What can you do for your children? What can you do to better the world around you? Like so many other responsible seniors, you’ve sought to eliminate as much debt as possible and get your affairs in order to the best of your ability. But, sometimes life throws a curveball your way and you’ve got outstanding debt that will likely remain that way by the time you pass on. Will this debt be inherited by your children? If so, what can you do to minimize its impact?
Types of Debt
The most important thing to remember when learning about debt and inheritance laws is that laws may differ between states. While there are some federal guidelines, tax laws, and other factors that make for a more nationally consistent inheritance process, we recommend double-checking your local laws or getting advice from a legal professional who can assist you before making any lasting decisions.
That said, it’s worth noting that in general, your heirs will not be directly responsible for paying your debts. However, just because they aren’t directly paying off debts doesn’t mean that those debts will not be collected. In many cases, creditors will simply collect their dues from your estate rather than personally seeking it out from your heirs.
For instance, creditors could tap into your IRA or pension to collect their dues, and this may reduce the total amount that your heirs receive. However, if you list one or more of your heirs as beneficiaries to your pension, they may be able to prevent this collection from happening.
It’s also worthwhile to remember that your children will not be held responsible for income/property taxes owed at the time you pass away. The estate will take responsibility for any unpaid taxes as long as there are sufficient assets to cover them.
What About Credit Card Debt?
Like pensions and IRAs, credit card debt can usually be collected from your estate. You might imagine that creditors would simply go to your estate first if they know that they’re able to collect from it, but some debt collection agencies will actually seek out your heirs and try to convince them that they’re responsible for your unpaid credit card debt. If your child is also the executor of the estate, they may be legally responsible for paying certain debts, but in general, it is not legally permissible for collection agencies to contact a deceased person’s children in the pursuit of collection.
Unpaid Medical Bills?
Debt laws differ widely between states when it comes to medical debt. For some states, hospitals may only seek to collect from assets in the estate. However, over half of all states have instantiated laws that require children to attend to some portion of their parent’s remaining medical bills if the estate has insufficient funds. In the case of medical debt, it is very important to double-check the laws in your area.
Dealing with a Mortgage
A mortgage will not be wiped out when the home is inherited. Children (or other heirs) will be responsible for making monthly payments. Thankfully, mortgage lenders can’t normally force heirs to immediately pay the entire remainder of the mortgage. It’s also worth noting that if your heirs decide to sell the home and find that more money is owed than the value of the home itself (meaning that the home is “underwater”), they will not be required to pay the amount left over after the sale. Banks can tap assets from the parent’s estate, though.
The Reverse Mortgage Factor
If you’ve borrowed money from a reverse mortgage, you probably haven’t paid off the debt yet. That’s totally normal – after all, many people get a reverse mortgage in order to consolidate existing debts. So, what happens when the reverse mortgage comes due and payable?
Thankfully, you (or your estate/heirs) will never owe more than the value of your home at the time the reverse mortgage comes due. Because the reverse mortgage is insured through the FHA, it is known as a non-recourse loan, and that status prevents you from being held liable to pay more than the value of your home.
When the loan comes due because you pass away, the first thing that your heirs should do is to contact the servicing company. Each servicing company (that’s the one that sends you your reverse mortgage statement each month) will have slightly different timetables and policies regarding payment. If your children would like to keep the home, they may be able to. They have the option of refinancing the reverse mortgage into a traditional mortgage or paying the lesser of two values: either the loan balance itself or 95 percent of the home’s appraised value. In any case, make sure to tell your children about a reverse mortgage if you have one or are thinking about getting one.