Debt is a reality for most Americans. Even if your assets exceed your debt, it is likely that you owe some money on your house, car, credit card or as the result of a personal loan. In fact, nearly three-quarters of Americans have some debt when they pass away, with the average coming to more than $60,000 at the time of death. When formulating your estate plan, it is important to understand how this debt will be handled.
First of all, it is important to realize that most debt does not get transferred to your heirs automatically. Unless your children have voluntarily and legally agreed to accept a debt, your creditors will not be able to make them personally liable for paying it. In other words, if you die with debt, but no assets, your creditors are out of luck.
Changing your legacy
If, however, you do have assets, the picture is rather different. Most forms of debt give creditors access to your assets, including your home, as a way to settle the debt when you die. If you have enough cash to cover the debt, this will be of little consequence. If your house was always going to be sold, again, this may not be a problem. If your house will still be occupied after your death, whether by adult children or your spouse or partner, this can be a serious issue. If the occupants cannot pay your debt out of pocket, they may be forced to sell the home to cover the cost. If you have shared bank accounts, creditors may be able to empty them, leaving your family in the lurch.
The key to avoiding this trouble is to plan ahead. Debt is fine if it is properly managed and accounted for. If you do not control your debt or consider it in your estate plan, it is likely to make life difficult for your loved ones.
Source: Fox Business, “Americans Are Dying With an Average of $62K of Debt,” by Christine DiGangi, 21 March 2017