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Are beneficiaries liable for estate debts?

On Behalf of | Jul 1, 2022 | Estate Administration And Probate |

If a loved one died with debts to their name, you might be worried that creditors will come knocking at your door as a beneficiary to the estate. However, you do not have to worry. It’s only in certain circumstances that this can happen.

Usually, the deceased’s debts are settled using proceeds from their estate’s assets. Part of an executor’s duties during probate is to provide notice to potential creditors and clear any outstanding debts before distributing the remaining assets to its beneficiaries. Creditors can still make claims to an estate even if it does not pass through probate.

What if the debts are more than the size of the estate?

When the estate is smaller than the debt owed, it is declared insolvent. Heirs to the estate will get nothing in this case since all the estate’s assets will go towards settling outstanding debts. The pending dues are paid in order of priority as defined by state laws.

Can debts be inherited?

Generally, debts are not inherited unless there is a direct contract between the creditor and a surviving party. For instance, if you cosigned an auto loan with a loved one before their death, you may have to clear the pending balance if they die before clearing the debt.

Similarly, under California’s community property laws, surviving spouses may be liable for debts incurred together with the decedent. However, it depends on the nature of these debts. If your spouse acquired the debts on their own, you may not be responsible for them.

Protecting your loved one’s interests

When formulating your estate plans, it is crucial to factor in the debt you owe and plan accordingly. That way, your loved ones will not be left in a financially uncertain position once you are gone.

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