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What Happens to My Debts When I Pass Away?

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The primary focus for most people when they contemplate estate planning is the distribution of their assets when they pass away. You, however, may have a somewhat contrary concern. You may be worried about how your debts will be handled. Specifically, you may be concerned that your adult children will inherit your debts instead of your assets. To help you plan accordingly, the Essex Junction attorneys at Unsworth LaPlante, PLLC explain what happens to your debts when you pass away.

What Legal Steps Follow after You Pass Away?

Your death will unquestionably have an emotional impact on your loved ones when you pass away. Along with the emotional impact your death will have, your loved ones will be faced with the need to take several practical and legal steps, starting with initiating the probate of your estate. Probate is the legal process that is typically required following a death. If you appointed one of your children to be the Executor of your estate in your Last Will and Testament, it will be your Executor’s job to initiate and oversee the probate of your estate. During the probate process, your estate assets will be identified and valued and eventually passed down to the beneficiaries named in your Will if there are any assets left to pass down at the end of probate. That brings up another important function of probate – payment of debts. Creditors of your estate are entitled to notification that probate is underway and to the ability to file claims against your estate. Who is obligated to pay your debts?  What happens if your debts exceed your assets? Could your adult children or other heirs of your estate be responsible for paying your debts after you pass away?

What Happens to Your Debts When You Pass Away?

During the probate of your estate, creditors will file claims which must be reviewed by your Executor. Approved claims are then eligible to be paid using estate assets. When an estate has more than enough assets to pay all claims, there isn’t an issue. Claims (including taxes) and expenses are paid, and the remaining assets are transferred to beneficiaries and/or heirs according to the terms of your Will. If the value of your estate assets is insufficient to cover all approved claims and expenses, claims are paid according to the order of priority established under Vermont law, starting with the costs and expenses of administration.

What happens if a creditor files a claim, and the claim is approved, but the estate lacks sufficient assets to pay the claim? In other words, what happens to debts of yours that are not paid out of your estate assets? Understandably, you do not want to pass down debts to your adult children or other loved ones. The good news is that most of the time, your debts die with you. If your estate lacks the necessary assets to pay a claim, the creditor is usually out of luck. If, however, your adult child co-signed for a loan, co-signed for a lease, or took out a credit card with both your names on the card, the creditor can pursue the co-borrower or co-debtor for the full amount of the debt. In those situations, your child (or other co-signor) agreed to be fully responsible for the entire debt when they put your name on the account. The creditor has the legal right to pursue both parties for the entire debt while you are alive or after your death.

Nursing Home Debts

One of the few true exceptions to the general rule that allows your debts to die with you is related to nursing home or long-term care debts. Laws vary by state; however, some states allow an adult child to be held responsible for the nursing home bill of a deceased parent. In addition, some states have laws that allow a nursing home to pursue an adult child for the parent’s debts, but the laws are typically ignored. Finally, you should know that if you rely on Medicaid to cover long-term care expenses while you are alive, the Medicaid Estate Recovery Program could file a claim against your estate after you pass away for the value of the benefits you received from the program while you were alive. While that cannot make your children (or any other beneficiary) responsible for your debt, it can result in a significant loss of assets that you intended to be passed down to your children.

Do You Still Have Questions?

For more information, please attend one of our upcoming FREE webinars. If you still have questions about how your debts will be handled after you are gone, contact an experienced Essex Junction estate planning attorney at Unsworth LaPlante, PLLC by calling 802-879-7133 to schedule your appointment today.

Stephen Unsworth
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