When we pass, there will be debts that are left unpaid even if we stay caught up with our financial obligations. At the very least, there will be the medical bills accrued towards the end of life and any bills that can end up delinquent as a result of illness. There are more ways that you'll leave unpaid debts behind after you die, so knowing how to prepare for them in advance with a good estate plan is essential.
What Happens at Probate?
When anyone dies, their estate goes through the probate process, and this process can take anywhere from a month to up to two years. The length of time your estate remains in probate will depend on a variety of factors, including the laws of your state and the number of creditors seeking payment. A larger number of creditors, or a bigger overall claim against the estate, will prolong this period.
During probate, the estate is used to pay off death taxes and debts. If there isn't enough cash to cover these obligations, items in the estate, such as valuable works of art and real estate, may be sold to cover the remaining amounts owed. Once taxes and debts are paid, the probate process ends with the executor satisfying the terms of the will by providing heirs with their inheritances.
Which Assets are Protected?
You may be concerned that cash, or personal items, that you intend to leave to your loved ones will be liquidated and used to satisfy your debts. There are a number of ways an estate planning attorney can help you to sidestep this situation and protect the inheritances you want to leave for your spouse, children, or others.
First, it's important to know that life insurance policies, retirement funds, and similar investment tools are separate from your estate. Upon your death, the value of these accounts will be passed to the beneficiaries you name in each of the documents. Since these assets aren't named in the will, they aren't a part of the probate process.
You can also ask your estate planning lawyer to help you draft a living trust. The living trust is a private document that doesn't become a part of the probate process, so it helps protect specific assets from being liquidated. You can include real estate, personal assets, or family heirlooms in the living trust to keep them within the family and to ensure your loved ones receive what you intend to leave for them.
What Can You Do About Unpaid Debts?
There are some debts that will automatically pass to your spouse upon your death. Primarily, this includes loans, mortgages, and credit cards that name your spouse as a co-owner on the account. Once you die, your spouse will be responsible for taking over these financial responsibilities until they have been repaid. Typically, the only option in eliminating these debts is to write a letter to each creditor, explaining that there has been a death and asking for debt forgiveness. This type of request isn't always approved, but it can work in some cases.
If you have children in college, you can trust that their student loans won't place an extra burden on the family. Federal student loans and Parent PLUS loans are forgiven upon the death of a parent, or if the student passes away. This ensures your children won't be saddled with that debt, while they're coping with the grief of loss.
Every person's situation is different, requiring different estate planning tools. When you visit a lawyer skilled in probate and estate planning, they can tailor a plan that will take your specific concerns into account. A good estate plan will help you ensure your family and your assets are protected after you're gone.