes part of the estate and creditors can petition for the money.
However, there are ways to protect your family from inheriting your debts. There are some financial planning tips that you can implement while you are able that can be beneficial later. Below are some tips on how to avoid leaving debts after your death.
One of the best strategies is to make sure you have enough life insurance. Make sure you consider how much debt you have, then speak with an insurance agent about securing enough insurance to more than cover your current debts and any debts that may happen later on down the road. If you cannot afford life insurance, then consider getting a type of life insurance called loan protection insurance. This is a type of insurance that specifically earmarks the money for paying off certain types of debt such as a car or a home.
Do not blindside them with your debt, even if it is embarrassing to you. Share your complete financial landscape with them, especially as you go into retirement. Not only is it critical your loved ones know where you stand financially, but they should also know where you keep important paperwork, passwords and documentation for various accounts.
Many put off naming a beneficiary for their retirement and insurance accounts thinking it will upset someone in the family. However, not naming a beneficiary means when you die the beneficiary is automatically considered to be your estate. This means it can go to probate court, become public and your estate’s assets are fair game for anyone you still owe a debt to.
This last strategy is a no-brainer. If you want to remove the burden of your debts from your heirs, then simply resolve not to have that much if any. Begin a plan to pay down the debt you currently have and make sure you have enough in savings to cover anything you may not get paid off in time. The added bonus to this is that if you pass away with no debt and a large insurance policy, then your heirs will actually have something to inherit.
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