Sunday Refresh If you died tomorrow, what would you leave behind?
When I (Laura) wrote my will, I had to decide what assets I'd leave to various family members and friends. But I also had to figure out what debt I'd leave behind... and who would have to pay it.
According to data from Experian's File One and Credit.com, Americans die with an average of $62,000 in debt... mortgage debt, credit card debt, auto loans, and more.
Some people think that when you die, your debt dies with you. But in most cases, that's not true... That debt will need to be paid.
What happens to your debt when you die depends on a few things...
- The type of debt
- Whether the debt was jointly held, had a co-signer, or a beneficiary
- If you lived in a community property or common law state
- Your remaining assets
If you leave your kids a house worth $400,000, but you still owe $350,000, you're leaving them a new home and most of the bill for it.
So let's take a look at what happens to debt when you die...
Mortgage
If your spouse co-signed your mortgage, he'll be responsible for continuing to make payments after you die, including any tax liability. The same goes for any heirs that inherit your home... The heirs take on responsibility for any payments – including the mortgage and taxes – unless and until they decide to sell the home. (The proceeds can go toward any remaining mortgage balance.)
If there's an outstanding home equity loan, the lender may require the loan be repaid immediately.
Auto loan
Like with a mortgage, if someone co-signed your auto loan, he'll be responsible for continuing to make payments after you die. The same goes for any heirs who inherit the vehicle.
Credit card
If your credit card has a joint account holder, he'll take on any remaining debt. If there's no joint holder, your estate is responsible.
Medical bills
If you live in a community property state and acquired debt during your marriage, your spouse will need to pay off the debt. Your estate can also pay for any outstanding medical bills.
In contrast, your spouse is not automatically responsible for any assets or debt you acquire during marriage if you live in a common law state.
Student loans
This one depends on the type of student loan. Private student loans must be paid, either by the estate or the co-signer. If you incurred the debt while married and you lived in certain community property states, the debt may be the responsibility of your spouse.
Federal loans are discharged on death. That also goes for Parent PLUS Loans if either the parent or the student dies.
If you're single, leaving the asset to an heir, or have debt without a co-signer or a joint account holder, your estate will be responsible for any remaining debts.
Creditors for secured debt – like mortgages – get first dibs on your estate. Once all that debt is paid off, anything remaining goes to unsecured debt... things like credit cards and medical bills.
But creditors can't go after just any asset.
Retirement accounts like IRAs, 401(k)s, and 403(b)s, are safe from creditors.
And although creditors can't take life insurance to pay outstanding debt, using life insurance is a common strategy to keep your heirs from getting stuck with your debt when you die.
Planning for your own death might be uncomfortable, but proper estate planning is important... whether you're 30 years old or 80 years old. So make sure you're thinking about everything you'll leave behind... debts included.
Have a great week,
Laura Bente & Amanda Cuocci
July 22, 2018