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What happens to debts when a person dies?

On Behalf of | Dec 9, 2023 | Estate Planning

Dealing with a loved one’s passing is challenging, and the complexities of handling their financial affairs can add to the stress. A common concern in estate planning and administration is what happens to a person’s debts after death. 

Understanding how debts are managed is crucial for those planning their estates and for family members who might be handling the affairs of a deceased relative. Consider these important points about these debts:

Creditor claims on the estate

When a person passes away, their debts don’t simply disappear. Instead, these obligations are generally paid out of their estate. Before any assets are distributed to heirs, the executor of the estate must notify creditors, allowing them to make claims against the estate for any debts owed. Only after all debts and taxes have been paid will the remaining assets be distributed to the beneficiaries.

Irrevocable trusts and creditor protection

The irrevocable trust is one estate planning tool that can protect assets from creditors. Unlike a will, assets placed in an irrevocable trust during the individual’s lifetime are generally not considered part of the estate at death and are shielded from creditor claims. 

Responsibility of loved ones for debts

It’s a common misconception that family members or loved ones are responsible for the deceased’s debts. Individuals are generally not personally liable for a deceased relative’s debts. The exception is if they co-owned a debt with the deceased. For example, if a husband and wife have a joint mortgage or credit card, the surviving spouse would be responsible for continuing to pay that debt. 

Handling debts is a challenge for someone who just lost a loved one. Ensuring the understanding of the ins and outs of this is critical to reduce the stress.