Taking it to the Grave: How Creditors Can Impact Your Legacy

Very often, clients tell us that they wish they hadn’t waited so long to start the estate planning process. It can seem scary or overwhelming, and there are a lot of reasons people put it off. One of the most common is that people want to wait until they have achieved certain financial goals before meeting with an attorney. These goals may include buying a home or earning a certain amount of money, but one we hear the most is getting out of debt. Many individuals we see say that they really wanted to resolve all credit card debt or finish paying off a mortgage before making an estate plan. However, many of these people don’t realize that the vast majority of Americans pass away while they still owe outstanding debt. Ignoring the situation or putting off making a plan can create a significant impact on your loved ones and your legacy.

Americans are Buried in Debt

Seventy-three percent of American consumers die with outstanding debt -- on average almost $62,000 per person. These numbers, compiled through data collected by Experian, break down to show that, among those who die with debt,

• 60% have outstanding credit card balances

• 37% have some amount of mortgage debt

• 25% have auto loans

• 12% have personal loans

• and 6% have remaining student loans.

These debts are incredibly common, and they are nothing to be ashamed about. However, it is necessary that consumers come to terms with their debts and make a plan to deal with them sooner than later. If you die with debt and you have not put a plan in place, your loved ones will be left with a complex, stressful, and overwhelming legacy to manage.

What Happens to Your Debt When You Die

In most cases, debt does not directly pass to your loved ones after you die. Instead, your estate will be responsible for any outstanding debts. It will be the executor’s responsibility to identify outstanding debts, give notice to potential creditors, and then distribute funds to satisfy creditors. If there are enough assets in the estate to satisfy all debts, then the executor will ensure that creditors get paid before distributing the remainder of the estate to the beneficiaries in accordance with the will. If there aren’t enough assets in the estate, the probate court will prioritize creditors. Those with top priority will be paid first, and creditors with lower priority may lose out. Any heirs named in the will may also receive nothing, since the full estate amount will be necessary to satisfy debts.  

Although the majority of outstanding debts are resolved through this probate process, there are some situations in which heirs or loved ones may need to step in to resolve outstanding debts. For example, if family members or friends live in a home owned by the deceased, the home may need to be sold to cover outstanding debts such as mortgages. Instead, to preserve the family home, it is possible that heirs could take over the mortgage.

If there are co-signers or co-applicants who incurred a debt with the deceased, these debts will likely not pass to the estate. Instead, the creditors may hold the surviving signer responsible for the full balance of the debt.

Student loans are another incredibly common form of debt, and as the cost of higher education increases, more and more former students will pass, leaving behind outstanding federal and private loans.

What Can You Do About it?

If you have any debt, whether it’s a mortgage, credit card debt, auto loans, or any other form of credit,  it is essential that you make an appointment to meet with an estate planning attorney. Being in a less-than-desirable financial position is more of a reason to meet with an attorney, not a reason to put it off. Ignoring your debt or waiting until you are out of debt to meet with an estate planning attorney is a huge mistake. The only way to protect your family is to take responsibility for your future.

First, take a look at your credit report to get a sense of your debts and where you stand. If you need some help, you can meet with a financial planner to create a plan to reduce your debt as quickly as possible and to ensure that you are living within your budget.

When you take stock of your financial situation, if there is a possibility that you could pass leaving an insolvent estate (debts greater than the value of the estate), it may be a good idea to purchase a life insurance policy to provide for your spouse or minor children. A life insurance policy, as long as beneficiaries are properly designated, will pass to your loved ones outside of probate, which can provide protection from creditors.

Other financial assets, such as retirement and investment accounts can be distributed using beneficiary designation forms. These forms control outside of the probate process, so assets may be protected from creditors. To ensure that these assets pass smoothly to your heirs without being subject to your debts, it is essential that you keep beneficiary designation forms up-to-date. An experienced estate planning attorney can help you review your financial assets and make sure that all beneficiary designations are correct and effective.

Finally, it is also possible to protect assets from creditors using a trust. Different trust structures provide different levels of protection from creditors, but all trusts keep assets out of probate, which means preserving your privacy and saving money. The probate process is lengthy, public, and can be expensive. Especially if you are worried about the amount that your debts will cut into your loved ones’ inheritance, a trust may be a good way to transfer assets quickly and without extra court costs and legal fees.

Get Started Now with a Plan to Protect Your Loved Ones

If you are ready to get started on your estate plan and begin managing your debt, give the Stewart + Gordon a call. Our experienced estate planning team is ready to help you stop hiding from your debt and start taking control of your legacy.