As parents age, many financial considerations come up: long-term health care, assisted living facilities, funerals and more. Especially if your parents have a lot of bills to pay, you may also wonder: Am I responsible for my parents’ debt when they die?
In a word, no (most of the time).
“As a general rule, you’re not responsible for your parents’ debts like a car loan, mortgage or credit card debt,” says Thomas Anderson, a director of financial planning at Northwestern Mutual. “But when someone dies and their probate estate goes through the courts, their debts are paid from what’s included in probate — so that’s what you have to watch for.”
Probate is a proceeding in which a court determines the value of an estate and makes sure those assets are used to pay debts before any leftover funds are given to heirs.
“If they have $300,000 worth of debt and only $150,000 of probate assets, then some of the creditors lose out,” Anderson says. “Secured creditors have to share the assets that are in there, and the unsecured stuff like credit card debt gets discharged.”
Encourage your parents to review their estate plan with their attorney to ensure assets that they want to pass down free and clear don’t inadvertently become subject to probate.
REVIEW YOUR PARENTS’ BENEFICIARY DESIGNATIONS
In the probate process, after a person dies, certain creditors who are still owed money are paid out from the value of assets subject to probate: items like the house, the car, the checking account.
However, assets that can be passed down to a named beneficiary can’t be snagged by creditors as a general rule. These include life insurance policies and retirement accounts like IRAs and 401(k)s. Here’s a key point: Your parents must actively name you or someone else as the beneficiary for the asset to avoid probate. A local estate planning attorney or financial planner can also help advise on this.
“Unfortunately, we do see situations where dad dies and passes his $300,000 IRA to mom, who never ends up adding a beneficiary before she passes,” Anderson explains. “In that case, it becomes part of probate and subject to creditors when mom dies.”
BEWARE OF COSIGNED LOANS, SHARED ACCOUNTS
You also want to avoid any moves that inadvertently make additional assets part of probate — or leave you on the hook for a debt. People typically encounter a situation like this when they try to help their parents by cosigning a loan or adding them to a checking account.
“If you co-sign a loan, you’re liable for that full debt,” Anderson says. “Maybe mom and dad wanted to get a second mortgage but didn’t have the income and you cosigned. Now that’s your debt. The same goes for cars, credit cards and other loans.”
It might seem harmless to add mom or dad to your checking or savings account so they can grab some cash as needed, but that account becomes subject to probate simply because mom or dad’s name is on it. It might be “your” $50,000 in checking, but as far as the probate process is concerned, it will be used to pay any outstanding debt from your parent.
“Remember, the good news is that the system is set up so you’re generally not responsible for mom and dad’s debt,” Anderson says. “Take the time to make sure they’ve set up their beneficiaries, and that you haven’t accidentally put yourself on the hook by cosigning loans or sharing accounts. It’s time well spent.”