What Happens to Your Debts on Death?

There’s been a lot of attention lately to the issue of what happens to a person’s debts after he dies. It seems there are firms that specialize in collecting the debts of the deceased, often by telling survivors they need to pay and often by not being completely honest.

We’ll have more detail in a future Retirement Watch, but the basics are that creditors can seek payment from your estate for legitimate debts. They get paid before heirs receiving anything, if they file claims on time with the probate court. But if assets were held in the right kinds of trusts or in assets that are outside the probate estate (such as IRAs, life insurance, and annuities), they might not be available to creditors.

If you owe money, you should make clear to your executor and probably to your main beneficiaries whether or not they will be liable to pay those debts. Otherwise, they could end up paying debts of your that they didn’t have to.

Death dissolves contracts, so someone who died owing money will generally not pass that legal obligation on to anyone except maybe a spouse.

If there’s money left behind after paying creditors, the heirs inherit it. But If the estate can’t cover all of the deceased’s debts, liability ends there.

Parents, children and other heirs are off the hook.

The problem is that the survivors don’t know that.