Economists are forecasting that Baby Boomers will pass down trillions of dollars to their beneficiaries in future years, so much so that the phenomenon is being called the "great wealth transfer."
Despite this, there is also a growing shadow of adult Americans retiring with debt in their names. Most individuals have the intention of retiring debt-free. However, only one-quarter of retired Baby Boomers are actually debt-free. Many still have mortgages and consumer debt to pay off before they pass away.
This begs an important question: can you inherit your parents' debt when they pass away?
Keep reading to learn whether or not you can inherit your parents' debt and what you can do to protect yourself.
Can you inherit your parents' debt?
In general, you will not inherit any individual debt incurred by your parents or other family members. Deep sigh of relief.
At the time of their passing, your parent's estate will be used to pay off or settle any outstanding debts. This means that any assets, property, or investments they had will go toward paying off what they owed. Unfortunately, existing debt at the time of your parent or parents' death can impact the value of your inheritance. If there is still any remaining debt exceeding the value of the estate, creditors and lenders often have to write it off.
There are some notable exceptions when you may be held personally liable for debt, which we'll discuss shortly.
What happens when your parent dies with debt?
If your parent passes away with debt in their name, the debt unfortunately doesn't go away on its own.
When they pass away, their personal property and assets will pass to their estate. Then their estate repays any unpaid debt, such as taxes or credit card balances. If the total outstanding debt exceeds the value of the estate, then the remaining debt generally isn't paid.
If your parent has an estate plan, they likely nominated an Executor responsible for overseeing this process. It is common for parents to name their adult child as an Executor, so it's a good idea to have a conversation with your parents about their estate plan if you're unsure.
Next, we'll discuss a few instances when you may be held personally liable for any remaining debt left by your parents.
What kind of debt can be inherited?
In general, you do not inherit your parents' debts. However, there are a few exceptions:
You took out a loan with your parents as a co-signer.
You and your parents are joint account owners.
You are subject to a state filial responsibility law that requires you to cover your parents' nursing home bills or long-term care costs.
If you inherit a home that has a mortgage or home equity loan on it, if you wish to keep the home.
A common misconception is that you could inherit credit card debt from your parents if you were listed as an authorized user on the account. This is inaccurate. You are only held liable for consumer debt if you applied for the account or the loan with your parents as a co-signer or joint owner. Otherwise, you are not personally liable, even if you were an authorized user.
How to protect yourself from inheriting parent's debt
Even though it's unlikely that you will inherit debt from your parents, you might feel pressured or even bullied into feeling like you're obligated to repay their debt. Creditors and debt collectors can be aggressive and pushy, so it's important to know your rights and how to protect yourself.
Here are some tips on how to protect yourself from inheriting your parents' debt:
Know your rights. You generally aren't responsible for your deceased parents' consumer debt unless you specifically signed on as a co-signer or co-applicant. Do not allow aggressive debt collectors to trick you into thinking you have to repay the debt. It's recommended that you take notes when speaking with collection agents, such as the name of the person you spoke with, the date and time the conversations took place, and what was said during the conversation. This information can be passed on to an attorney if needed.
Accounts with a designated beneficiary or with the right of survivorship belong to an asset called "non-probate assets." These pass to you directly outside of the probate court and cannot be used to repay debt. Although any probate assets may be used to pay off your parent's debt, at least these protected assets will not be taken away from your inheritance. Life insurance policies and retirement accounts are common examples of non-probate assets.
Similarly, assets held in a Trust will be passed to you outside the probate process. Trusts protect your inheritance from creditor claims.
If your parents pass away with a lot of debt, consider investing in an attorney who is an expert in debt collection law. They can help you determine if you are responsible for repaying any of the debt. If you are responsible for any of the debt, they can provide advice on how to best handle it. They can also offer guidance on how to handle pushy creditors.
Create your own estate plan today
Can you inherit your parents' debt? This question can be top of mind if you support an aging parent with debt in their name. Many Baby Boomers plan to pass down inheritances to their loved ones, but some aren't so lucky.
It may come as a relief to find out that, in general, you are not personally liable for your parents' debt. If they pass away with debt, it is repaid out of their estate. However, this means that debt repayment could diminish or eliminate assets and property you could have inherited from your parents.
This can serve as a powerful reason to have a conversation with your parents about estate planning. By creating a proactive plan, your parents can determine how their debts and assets should be handled. Even if they pass away with debt, having a plan in place can significantly ease stress and worry regarding debt inheritance. Further, they can utilize legal tools such as Trusts and beneficiary designations that protect assets from creditors. That way, they can maximize what can be passed directly to their loved ones without being subjected to debt repayment.
However, note that there are specific circ*mstances in which an adult child can become liable for their parents' debt. Common examples include co-signing onto a loan application or agreeing to be a joint account owner of a mortgage or credit card. This usually should only happen with your prior action, consent, and knowledge. If you wish to protect yourself, you may consider abstaining from taking on any debt with your parents during their lifetime.
Estate planning is for the whole family. If you and your parents would like to set up Estate Plans to direct how your assets and debts should be handled, Trust & Will is here to help. We provide affordable and accessible estate planning solutions that meet the needs of any family member. Take our quiz to find out how to get started.
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