As Robert W. Service, a poet and bank clerk, once said, “a promise made is a debt unpaid.” Credit can be great a great way to pursue opportunities such as pursuing education, purchasing a home, or opening a business, but have you thought about what happens to debt upon your death if it is left unpaid? Most debt does not just “die” with you and addressing this when designing your estate plan with an attorney is something that is often overlooked. We don’t want our promises left during our lifetime be someone else’s burden, so why not have a plan?
As Robert W. Service, a poet and bank clerk, once said, “a promise made is a debt unpaid.” Credit can be great a great way to pursue opportunities such as educational endeavors, purchasing a home, or opening a business, but have you thought about what happens to debt upon your disability or death if it is left unpaid? Most debt does not just “die” with you and addressing this when designing your estate plan with an attorney is something that is often overlooked. We don’t want our promises left during our lifetime be someone else’s burden, so why not have a plan?
Let’s take a look at different types of debt and scenarios to explore where liabilities go when you are no longer able to pay them off yourself.
Regular Consumer Debt
When it comes to “regular” consumer debt, such as credit cards, mortgages, car notes, etc., this is the debt that we see really dwindle the resources of an estate. Depending on what type of estate planning you have done dictates who is liable for your debts when you pass away.
If you have a Will or no estate planning and your estate goes through probate, your Personal Representative, will be in charge of collecting assets and liabilities including consumer debts, taxes, administrative costs (such as accountant, attorney, and appraiser fees), get taken “off the top” of an estate before the rest of your estate is divided amongst beneficiaries. This is similar to trust-based planning, but your successor trustee must “settle up” any debts.
If no estate planning has been done, typically, next of kin, such as your surviving spouse or adult children, gets stuck with repayment of debt.
If you have passed with any jointly held debt, including debt that has been cosigned, the surviving party is liable for the debt.
If you become mentally disabled, the person in charge of your finances, which depends on what estate planning has been done (guardian, power of attorney, trustee) will be in charge of maintaining payments on any outstanding debt.
This is a question that a lot of our younger clients ask us about, often even before getting married in order to effectively plan and know how they are affecting their partners and loved ones. With this being a hot topic in the news these days, we all are aware that the younger generation have student loan debt…and a lot of it.
In terms of dying with a Federal Student Loan, the answer is fairly straightforward. This is debt that essentially “dies” with you, meaning that your family and spouse are not liable for repaying this debt.
If you become permanently disabled (mental disability), your guardian, power of attorney, or trustee, may apply for your Federal Student Loans to be discharged.
However, if you refinance a Federal Student Loan with a private company (i.e., Sallie Mae, Earnest, Ascent) you may be getting a better interest rate, but you could also be losing that protection of the debt not being charged after your death. This is where it is important to read your contracts! Most private student loans will try to collect the remainder of the loan from your estate or the surviving spouse, which could also affect cosigners of your debt.
Medicaid, not to be confused with Medicare, is something that people consider for long-term health expenses. The Medicaid program is geared towards supporting low-income individuals and their long-term healthcare expenses. In order to qualify for this government assistance there are caps to assets and income. In Indiana as of 2022, you may only have $2,000 worth of assets to your name, but there are some assets, such as your home that are protected during lifetime. Although some assets may be protected from Medicaid spenddown during lifetime, Medicaid has an Estate Recovery procedure that occurs after death. Once a Medicaid recipient has died, Estate Recovery will liquidate the remaining assets in order to collect up to the amount of which the program has paid for in healthcare expenses on behalf of the deceased.
This is why it is important to be proactive with Medicaid planning and estate planning with focus on long-term care expenses. Through estate planning, you can protect some assets and potentially avoid having to go on Medicaid entirely.
Planning for Debt Repayment
Plan A is to always try to pay off your debt obviously. However, since we do not know when we are going to die, it is always best practice to ensure there are accessible funds for your loved ones to be able to pay off any remaining debts.
Life Insurance is a great way to have some quick liquidity after death. Typically, life insurance is the quickest to pay out, so that Personal Representatives and Trustees can take care of any funeral costs, estate administration, taxes, final medical expenses, etc. Additionally, in the event of a disability, having a long-term care rider on your life insurance policy that can be accelerated to pay for healthcare is a great way to have resources to pay healthcare debt. There is also disability insurance that could cover debt repayment and living expenses.
Another way to reduce debt at death is to get prepaid funeral policies to take care of the expenses of a funeral and to prepurchase burial plots. Families of our clients who have preplanned and prepaid for funeral arrangements have expressed gratitude that their parents and loved ones had made arrangements, so that they had the time to grieve instead of having to make decisions on what their deceased loved ones would want and planning arrangements.
Estate Planning and Debt
Planning for settling debts upon disability and death is something that you should talk to with your estate planning attorney. Together with your planning partners, we can cocreate a plan that reduces or alleviates the burden of debt repayment. If you would like to discuss your options, please feel free to set up a no obligation appointment to discuss your goals.