When deciding how an estate will be distributed to heirs, people spend far more time considering the assets they’re leaving behind, rather than the debts. However, it is equally important to devise a plan that will account for the debts that will remain owing after you pass away, including whether a portion of the gifts you leave will be affected by those debts. Read on to learn more about how debts are handled after the debtor passes away, and speak with a skilled New York estate planning attorney with any additional questions.
With few exceptions, the debts of the debtor will survive that person’s death. One of the executor’s jobs is to pay the debts of the deceased person and to do so in order of priority. This means that taxes, unpaid family court debts, and secured loans will be paid before unsecured debts, such as medical bills or credit cards. In most cases, a debt will solely remain the obligation of the deceased person’s estate and not become the responsibility of the heirs, unless an heir’s name was on the debt (i.e., they cosigned on a loan or their name was on a credit card). In other words, if the estate runs out of money before all credit card bills are paid, then the credit card company will be out of luck.
One exception to this rule is residential mortgages. If a mortgage exists on the deceased person’s home, and the will does not instruct the executor to use estate funds to pay off the loan, the inheritor will be obligated to pay that mortgage to retain the home. If a family member of the deceased person inherits the home and plans to live in it, they have a right under federal law to assume the existing mortgage rather than having to apply for a new one or pay off the old mortgage entirely. That said, if the current mortgage isn’t affordable for the inheritor, they can try to refinance the property or, failing that, sell the home.
While most debts will survive the death of the debtor, some will be erased upon death. For example, federal student loan debt does not survive the death of the debtor. Be sure that, as you plan your estate, you have a plan in place for how your debts will be paid so that gifts remain for your heirs. One way to avoid depletion of your estate is by passing gifts to heirs that are not reachable by creditors. For example, certain retirement accounts and life insurance policy benefits may not be seized by creditors for payment of a deceased person’s debts. Speak with your New York trusts & wills attorney to learn about other ways to maximize your gifts to your heirs.
For assistance with creating an estate plan in New York, contact the dedicated and detail-oriented Poughkeepsie estate planning attorneys at Van DeWater & Van DeWater for a consultation, at 845-452-5900.