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Adverse economic conditions and poor financial decisions have left thousands of people in debt. Added to this, many face a perplexing situation when they are informed that their inheritance from dead relatives or friends will also be subject to debts incurred by the deceased!
Debt Can be Inherited
Generally, debts of friends or relatives who have declared you a beneficiary of their estate are not directly inheritable. In this case, the net value of your inheritance will decrease as the debts will be amortized, but your personal assets will not be included in estate-related debts.
Some Facts on Inheritance
When someone passes away, his/her assets are passed in to the immediate family. No written will is required for this, though family members can refuse to take the assets, in which case the next closest relatives will be called upon.
If this continues and no fixed heir is found, the estate goes to the government. But if the deceased had some outstanding debts, inheritance procedures can become fairly complicated.
Standard Procedure
When a deceased person has debt, the standard procedure is the liquidation of his/her assets where the creditors are paid first. Whatever remains in cash or property is distributed among the beneficiaries. In some cases the beneficiaries may pay the creditors themselves to prevent the auction of the estate.
This usually happens if the debt amount is insignificant in comparison to the value of the estate. Why sell the house when you can retain it by paying a little amount from your pocket?
If, however, the debt exceeds the value of the inherited assets, the beneficiaries are absolved from doing anything at all. The standard procedure is carried out, and the remaining debt is written off.
Deceased Spouse
Inheritance rules can slightly vary in the case of a deceased spouse. The surviving partner will only inherit debt if they were living in a state with joint-property laws and if the debt was accumulated during marriage. However, business debt of the deceased person can be exempt from these conditions if the surviving partner was not part of the business entity.
Debt Co-Signing
Co-signing refers to the event where you help out a relative by acting as a guarantor of your loan. If a person is a co-signer on the debt of a deceased person, he/she will be liable to repay the outstanding amount. Note that it is also possible that a person may be a co-signer of the debt, but doesn’t receive a share in the inheritance.
This means that the debt has to be repaid but the person cannot have any access to the inherited assets. But if you were a co-signer and a recipient of the inherited assets, it is up to you to liquidate them. However, if the debt value exceeds the value of the inheritance, or let’s suppose there was an underwater mortgage on the estate, you have the financial responsibility of amortizing debts.
Other Cases of Inherited Debt
Sometimes, survivors of a deceased can be impacted by debt even if they did not inherit it directly. This mostly happens if you were using the late person’s property, which you would have to give up if the bank seizes it.
Taxes
Inherited property can be exempt from taxes if its gross value falls below $5,120,000. If that is not the case, tax returns have to be filed on inherited estate at 35%. Note that this tax is different from the inheritance tax levied in:
- Pennsylvania
- New Jersey
- Nebraska
- Maryland
- Kentucky
- Iowa
- Indiana
If you happen to live in these states, you will have to pay additional tax as heir to an inherited property along with its estate tax.
Conclusion
So here we have another case where lack of awareness about inheritance laws can lead people further into debt. To avoid falling in this hole yourself, educate yourself and your friends.
If you are already at the receiving end of a financially irresponsible relative’s inherited debt, you need to use some financial management tools, such as a debt to income ratio calculator. You can use a debt to income ratio calculator to help with management of your current financial position and the debt you recently incurred.
You can search the internet for more information on inheritance and using a debt to income ratio calculator.
I would like some advice. We are debt free and have a trust. Our house is paid for. Our college age child has made bad choices (drugs, etc.) and has blown their own money very quickly. We want to take them off of our will but we want to put them back on when they straightens up. If they inherits a lot of money right now, it will probably be gone in a year or less. Do you have any advice? Thank you.
First, I would talk to a financial advisor, or the person who manages your estate at the moment. I don’t know about other countries, but in France where I am from it is illegal to take your kids off your will. There is a minimum you have to leave them. The solution would be to start a foundation maybe, and donate most of the money to that foundation, or to buy your kid some property under your grandchild’s name if you have one, or someone who is not an adult yet, so they can’t sell the property while the child is under aged. I know people who donated a house to their child but they remained living in the house until they pass, then the child can have the property. There are lots of ways to avoid that a person who is not good with money doesn’t spend it all, including having a professionally managed fund that will only give the child an allowance, until he is sober for five years, or some other setup that you feel convenient. Unfortunately, I cannot help you much with what the law says.
Hi Anonymous,
Your best bet is to talk to a lawyer who handles this kind of situation. The lawyer would direct you step-by-step what to do. You need specific and concrete steps to take. Again, talk to a lawyer. Do it fast before it’s too late when they could get your inheritance.
Yes i found out that this topic is very interesting. Debt is very stressful thing that happened in your life, and if you want to help you out your debt, you can file for bankruptcy.
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