Your estate is comprised of all that you own, minus outstanding debts. Any debts that you incurred during your lifetime become the responsibility of your estate or your family at your passing. Repayment of outstanding debts, and the distribution of your estate, are handled during the probate process.
The executor of your estate (a person appointed by you in a valid will) or the administrator of your estate (a person appointed by the court if you do not have a will) is responsible for handling its distribution. Liquid assets are usually deposited into a separate bank account for the estate. Your executor should not write checks from your bank account or sell real property to fund the payment of debts, without the approval of the probate court.
Executors Will Notify Creditors and Credit Bureaus
The executor of the estate will be tasked with notifying any creditors as soon as possible after your death, particularly those creditors who hold a security interest in your property, such as motor vehicle loans or mortgages on real estate and will likely need to show those creditors a copy of your death certificate. Usually, credit reporting agencies like Experian, Equifax, and TransUnion will also be notified of your passing. Notifying these agencies can help prevent identity theft and fraud. Additionally, the probate process includes a published notice to creditors generally to cover any creditors that might have been unknown to your family.
When working with the credit agencies, the executor can also request a copy of your credit report. Having this accounting is the quickest, most effective way to know what you may owe and to whom.
Circumstances in Which Family Members Assume Debt
If a family member, specifically a spouse or a parent, has co-signed for a loan with you or if they are joint account holders then they could be liable after your death for the debt you incurred In community property states like Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, spouses are not responsible for debts that predate the marriage, but obligations incurred during the marriage, even if not in the spouse’s name, will impact the extent of the estate delivered to the spouse. Any debts that are secured by property of the estate must be paid, or the property sold to satisfy the debt as your death does not wipe out the obligation secured by property.
If your family member wants to keep the house or continue to drive the car which that relative inherits from you when it is encumbered with a debt incurred by you during your lifetime, arrangements will need to be made to make the payments on the obligation, and preferably refinanced. Your executor or administrator has the legal authority, with some limitations, to convey title or deed to evidence that beneficiary’s ownership so that the car or the real estate can be refinanced. In some instances, the estate may pay off the debt on property, but such financial obligation would be governed by the terms of the will or by order of the court and the extent of the other financial assets of the estate.
Under Federal Trade Commission rules, debt collectors can contact your family after death. However, it is unlawful for collectors to mislead family members into thinking the family may be responsible for paying the debts that will be paid by your estate.
What is Protected from Creditors?
Retirement accounts and life insurance benefits are usually protected from creditors and will pass to the designated beneficiaries listed in each of those plans. These monies are not part of the probate process through which creditors can seek compensation from your estate.
Life insurance is a great way to ensure that your family will receive some monetary support after your death since these payments are protected from creditors. Life insurance can be designated for family members who will likely be tasked with assuming your debt or to those family members to whom you would like to leave a monetary gift. Importantly, but separately, life insurance payments are usually protected from taxes, as well.
How can an Attorney Help Protect My Estate from Creditors?
The qualified estate planning attorneys at Bennett Weston LaJone & Turner, P.C. can help you limit the effect of creditors diminishing your estate, and can help your executor(s) with estate probate matters. Working with one of our asset protection attorneys to protect your wealth from creditor claims can be a real benefit to your entire family.