April 20, 2013
When it comes to estate planning, many people are confused about what happens to their credit card debt when they die. Clients tell their estate planning lawyers that they thought the debt would be forgiven, for example. Unfortunately, this isn’t truly the case, so it’s a good idea to understand what will happen to your estate and the assets you plan to leave to your loved ones.
First of all, your estate will be expected to pay off credit card debt when you die. In fact, whatever you leave behind will first be used to pay for any outstanding debt. Creditors of all kinds will have first crack at what you (or your heirs) will have. Contacting the creditors and getting these debts paid off is one of the most important jobs of the executor of your estate.
However, credit cards aren’t necessarily the first thing that will be paid off, but they are definitely on the list. If your estate doesn’t have the necessary assets to pay, then other courses of action may be available to those trying to collect on the debt. If there is another name on the account, for example, they can go after that person for an outstanding balance.
This is important to note if you’ve put your adult child on any of your accounts. Doing so is a fairly common practice, as it can make it easier for the adult child if they are helping by picking up groceries, paying bills, etc. By having them on your accounts, they can simply use their own cards for your purchases.
Unfortunately, if and when you pass away, they could become responsible for the entire balance on any of those accounts. Having them on bank accounts could even have tax implications. It is really a good idea to work with a Sacramento estates attorney in order to determine what the state and federal laws are as they apply to your situation. One possibility is to have the adult child or other caregiver listed on the account as an “authorized user.”
Just what funds are used to pay off outstanding credit card debt after death can vary. In most cases, for example, retirement accounts such as IRA and 401(k) plans with a specific beneficiary are not considered part of the estate. Those funds pass directly to the named party and do not go through probate and are not available to pay creditors. This may also be the case with life insurance policies. Things can get a bit more complicated when talking about real estate or jointly held assets, however. For example, can one spouse be forced to sell a home that has been inherited by a partner who had a large credit card debt in his or her name?
Laws regarding this and similar issues vary from state to state, which means that your best bet is to work with a Sacramento estates attorney to determine what our laws mean for you and your estate.