Even if it’s expected, the death of a loved one is one of the most traumatic events an individual can endure. While the emotional distress of losing a family member can be overwhelming, the resulting financial fallout can be equally stressful. So, while people often inquire about what they will inherit, many don’t think to ask if they can also inherit debt.
Is there such a thing as “debt inheritance”?
Unfortunately, it is possible to inherit unpaid debt. While this may be an uncomfortable conversation with loved ones, knowing whom you can inherit debt from is essential. Planning for debt inheritance is also crucial if you have children, as you may find yourself on both the giving and receiving end of debt inheritance. So, it’s important to ensure that you (or your children) don’t inherit any outstanding debt. The following are common situations to consider and ways to eliminate the stress of debt inheritance.
Do you inherit your spouse’s debt when you get married?
The short answer to this question is no. Any debt accumulated before marriage belongs to the person who created the debt. The spouse is not responsible for repaying any unsecured (i.e., credit cards) or secured debt (i.e., auto loans). However, there are other types of debt that are transferred when one spouse survives the other.
One such debt inheritance is mortgage debt. If a spouse dies and the other inherits the home, the surviving spouse is responsible for paying the mortgage. If the surviving spouse cannot make mortgage payments, the house will be foreclosed. This can harm the surviving spouse’s credit score. In the eyes of the lender, they are the party responsible for that debt.
Another type of debt that can be inherited is joint debt. Examples of this type of debt are joint credit card accounts and mortgages in both parties’ names. These debts are essentially contracts stating that the surviving party will be responsible for paying off the remaining credit card or mortgage balance in the event of any tragedy. Ownership transfer of the debt is automatic.
Do you inherit your parent’s debt?
Adult children will only inherit their parent’s debt if there’s an asset attached to it. In most cases, the estate will pay off any outstanding debt before granting cash and property inheritances. If the property is still under a mortgage agreement with the bank, the party receiving the property will become responsible for the mortgage payments.
The estate is also responsible for any outstanding tax debt. The IRS does not accept death as a reason to not pay taxes, which means the IRS will deduct outstanding tax debt from the estate’s assets. If the value is less than the total amount owed in taxes, then the government will forgive the remaining balance.
To help with outstanding debt, many adults request to liquidate their assets before children receive inheritances. For example, some consider selling their house and using the proceeds to pay off the mortgage and other outstanding debt. This strategy is the best way to ensure parents don’t pass on debt to their children.
Can you inherit medical debt or student loan debt?
Medical Debt
Medical debt works the same as tax debt. Technically, the spouse and children don’t inherit the medical debt. However, any inheritance is first used to pay off any outstanding medical debt. One exception is if the medical bills are cosigned by someone else. In this case, the deceased person’s spouse and children are not responsible for the medical payments.
It is also important to note that some states have filial responsibility laws. These laws hold adult children responsible for financially supporting their parents and Medicaid can use these laws to take from the children’s inheritance. Additionally, some states have enacted community property laws that put the responsibility for all debt payments on the surviving spouse.
Student Loan Debt
Student loans are slightly different from medical debt, and student loan debt is handled differently depending on whether it is a federal or private loan.
Federal student loan debt is the easiest to handle, as it is forgiven upon the borrower’s death. The government does not pass federal student loan debt to anyone in the family. The same goes for parent PLUS loans. To get loans discharged, estate members must provide proof of death.
On the other hand, private student loans aren’t as generous. While some private lenders, like Sallie Mae, waive the borrower’s debt, others pass the debt to the estate. If the estate cannot afford to pay the debt, then the debt remains unpaid. Children and spouses do not inherit the student loan debt.
Use the Benefits of Term Life Insurance to Pay Off Oustanding Debt
Struggling with a mortgage payment, property payments, or a cosigned student loan is the last thing you want your family to deal with if something tragic happens to you. While they will not inherit all of your debt, you still need to prepare for the debt they can inherit.
Many people opt for term life insurance to avoid the financial stress of debt inheritance. One significant benefit of term life insurance is that it pays beneficiaries a lump sum of cash when the policyholder dies. Children and spouses often use this lump sum cash benefit to pay off inherited debt.
Another benefit of term life insurance is that the death benefit is not considered part of the estate. Meaning, once the estate and/or insurance has paid off any outstanding debts, your beneficiaries will have the remainder as an inheritance.
We Can Help
Term life insurance can be the difference between leaving your family with an inheritance and a mountain of debt. If you’d like to learn more about your life insurance options, please give us a call any time and one of our experienced life insurance advisors will be more than happy to help you find coverage that fits your life.