Do I have to Pay the Estate’s Debt?

People often have debts when they pass away such as credit cards and medical bills, but family shouldn’t pay those debts themselves outside of the estate.

When a family is grieving after the death of a loved one, the last thing any of them wants to deal with is unpaid debts and debt collectors.  But, sooner or later creditors must be dealt with, and one of the first questions clients ask is whether they have to pay the estate’s debt.

nj.com’s recent article asks “Is mom liable for my dead father’s credit card debt?” The answer: generally, any unpaid debts are paid from the deceased person’s estate, which means from the estate’s assets only.  In fact, fair collection laws require debt collectors to let you know that you aren’t responsible for that debt.

In many states, family members, including the surviving spouse, typically aren’t required to pay the debts from their own assets, unless they co-signed on the account or loan.  In other words, if they would have been liable for the debt themselves, they are still responsible.  If the debt belongs to the decedent, such as a creditor card they used, then only the estate is responsible to pay the debt.  There are a few potential exceptions, such as the IRS collecting estate income from anyone who benefits from the estate, but not many.

All the stuff that a person owns at the time of death, including everything from money in the bank to their possessions to debts they owe, is called an estate. When the deceased person has debt, the executor of the estate will go through the probate process.  There is a lot more to this process, see here for a fuller description.  https://galligan-law.com/probate-dissolving-the-mystery/

During the probate process, all the deceased’s debts are paid off from the estate’s assets. Some assets—like retirement accounts, IRAs and life insurance proceeds—may pass outside of probate and aren’t included in the probate process. As a result, these assets may not be available to pay creditors. Other estate assets can be sold to pay off outstanding debts.

Now, this portion is very state specific sometimes with very specific requirements, so you should do it at the advice of an attorney.  A relative or the estate executor will typically notify any creditors, like credit card companies, when that person passes away. The creditor will then contact the executor about any balances due. Note: the creditor can’t add any additional fees, while the estate is being settled.  At this point, assuming there is enough money, the executor will pay the estate’s debt from estate assets.

If there’s not enough money in the estate to pay the estate’s debts, then the executor has a very important task.  Every state has an order of priority to satisfy debts such as administrative debts (attorney’s fees, accountant’s fees, court costs), priority debts and then general creditors.  Different states also have different rules about whether you have to satisfy one creditor to the exclusion of the other.  The executor, with the assistance of an attorney, should pay the estate’s debt according to that order of priority.  The executor and the heirs aren’t responsible for these debts and shouldn’t pay them. Unlike some debts, like a mortgage or a car loan, most debts aren’t secured. Therefore, the credit card company may need to write off that debt as a loss.  As an aside, there might be an opportunity to settle or negotiate debts on this basis, though there are tax implications to the estate for writing off the debt.

If your loved one passes away with debt, don’t pay it.  Talk with an attorney about opening an estate for that deceased loved one and discuss how or whether to pay the estate’s debts.

Reference: nj.com (Jan. 15, 2020) “Is mom liable for my dead father’s credit card debt?”

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Inherited Property? What You Need to Know

There are many options for what to do with inherited property, but they depend on debts, costs of property, beneficiaries and your needs.

Many clients wonder what to do with inherited property, particularly real property like a house.  There are choices, and they depend on several factors. Are there other siblings who also have inherited portions of the ownership of the house? Is there another owner who needs to be bought out? Can the heir afford to take on the responsibilities and expenses of a home? Is someone else already living there?  These are all questions presented in the article “What to do when inheriting a house” from The Mercury.

There’s a tax issue to consider, for starters. Property that was titled in the name of the decedent at the time of death or is part of their estate taxable estate and then inherited, receives what is called a “step-up” in basis. This means that there is no federal tax due on the appreciation in value from the time the person purchased the home to the time that the person died.  They may also be state taxes as well.

Let’s say the person bought the home for $100,000 and at the time of her death the property is worth $300,000. The federal government will not tax the $200,000 difference between the original value and the DOD (Day of Death) value of the home. If the heir obtains an appraisal shortly after the death of the home owner and then moves in or if you already live there and the house is transferred into your name, the “clock” starts running again for another tax break, which is an additional $250,000 exclusion from capital gains on resale after you have lived there for two years.  If the property is sold shortly after the person’s death to a third party in an arms-length deal, the sales price would be the DOD value of the inherited property.

Now, this all assumes that any other beneficiaries have been satisfied as to the ownership of the house. A good elder law estate attorney will be able to help with the details, including the transfer of title.

Another issue: is there a mortgage on the house? If so, the new owner may need to satisfy the lender and refinance. If the heir has enough money to meet monthly payments, a strong credit rating to be able to get a mortgage and enough income to maintain the home, then it should be a relatively simple transaction.

Have the home inspected before moving in. Is the inherited property in good shape? If repairs need to be done, are they budget-friendly, or will they make the inheritance too expensive to be financially viable?  Who will pay for it?  The estate, the heirs, or a new owner?

Property maintenance is another consideration. If the estate can carry costs associated with the property until the property is sold and if the estate can pay for repairs, upgrades and maintenance so the house can be sold for a good price, then that is a reasonable approach to take. If there are other beneficiaries, they should all part of a discussion about how much money is worth investing in the house and what the return on investment will be.

One key concern that I’ve told countless clients over the years is decide early what to do with the inherited property, and stick with the plan.  Maintaining the property is time consuming, potentially costly, carries a risk in the form of liability and may prevent the estate from making liquid distributions if it isn’t sold.  Some of the worst estate administrations I’ve dealt with involved not deciding what to do with inherited property, and that lead to unnecessary cost and years of administration. So, the executor or trustee should decide earlier what to do with the property.

Finally, if the language of the will says “equally to my three children” or language similar to that and one sibling wants to buy out the other two, then an agreement on the value of the house and a plan for working out timing of the sale will need to be created. An estate planning or elder law attorney will be able to help create a family settlement agreement that will include an informal accounting, whereby all of the heirs receive their fair share of the inheritance and all sign off that they have agreed to the transaction.

Reference: The Mercury (Jan. 15, 2020) “What to do when inheriting a house”

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How Does a Trust Company Work?

A trust company may provide expert investment, asset management and estate settlement services for clients who need them.

Although they aren’t for everyone, a trust company can provide a variety of investment, tax and estate planning services for their customers.  Wealth Advisor’s recent article, “Understanding How Top Trust Companies Operate,” gives us a high-level overview of the nature and function of trust companies, as well as the services they provide.

A trust company is a separate entity owned by a bank or other financial institution, or in some cases by a law firm or other professional. It can manage trusts, trust funds and estates for individuals, businesses and other entities. In most cases the assets are held in actual trusts, with the trust company named as the trustee. They typically use several types of financial professionals, including financial planners, attorneys, portfolio managers, CPAs, and other tax professionals, trust officers, real estate experts and administrative personnel to effectively manage the assets.

Trust companies perform a wide variety of services related to investment and asset management. Most companies manage the investment portfolios within the trusts of their clients, however some prefer a client’s financial advisors do so instead. There’s also a variety of investments, such as individual securities, mutual funds and real estate, that can be employed to achieve growth or income.  They also can provide safekeeping services within secure vaults for other types of tangible investments or valuables, like jewelry, and occasionally for important documents, such as an original will or trust.  They also take full fiduciary responsibility for their clients’ financial well-being. This means that the clients’ best interests are always considered in each service and transaction performed.  See here for a fuller list of areas where a professional fiduciary may be utilized.  https://galligan-law.com/practice-areas/estate-planning/

Most clients use trust companies for estate settlement services, either as the executor or a trustee.  They can perform such tasks as valuation, dispersion and re-titling of assets, payment of debts, and expenses, estate tax return preparation and the sale of closely held businesses.  Trust companies frequently work with their clients’ heirs to provide the same types of services to the estate assets’ recipients as to the donor.

Trust companies aren’t for everyone, but serve a vital role in some estate plans.  They are especially useful where there are likely to be family disputes, disabled or very young beneficiaries, or in some cases, where a client doesn’t have someone they feel comfortable putting in charge of their estate.  Most clients who want to use a professional trustee must meet certain financial requirements, usually including at least a certain net worth, but for clients with these concerns, it’s worth it.  See Kevin’s Korner for more ideas on how to pick your fiduciaries.  https://youtu.be/W2LjFQFmY_I

If you expect to avoid family disputes in your estate, have young or disabled individuals or don’t have someone suitable, you should consider the use of a trust company in your estate plan.  Please contact our office for a free consultation to discuss how a professional fiduciary can help you achieve your goals.

Reference: Wealth Advisor (December 10, 2019) “Understanding How Top Trust Companies Operate”

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