Modern Estate Planning Blog

Mortgages, loans, credit cards, even medical bills…nearly every wills and estates lawyer in Sacramento is asked about what happens to a person’s debt when they die. It doesn’t seem quite fair for your descendants to be saddled with your debt, but it also doesn’t seem fair for creditors not to get the money that is owed to them, either.

There are a couple of scenarios that may play out when someone dies with debt.  Both require the effort of the Personal Representative (or executor) and are based on your estate.

First, if your estate in California is solvent, then debts will be paid from that before heirs get their share. “Solvent” refers to the fact that the assets of the estate add up to be worth as much as or more than the amount of debt owed. So, if the deceased’s estate is worth $50,000 and he or she has debts totaling $25,000, the estate would be solvent. After the debt is paid off, the remainder of the estate can be distributed to the heirs.

If, however, the estate doesn’t hold enough value to pay for outstanding debts, it is considered “insolvent.” In these cases, the Personal Representative will have to spend some time going through the debts, possibly with an attorney, to prioritize which debts get paid first, in full, partially, or not at all. There are state and federal laws that help to determine how this process works. For example, state and federal regulations may state that medical bills take priority over credit card debt.

In situations where the estate is insolvent here in Sacramento, the heirs will not be entitled to the assets, even if there was a will or trust in place. On the other hand, they do not have to take on the responsibility of paying for the debt, which is at least a relief. Still, it can certainly be a disappointment to discover that the home or other assets your kids expected to inherit will have to be sold off to pay for debts instead. In some states adult children may be expected to pay outstanding nursing home costs.

According to USA Today, more and more baby boomers and seniors are living in debt. There are several potential reasons for this, from medical and funeral expenses to unrealistic expectations about what is “deserved” at that point in life. Unfortunately, the final outcome often ends up costing your heirs some or all of their inheritance.

In order to ensure that your estate is solvent—or better yet, to leave no debt behind for your Personal Representative and heirs to deal with—it’s a great idea to work with your Sacramento wills and estates attorney to set payoff goals and keep yourself and your estate on track. To get started with this process, simply call our Fair Oaks law firm at (916) 241-9661 and ask to schedule a Peace of Mind Planning Session; mention of this article and we’ll waive the consultation fee.