What Happens to Parents’ Debts When They Die?
There are two common myths about what happens when parents die in debt, says a recent article “How your parents’ debt could outlive them” from the Greenfield Reporter. One is the adult child will be liable for the debt. The second is that the adult child won’t.
If your parents have significant debts and you are concerned about what the future may bring, talk with an estate planning attorney for guidance. Here’s some of what you need to know.
Debt doesn’t disappear when someone dies. Creditors file claims against the estate, and in most instances, those debts must be paid before assets are distributed to heirs. Surprisingly to heirs, creditors are allowed to contact relatives about the debts, even if those family members don’t have any legal obligation to pay the debts. Collection agencies in many states are required to affirmatively state that the family members are not obligated to pay the debt, but they may not always comply.
Some family members feel they need to dig into their own pockets and pay the debt. Under Louisiana law, if you are a child of the decedent, you are not requried to do this. Speak with an estate planning lawyer before taking this action, because in Louisiana this is generally not your obligation, and in addition, the estate may not have any obligation to reimburse you if you do.
For the most part, family members don’t have to use their own money to pay a loved one’s debts, unless they co-signed a loan, are a joint-account holder or agreed to be held responsible for the debt. Other reasons someone may be obligated include living in a state requiring surviving spouses to pay medical bills or other outstanding debts. Since Louisiana is a community property state, a spouse may be required to pay the debts of the deceased spouse if those debts are “community obligations”. If the debt was incurred before marriage, however, this is called a “separate obligatoin” and the surviving spouse is not responsible for that debt.
Executors are required to distribute money to creditors first. Therefore, if you distributed all the assets and then planned on “getting around” to paying creditors and ran out of funds, you could be sued for the outstanding debts.
If a person dies with more debts than assets, their estate is considered insolvent. Louisiana’s law determines the order of bill payment. Legal and estate administration fees are paid first along with funeral and burial expenses. Secured debt, like a home mortgage or car loan, must be repaid or refinanced. Otherwise, the lender may reclaim the property. Federal taxes and any federal debts get top priority for repayment, followed by any debts owed to state taxes.
If the person was receiving Medicaid for nursing home care, the state may file a claim against the estate or file a lien against the home. This is called “medicaid estate recovery.” Medicaid estate recovery can be asserted against the home of the decedent who spent a considerable time in a nursing home. Although the home was exempt when the loved one went into the nursing home, the state may seize the home after death. To avoid this, planning during life is necessary, so you’ll need to talk with an elder law attorney to avoid this from happening.
Many creditors won’t bother filing a claim against an insolvent estate, but they may go after family members. Debt collection agencies are legally permitted to contact a surviving spouse or executor, or to contact relatives to ask how to reach the spouse or executor.
Planning in advance is the best route. However, if parents are resistant to talking about money, or incapacitated, speak with an estate planning attorney to learn how to protect your parents and yourself.
BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.
If you liked this article, “What Happens to Parents’ Debts When They Die?” read these additional articles: Write a Letter of Instruction for Loved Ones and Can I Avoid Paying Taxes on Social Security? and What Can a Trust Do for Me and My Family? and Can You Get a Tax Deduction for Giving a Gift?
Reference: Greenfield Reporter (Feb. 3, 2022) “How your parents’ debt could outlive them”