It is said that the only things that are certain in life are death and taxes.
But debt should be added to that list, especially considering how many Americans spend their entire lives mired in high amounts of debt due to mortgages, car payments, credit cards and student loans.
The average American owes $90,500. If you are between 40 and 55, you probably owe over $136,000 in personal debt.
And if you are between 56 and 74, you likely have more than $97,000 in personal debt.
Too many Americans don’t consider the consequences of debt throughout their working lives, or the consequences of debt outliving them and haunting surviving relatives.
Here is what you must know about what happens to your debts after you die.
Your estate
After your death, everything that you previously owned in life, like bank accounts, properties, and assets, becomes your estate.
If you didn’t prepare a will before your death, every penny and item you owned in life will be divided up by a local court. This process is called probate.
A local judge will appoint a lawyer called a probate administrator to determine which of your survivor relatives count as beneficiaries. Then the probate administrator will decide which items in your estate will be legally bequeathed to your relatives.
If you have significant debt at death, this process won’t be simple.
Every creditor you owed in life can lodge a claim against your estate after your death. It will be up to the probate administrator to decide how to pay off your outstanding debts with your estate’s total assets, such as home equity, bank accounts and investments.
A probate administrator will start by auctioning off portions of your estate to pay your creditors.
Additionally, estranged relatives, business partners and anyone you knew in life and perhaps owed money to can try to claim your estate or a portion of it.
It will be up to the probate administrator, or legal challenges to your estate, to determine the legitimacy of such claims.
Once a person dies, the survivors must make sure that a death certificate is sent to all creditors. This should stop most collection action, except where the law allow those creditors to seek payment from a probate court.
What about credit cards?
Surviving spouses and anyone who cosigned a joint credit card account with you would be liable for the full debt after your death. If you have no cosigners, those debts fall to your estate instead.
“Authorized users” of your credit cards are not, however, required to pay your debts.
If you live in a community property state, however, your surviving spouse is liable for paying pay all of your credit card debt. The community property states are Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
In addition, some states have laws that specify certain debts that a spouse must pay.
If you leave a home to your heirs and it has a home equity line with debt attached, they must pay it.
So what’s safe from creditors? Generally, retirement accounts, brokerage accounts and money left in a trust.
The best way to protect your family from the consequences of debt after death is to have a will drawn and name them as beneficiaries. If the amount of your estate is significant, say, more than $1 million in total assets, a trust can be a way to avoid probate and make the process cleaner and quicker for your heirs.
In the case of a trust, you assets are transferred in life to the trust for your benefit. Once you and a spouse pass, the named heirs simply assume control of the trust, no probate necessary.
