Savvy Senior: Dying with debt

Will your children inherit your obligations?
BY JIM MILLER Published: April 10, 2012
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DEAR SAVVY SENIOR: What happens to a person's debt after they die? At age 78, I have accumulated quite a bit of credit card and medical debt over the past few years and am concerned about leaving my son and daughter with a big bill after I die. What can you tell me?

Old and Broke

DEAR OLD: In most cases when a person with debt dies, it's their estate, not their kids, that is legally responsible. Here's how it works.

When you die, your estate — which consists of the stuff you own while you're alive (home, car, cash, etc.) — will be responsible for paying your debts. Whatever is left over is passed along to your heirs as dictated by the terms of your will, if you have one. If you don't have a will, the intestacy laws of the state in which you (see mystatewill.com) will determine how the estate will be distributed.

If, however, you die broke, or there isn't enough money left over to pay your unsecured debts — credit cards, medical bills, personal loans — then your estate is declared insolvent, and your creditors (those you owe) will have to eat the loss.

There are, however, a couple of exceptions that would make your kids legally responsible for your unsecured debt after you pass away: if your son or daughter is a joint holder on a credit card account that you owe on, or if they cosigned on a loan with you.

Secured debts — loans attached to an asset such as a house or a car — are another story. If you have a mortgage or car loan when you die, those monthly payments will need to be made by your estate or heirs, or a lender can seize the property.

Untouchable assets: You also need to be aware that there are some assets, such as 401(k) and 403(b) accounts, brokerage accounts, and some life insurance policies that creditors cannot get access to. That's because these accounts typically have designated beneficiaries, and the money goes directly to those people without passing through the estate.