Generational Debt Transfer: Can You Inherit Debt?
What comes to mind when you think of the word “inheritance”? Most people may imagine receiving a financial windfall or property that has been in their family for generations.
But what happens if an inheritance includes debt? Can you inherit certain types of debt from the deceased; and, if you do, what should you do next?
Here’s what beneficiaries need to know about the possibility of inheriting debt.
Who Pays for Debt?
Jason Gray, attorney and owner of Pinnacle Estate Planning, said the debts of someone who dies generally should be paid by the person’s estate. If the estate doesn’t have any available funds, this does not mean family members are necessarily obligated to pay those debts.
“The primary exception would be if it was a joint debt the decedent and an heir agreed to pay back,” Gray said. “If a beneficiary is inheriting an asset encumbered by a debt and the beneficiary would like to keep the asset — as opposed to having it sold — the debt would likely need to be refinanced in the beneficiary’s name or paid off.”
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How Estates Pay Debts
How does an estate pay for the deceased’s debts? Matt Sampson, CFP and senior investment advisor at Arnerich Massena, said the payments of claims and debts are overseen by the executor of the estate.
The executor is the person appointed in your will to handle your affairs. The executor goes through the probate process and uses the estate’s assets to pay any outstanding bills. This can include items such as jewelry, artwork and fine china.
If a person dies without any assets, individual debts are generally not paid.
Is Any Debt the Exception to the Rule?
While it’s the job of the estate to pay for debt after someone’s passing, there are a few debt exceptions, said Mitch Mitchell, associate counsel of estate planning at Trust & Will.
Credit Card or Loan Co-Signer
If you are the co-signer on an account held with the decedent, Mitchell said, you would be responsible for paying off the debt on that account.
Jointly Owned Property
Do you have any jointly owned property or credit card accounts with a decedent? You’re required to pay the balance on this loan or account.
Community Property Taxes
Those who live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin live in a community property state. Mitchell said Alaska or Oklahoma also might qualify when special agreements are made. Spouses are required to pay off community property — anything owned jointly by the married couple.
State Law Requirements
“Certain states may require family members of the decedent to pay debts like healthcare expenses or to resolve the estate,” Mitchell said.
What Should You Do If You Inherit Debt?
The next best step to take if you inherit the debt of the decedent, Sampson said, is to check in with local legal counsel, as these rules vary from state to state. Heirs and beneficiaries who want to better understand their rights to an estate are advised by Gray to speak with an estate planning attorney.
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