When creating an estate plan, it is crucial to look at your entire financial situation. You need to consider your debts, not only your assets. If you die before you can pay off your debts, it will have implications for your family.
What happens to debt when you die?
- Joint debts pass to your spouse: If you have a joint credit card with your spouse, or a loan that you both signed, these debts will not disappear when you die. Your spouse will become responsible for paying them back.
- Debts you alone own pass to your estate: Creditors can claim against your estate for any monies you owe them. Only once these debts are settled can your estate executor pass your assets to your beneficiaries.
- Certain debts are offset against an asset: When you take out a mortgage on a home, the bank technically owns the property until you have paid everything off. The same is true for car loans. If you die before you can complete payments, your family will have two options. To keep the asset, they need to pay what is outstanding. This can be with a lump sum or by taking over the scheduled payments. If your family does not want to keep the asset, they can sell it, pay off the loan and retain any money left over from the sale.
Estate planning can ensure your debts do not outlive you
Estate planning tools such as trusts can remove assets from your estate, protecting them from being used to pay your debts. While debt may be a part of your life, it does not need to be a part of your death.
