July 28, 2016

blankAs much as you may not want to think about it, death cannot be avoided. But what happens to the debt of the deceased? Will you, for instance, be held responsible for your parents’ debt after they die? Is it possible to pass on your own debt to your children?

When you pass away, your money, property, and physical possessions are all automatically referred to as your legal estate. The value of your estate is calculated by totaling your cash accounts, vehicles, real estate, and investments, and then subtracting out the total of everything you owe to other parties.

Someone has to handle your estate after you die. This person is referred to as an executor—typically someone you consider trustworthy and have already named in your will. If you die without a will, a judge will appoint an executor on your behalf.

The executor will notify all creditors of your death, and these creditors will submit proof of your debts and request for repayment from your estate. The executor will then pay off these debts by using whatever cash you may have left, and then by liquidating any assets that remain. If there is not enough to pay off your debts, then your estate will be declared insolvent. If your estate is insolvent or if there aren’t enough assets or money to cover your debts, then there’s nothing that creditors can do and your debts will remain unpaid.

Note that the money in your estate will be used to settle debts that are in your name. Debts that are solely in your name do not get passed on to your spouse, partners, children or brothers and sisters.

After your debts have been paid off by your estate, any remaining assets and money can then be distributed to the beneficiaries named in your will. However, if you leave property such as a house or car to a loved one and that particular property is secured by a debt, then that beneficiary will be responsible for paying off the debt after you die.

If you co-signed for a loan or credit card with a spouse or significant other, then that person will be answerable for any debt when you pass away. Every individual on a shared account is held responsible for the entire amount, even if there were expenses or charges he or she was not aware of.

If you pass away while owing back taxes to the IRS, your spouse must pay both the back taxes and any current taxes owed. Your spouse must file taxes for your final year of income in the year of your death, and may file a joint final income tax return with a note of your death when filing. Only spouses are held liable for tax debt. As with all other debts, any taxes owed must be paid off before your heirs can claim their inheritance.

Secured debts are prioritized, while unsecured debts such as credit cards are paid afterwards. Unsecured debts do not usually receive payment in the event of an insolvent estate.

Categories: Blog, IRS, Tax Tips, Taxpayers' Rights, Uncategorized