by Robert G. Yetman, Jr.
One of the questions people are now asking with increasing frequency as their parents age is, “Who is responsible for their debt when they pass on?” The question is of greater concern now than it used to be, because more elderly folks are making ongoing debt obligations a part of their financial profiles. This was not the case many decades ago, but a number of factors, including a more challenging economy and a greater “philosophical” acceptance of debt, overall, have conspired to cause more and more people to leave debt obligations behind at the event of their passing. Accordingly, more loved ones, children as well as spouses, are taking a greater interest in this subject.
For starters, whatever assets you have when you die will be liquidated to meet your debt obligations. If you have no debt, then no worries, obviously, and if you have a little debt, then only what is needed to pay off that sum will be given over to those you owe. What happens, though, if you have a substantial credit card balance, and what you leave behind in assets is not enough to cover it?
The short answer, and good news for those who remain, is that unless others are co-signers on whatever the obligation at issue is, no one else can be held legally responsible for the debts, and that includes spouses and family members. This reality also includes “authorized users” of credit cards, as well. The bottom line is that unless an actual obligation is in your name, you have no responsibility to repay a debt.
Those left behind in these situations may hear from the credit companies to see about payment, particularly if the amounts owed by the deceased are large, but, again, there is no obligation on their part to actually pay anything. That said, because because the executor is responsible for paying as much of the debt obligation as possible with the assets left behind, if the debt exceeds the amount of the assets, then there is likely no money available for distribution to heirs.
There is one important exception to the previous paragraph. Any asset that avoids probate is generally considered to exist outside of the estate. For example, IRAs, 401(k)s, beneficiary payments from insurance policies, even fully-taxable brokerage accounts that are set up with a TOD (transfer of death) provision that allows the naming of a beneficiary to the account…live outside of an estate, for the purpose of asset distribution. However, any assets that are a part of the estate are fair game for those to whom you owe money.
As for obligations that represent secured debt, like a mortgage and car loans, the goods associated with those will be subject to reclaim by the bank, assuming the loans attached to them were solely in the name of the deceased and no one takes over the obligations. Spouses will generally have the opportunity to refinance secured debt like this in their own names, which means that the death of a spouse in whose name the relevant obligation solely existed does not necessarily translate to the house or vehicle automatically going back to the bank. However, if that does not happen, and payments are not continued, the house, car, etc., will be repossessed.
So, the good news, generally speaking, is that any debts for which you were not legally obligated to begin with…do not become yours due to the passing of someone close to you, even if that person was a spouse or a parent. There is one more component to this I want to discuss, however, before we leave this subject behind – it has to do with continuing to use a credit card as an authorized user after the account holder has died.
In some cases, the person doing it may not necessarily realize, in the midst of his grief, that he’s doing something wrong. When people die, a spouse may use the card to buy groceries and pay for incidental expenses, not realizing the legal ramifications of doing so. However, you should know that any charges you rack up after the passing of the account holder are your responsibility, and, what’s more, you’ve given the credit card issuer a potential “in” to try to hold you responsible for the debt that was incurred before the account holder’s death. Bottom line: the card should not be used by anyone once the account holder has passed away.
Problems can even arise stemming from charges made when an account holder was alive but nearing death. If an account holder knows his death is imminent, and uses the card in a way that those close to him benefit from his “generosity,” such as securing cash advances in order to give money to kids or grandkids, or using the card(s) to buy a car for a child or spouse, those recipients can be held responsible for what they received if the deceased’s estate is not sufficient to cover the total of his obligations.
Those kinds of situations aside, however, the bottom line remains that the death of someone to whom you are connected in the familial sense does not mean you are now legally bound to honor their obligations – you’re not.