What Happens to the Debts I Owe After I am Gone?

Many individuals primarily engage in estate planning to decide how their assets will be distributed after their passing. While that may be your main focus, you might also be concerned about the management of your debts, especially the potential for your adult children to inherit debts rather than assets. To help you better understand the situation, the Indianapolis attorneys at Frank & Kraft explain what happens to the debts you owe after you are gone.

A Brief Lesson on Probate

The emotional impact of your demise is undeniable, and your loved ones will need to navigate various practical and legal steps, beginning with initiating the probate of your estate. Probate is the legal process following a death. If you have designated one of your children as the Executor in your Last Will and Testament, it becomes their responsibility to initiate and oversee the probate of your estate. During this process, your estate assets will be identified, assessed, and eventually distributed to the beneficiaries mentioned in your Will, provided any assets remain after probate. Another significant aspect of probate is the settlement of debts. Creditors of your estate have the right to be notified that probate is underway and to submit claims against your estate; however, who is responsible for paying your debts, and what happens if your debts exceed your assets? Could your adult children or other heirs be held accountable for your debts after your passing?

After You Are Gone, Who Pays the Debts You Owe?

Throughout the probate of your estate, creditors will submit claims that your Executor must review. Approved claims can then be paid using estate assets. If your estate has sufficient assets to cover all claims, there is no issue. Debts, including taxes, and expenses are settled, and the remaining assets are distributed to beneficiaries and heirs per the terms of your Will. If, however, your estate’s value is insufficient to cover all approved claims and expenses, the claims are paid following the order of priority established by Indiana law, starting with administrative costs and expenses.

But what happens if a creditor’s claim is approved, and your estate lacks the necessary assets to cover it? In other words, what becomes of your unpaid debts? Generally, your debts cease to exist upon your passing if your estate lacks the assets to pay a claim. If your estate cannot cover a claim, the creditor usually has no recourse. Nevertheless, if your adult child co-signed for a loan, lease, or credit card where both your names are involved, the creditor can pursue the co-signer for the entire debt. In these instances, your child (or other co-signer) agreed to full responsibility for the debt when including both names on the account. The creditor has the legal right to pursue both parties for the entire debt, whether you are alive or after your passing.

There are limited exceptions to the general rule that your debts are extinguished upon your passing. One of these exceptions concerns nursing home or long-term care debts. Laws differ by state, but some states may hold an adult child accountable for the nursing home expenses of a deceased parent, although these laws are often disregarded. It’s essential to be aware that if you rely on Medicaid to cover your long-term care expenses while alive, the Medicaid Estate Recovery Program may file a claim against your estate after your passing to recoup the benefits you received while alive. This does not make your children or any other beneficiaries responsible for your debt, but it can result in a significant reduction of assets intended to be passed down to your children.

Do You Have Specific Questions?

For more information, please join us for an upcoming FREE seminar. If you have specific questions about debts you will owe after you are gone, contact the experienced Indianapolis estate planning attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.

Paul Kraft is Co-Founder and the senior Principal of Frank & Kraft, one of the leading law firms in Indiana in the area of estate planning as well as business and tax planning.

Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.

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