If you pass away with debt, do your heirs have to pay?

 Posted on December 07, 2021 in Estate Planning / Probate

If you start looking into your estate planning, you know that it begins with dividing assets, but you may quickly realize that you have a lot of debt, as well. You plan to pay this off before you die or to declare bankruptcy or take care of it in some other fashion, but there's no guarantee.

If you pass away and still have debt, does that have to become part of your estate plan? Do your heirs need to pay your debt, and will they inherit it just like they would inherit your assets?

Your estate will be responsible for any remaining debt

Your heirs don't have to deal with your debt, at least not in the sense that they have to pay the creditors back on your behalf. Instead, the money will be taken from your estate. The executor of that estate may have to pay the debt directly with the financial assets you have, or they may even have to sell your physical assets and then take the earnings to pay back as much of that as possible.

It is still important to think of this in the context of estate planning since it will reduce the size of your estate and possibly absorb assets that you meant to leave to your heirs. They won't get the assets that are used to pay debts and taxes. But they also don't have to worry about covering your debts beyond that point, so they're not going to take on debt that they never expected.

Setting up your plan

If you have a complex financial situation, perhaps one that includes a high level of debt and a high level of assets at the same time, you need to know exactly how to set your plan up for success.