Many of us in Arkansas struggle with debt. But while we’re focused on fighting our own battles, you might find yourself wondering if you’re going to end up shouldering your parent’s debt once they pass away. This is a legitimate concern, as most of us don’t have the funds built up to pay off others’ debts.
Are you responsible for your parent’s debt?
When your parent passes away, you probably aren’t going to be personally liable for any remaining debt. In other words, your parent’s creditors aren’t going to be able to come to you seeking to collect on your parent’s debt unless there was some sort of existing obligation on your end, such as if you were a co-signer on a loan.
One caveat here is that you may be responsible for debt that is securely attached to an asset that you receive from your parent’s estate, such as the mortgage on a home that you inherited. You’ll want to make sure that you stay up to date on those payments, otherwise the property may be foreclosed upon.
So how are your parent’s debts paid?
Although you may not be on the hook for your parent’s debts, those outstanding balances will have to be paid as much as possible. Creditors will seek to access funds available through your parent’s estate to settle those debts. Therefore, if your parent has $100,000 in debt but only $50,000 in assets, some of those creditors are going to lose out.
However, in that situation, you lose out, too. If creditors are left to sweep up everything in your parent’s estate, there’s nothing left to be passed down to you and other family members. This is where effective estate planning becomes crucial.
How estate planning protects assets from creditors
There are a number of estate planning strategies that your parent can use to shield assets from creditors. For example, life insurance policies and many retirement investment accounts can’t be touched by creditors as long as there is a named beneficiary on those accounts. If there is no beneficiary designation, creditors can access those funds to collect owed debts. Therefore, your parent needs to ensure that those beneficiary designations are active and current.
Your parent can also use an irrevocable trust. Here, your parent places assets in a trust and essentially relinquishes control over them. This means that your parent can’t remove an asset from the trust once it’s placed there. However, since the asset has been effectively removed from your parent’s estate, it can’t be reached by creditors.
Your parent might also be able to simply transfer assets or gift them away in accordance with appliable probate and tax laws. This ensures that the assets are inherited by those who your parent wishes to receive them while protecting them from the creditors’ reach.
Does your parent need assistance with estate planning?
Far too many people fail to see the advantages of a comprehensive estate plan. As a result, they see their familial wealth evaporate seemingly overnight when creditors come knocking.
But you don’t have to let that happen to your parent and your family. Instead, you can fully embrace the estate planning process sooner rather than later to ensure that your family has proper protections in place. Given the complexities associated with this process, you might want to have an experienced estate planning attorney by your and your parent’s side so that you’re protecting your family’s wealth as much as possible.