We Can Help You Prosper

Does debt pass to the next generation in an estate plan? 

On Behalf of | Oct 21, 2024 | Estate Planning |

When someone passes away, there is a wealth transfer. Their assets move on to the next generation. If they die intestate – without an estate plan – then state law may dictate how these assets should be divided. If they make an estate plan, they can choose beneficiaries who should receive specific assets.

But people don’t just have assets: They also have debts. They could have mortgage loans, student loans or business loans. They may owe money for property taxes or income taxes. They may have credit card loans or they may have financed specific products, like electronics. What happens to all of this debt when they pass away?

Paying off remaining debt

Creditors are still going to want to be repaid, even if the person who took out the debt has passed away. This is usually done by the estate executor. They have legal access to the financial accounts and funds, so they take money from the deceased person’s estate and pay off the debts. Ideally, there will be enough money to cover everything, and any remaining assets can be distributed to the beneficiaries.

In one sense, this does mean that beneficiaries can lose funds. If the deceased person didn’t make any plans to pay off their debt, money that was supposed to be given to a beneficiary may have to be used to settle this debt first. But the beneficiary doesn’t have to worry about inheriting the debt or taking on any future financial obligation.

A comprehensive estate plan

It is important to have an estate plan that addresses both assets and debts, and planning in advance can help this go smoothly for the family. Those drafting estate plans need to know about all of the steps they have to take and the legal tools at their disposal.