Savvy Senior: What happens to your debt when you die?

Dear Savvy Senior,

Can my kids inherit my debt after I die? I have taken on a lot of credit card debt over the past 10 years or so, and I’m worried that my son and daughter will get stuck with it when I die.

Indebted Senior

Dear Indebted,

In most cases when a person with debt dies, it’s their estate, not their kids, that is legally responsible. Here’s what you should know.

Debt After Death

When you die, your estate – which consists of the stuff you own while you’re alive (property, investments and cash) – will be responsible for paying your debts. If you don’t have enough cash to pay your debts, your kids will have to sell your assets and pay off your creditors with the proceeds.

Whatever is left over is passed along to your heirs as dictated by the terms of your will, if you have one. If you don’t have a will, the intestacy laws of the state you reside in will determine how your estate will be distributed.

If, however, you die broke, or there isn’t enough money left over to pay your “unsecured debts” – credit cards, medical bills, personal loans – then your estate is declared insolvent, and your creditors will have to eat the loss.

“Secured debts” – loans attached to an asset such as a house or a car – are a different story. If you have a mortgage or car loan when you die, those monthly payments will need to be made by your estate or heirs, or the lender can seize the property.

There are, however, a couple of exceptions that would make your kids legally responsible for your debt after you pass away. One is if your son and/or daughter is a joint holder on a credit card account that you owe on. And the other is if either one of them co-signed a loan with you.

Spouses Beware

If you’re married, these same debt inheritance rules apply to surviving spouses too, unless you live in a community property state, which includes Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states, any debts that one spouse acquires after the start of a marriage belongs to the other spouse too. Therefore, spouses in community property states are usually responsible for their deceased spouses’ debts.

Protected Assets

If you have any IRAs, 401(k)s, brokerage accounts, life insurance policies or employer-based pension plans, these are assets that creditors usually cannot get access to. That’s because these accounts typically have designated beneficiaries, and the money goes directly to those people without passing through the estate.

Settling the Estate

You should also make your kids aware that if you die with debt, and you have no assets, settling your estate will be fairly simple. Your executor will need to send out letters to your creditors explaining the situation, including a copy of your death certificate, and that will probably take care of it. But your kids may still have to deal with aggressive debt collectors who try to guilt them into paying.

If you have some assets, but not enough to pay all your debts, your state’s probate court has a distinct list of what bills get priority. The details vary by state, but generally estate administrating fees, funeral expenses, taxes and last illness medical bills get paid first, followed by secured debts and lastly, credit card debts.

Need Legal Help?

If you or your kids have questions or need legal assistance, contact a consumer law attorney or probate attorney. If you can’t afford a lawyer, go to LawHelp.org to search for free legal help in your area.

Send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070, or visit SavvySenior.org. Jim Miller is a contributor to the NBC Today show and author of “The Savvy Senior” book.