Does debt pass to the heirs of an estate?
Losing someone you love and then finding that you’ve inherited — not a bank account full of money — but a roster of debt collectors calling at all hours sounds like a nightmare. How likely is it to be a true nightmare? Not very likely.
The short answer here is no, debt does not pass to the heirs of the estate.
But to understand the bigger question (what does it mean for me if my loved one died with debt?), we’ll need to dive a bit deeper into how probate works.
Estates — not heirs — pay debts
The assets of an estate must be used to pay debts (including funeral expenses) and taxes before any money or property gets distributed to the heirs. In practice, this requirement means that once probate begins, an executor must notify creditors of the deceased’s passing, either individually or through a published announcement.
Creditors are provided a specific time period — usually between 60 and 90 days — to come forward and make their claim against the estate. The court determines the validity of all claims, and the estate’s assets are used to pay valid debts until either all debts are paid in full or the estate runs out of money.
The personal representative (called an “executive” if there is a will, “administrator” if there is no will) manages the process with creditors and can be held personally liable if they fail to pay a valid claim before distributing assets to heirs.
As you may have noticed, while an heir is not responsible for paying debts, the payment of debts can reduce or eliminate the amount of inheritance remaining for distribution to heirs.
What happens when an estate can’t pay its debts?
If there is not enough cash on hand to pay valid debts, the court may require the sale of property, such as real estate, vehicles, or jewelry, to cover the costs to creditors. Non-probate assets (keep reading to find out what these are) do not have to be sold during this process.
State law determines the priority of payments to creditors. If selling property assets still leaves the estate without enough money to pay all of its debts, any remaining creditors must take the loss.
What are non-probate assets?
Probate assets are assets (bank accounts, houses, etc) that must go through the probate process in order to be transferred to their new owners. Non-probate assets, on the other hand, are assets that do not have to go through the probate process to be transferred to their new owners.
Whether something is a probate asset or a non-probate asset does not depend on the type of asset — a house can be either a probate asset or a non-probate asset — but on how ownership of that asset is titled.
For instance, using a house as an example: A house that a husband and wife own in joint tenancy with rights of survivorship will transfer automatically to the surviving spouse when one of them dies. It does not have to go through probate. But if the house is owned solely by the husband or in joint tenancy but without rights of survivorship, it must go through probate.
Most assets have the capacity to become non-probate assets depending on how they are titled. One of the benefits, of course, to having assets that don’t have to go through probate is that they will go directly to the heirs and not to creditors.
If you’re looking for more detail on which assets have to go through probate, check out our article on probate assets and non-probate assets.
When an heir does have to pay
Unfortunately, there are a few specific situations when an heir may be responsible for the debts of the deceased.
- Spousal debt. In community property states, the surviving spouse may have to pay their spouse’s debts — even if they didn’t know the debts existed. Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Community property can be elected in Alabama.
- Joint accounts. If two parties (the deceased and the heir) owned an asset as a joint account, the heir is responsible for any remaining debt. A common example is a credit card held jointly by a married couple.
- Cosigners. An heir who cosigned on a loan taken out by the deceased may be on the hook for repayment of that loan. Not every loan will require this, but the terms of a loan should be read carefully before anyone co-signs.
Protecting yourself from creditors
Creditors are allowed to contact individuals to try to get in touch with an estate’s personal representative or to attempt to collect debts. However, they may not mislead someone by claiming that an individual is responsible for a debt when they’re not. Unfortunately, it happens. Heirs sometimes receive calls from creditors demanding payment on debts carried by the deceased.
If a creditor contacts you about payment on a deceased’s debts, do not automatically assume that you are liable. First, request information in writing. Do not give out any personal information, such as your social security number. And if you’re unsure whether you’re responsible for a debt, seek assistance.
And if you’re considering how to protect your own heirs, take these steps:
- Complete an estate plan, including handling any existing debts
- Modify asset titles so that they transfer automatically upon your death
- Make sure beneficiaries are up to date on life insurance or retirement policies
- Pay off credit card debt if you can
While heirs generally aren’t responsible for paying a deceased’s debts, they may be missing out on assets they could have received — had those assets not gone to creditors. Careful planning can ensure that beneficiaries — not creditors — get the inheritance the deceased intended.
If you still have questions, let us help. Call today.