Who Pays Credit Card Debt when Someone Dies?

Post author:Mary Galligan
Post published:December 31, 2020
Post category:Estate Planning Income Taxes Probate

*The estate is responsible to pay credit card debt after someone dies, but planning for that debt will protect the survivors.*

Credit card debt worries create sleepless nights for many. Will a surviving spouse or family members be burdened with the debt? A recent article titled “Here’s what happens to your credit card debt when you die” from CNBC explains how post-mortem credit card debt works.

The estate administration occurs after someone dies. Part of that process is “marshaling” the assets, which means to identify and gather the assets of the person who passed. Once that is done, there is a hierarchy of who gets the money, which is generally creditors and then the beneficiaries, and there are degrees of creditors that determine who get paid first among them.

Credit card debt is “unsecured” debt, meaning it isn’t linked to any kind of collateral, like a car or a house, and it is usually paid with the last in line creditors. However, it is important to note that it is only the decedent’s money in the estate that is used to pay the credit card debt.

Assets used to pay off the debt might include cash, or property with cash value. Certain types of accounts, including retirement or tax-deferred accounts, and life insurance payouts, might be shielded from this process. Other types of accounts might not be owned by the estate at all, in which case they would by pass the process. Laws vary by state, so an estate planning attorney who practices in the state where the decedent lived will be the best source to address this issue.

Is the surviving spouse responsible for credit card debt?

If the person has no assets, then loved ones won’t be responsible for the debt. However, if someone is a joint account owner on the credit card, then in certain states, the surviving owner may be responsible for the simple fact it is their debt too. Authorized users are generally not held responsible for the deceased’s unpaid balances.

I would say however that you always want to make clear to the company what your role and relationship is to the card account owner if you are an account owner. One of the first cases of my career involved a gentlemen who thought he had to pay his mother’s credit card after she died. He helped her pay it while she was alive despite not being on the card. The credit card company received so many checks from him that they changed the name on the account to his name. We ultimately resolved it, but this type of confusion made things more difficult than necessary.

It is also important to note that heirs may not be legally responsible for paying the credit card debt, but all debt must be settled before loved ones can receive their inheritance. Workarounds, if possible, need to be done in advance of the person’s death in the estate planning process. Further, if the credit card isn’t satisfied, credit card companies will issue 1099’s to the estate for cancellation of debt. This potentially creates income in the estate which may generate tax consequences to the beneficiaries, but that requires a far more involved analysis.

Estate laws differ by state, but any joint account holders on credit cards need to be aware of the debt and have a plan for when one of the owners dies. If paying off the debt is not possible, perhaps one of the joint owners may seek to remove themselves from the credit card, if the other person was responsible for creating the debt.

A frank discussion about the debt and how to manage it is definitely in order. One solution may be to purchase a life insurance policy and have the proceeds go to the person who will be effected by the debt, such as the surviving spouse. A term policy might be a manageable way to do this, especially if both people depend on two incomes to manage their bills. You can also see here for another discussion on estate debt that goes through the order of creditors a bit more fully. https://galligan-law.com/do-i-have-to-pay-the-estates-debt/

This won’t be the most pleasant discussion with a financial partner, but is necessary, along with planning for incapacity. Perhaps the best thing that can come out of the credit card problem, is a decision to have an estate plan created that includes addressing the debt and preparing for the future.

Reference: CNBC (Nov. 21, 2020) “Here’s what happens to your credit card debt when you die”

That Last Step: Trust Funding

Post author:Mary Galligan
Post published:August 14, 2020
Post category:Probate Trusts

*A trust only controls the assets it owns, so don’t forget the critical last step in a trust estate plan: properly funding the trust.*

Neglecting to fund trusts is a surprisingly common mistake, and one that can undo the best estate plans. Many people put it on the back burner, then forget about it, says the article “Don’t Overlook Your Trust Funding” from Forbes.

If you read our blogs routinely, you’ll know we are fans of trust planning. Done properly with appropriate trust funding, a trust helps avoid probate, provides for you and your family in the event of incapacity and streamlines the estate process.

Creating a revocable trust gives you control. With a revocable trust, you can make changes to the trust while you are living, including funding. Think of a trust like an empty box—you can put assets in it now, or after you pass. If you transfer assets to the trust now, however, your executor won’t have to do it when you die.

Note that if you don’t put assets in the trust while you are living, those assets may go through the probate process. While the executor will have the authority to transfer assets, they’ll have to get court to appoint them as executor first. That takes time and costs money. It is much better if you do it yourself while you are living.

A trust helps if you become incapacitated. You may be managing the trust while you are living, but what happens if you die or become too sick to manage your own affairs? If the trust is funded and a successor trustee has been named, the successor trustee will be able to manage your assets and take care of you and your family. If the successor trustee has control of an empty, unfunded trust, it may not do very much good. Instead, an agent under a power of attorney, or if none, a court-appointed guardian may have to be appointed.

Move the right assets to the right trust. It’s very important that any assets you transfer to the trust are aligned with your estate plan. I cannot stress this enough, but you should speak with an attorney regarding how to fund your specific trust. Not all plans and assets are the same, and different plans call for different trust funding. That said, taxable brokerage accounts, bank accounts and real estate are usually transferred into a trust either immediately during lifetime or upon death via a beneficiary designation. Some tangible assets may be transferred into the trust, as well as business interests. Some assets, such as life insurance and retirement funds may designate the trust in some manner by beneficiary designation, but in light of the Secure Act changes you’ll definitely want to discuss that with your attorney. See here for more: https://galligan-law.com/how-the-secure-act-impacts-your-estate-plan/

Your estate planning attorney, financial advisor and insurance broker should be consulted to avoid making expensive mistakes. You should also consider trust funding when you review your estate plan to ensure it is updated with new assets.

You’ve worked hard to accumulate assets and protecting them with a trust is a good idea. Just don’t forget the final step of funding the trust.

Reference: Forbes (July 13, 2020) “Don’t Overlook Your Trust Funding”

Long Term Care: What’s it all About?

Post author:Mary Galligan
Post published:August 15, 2019
Post category:Alzheimer's Elder Care Elder Law Estate Planning Family Legacy Long-Term Care Medicaid

*Long term care costs have a heavy impact and most people don’t know how to pay them. Long term care insurance and a well crafted estate plan can help.*

Many people are scared about the prospect of needing help in a long term care setting, and they are right to be worried. For many people, a spouse or adult children will become the go-to caregivers, but not everyone will have that option, says Market Watch’s article “This is how much long-term care could cost you, and don’t expect Medicare to help.”

If that’s not worrisome enough, here are facts to consider:

More than a third of people will spend some time in a nursing home, where the median annual cost of a private room is well over $100,000, says Genworth’s 2018 Cost of Care Survey. Don’t expect those numbers to go down.
Four of ten people will opt for paid care at home, and the median annual cost of a home health aide is more than $50,000.
Half of people over 65 will eventually need some kind of long term care costs, and about 15% of those will incur more than $250,000 in costs, according to a joint study conducted by Vanguard Research and Mercer Health and Benefits.

Medicare and even private health insurance don’t cover what are considered “custodial” expenses. That’s going to quickly wipe out the median retirement savings of most people: $126,000. With savings completely exhausted, people will find themselves qualifying for Medicaid, a government health program for the indigent that pays for about half of all nursing home and custodial care. See our website for more information https://galligan-law.com/practice-areas/elder-law/.

Those who live alone, have a chronic condition or are in poor health have a greater chance of needing long term care. Women in particular are at risk, as they tend to outlive their husbands, may not have anyone available to provide them with unpaid care and the burden of caring for their spouses affects their own health. If a husband’s illness wipes out the couple’s savings, the surviving spouse is at even greater risk with fewer options.

The best hedge against long term care costs is to purchase a long term care insurance policy, if you are eligible to purchase one and it is cost effective. Wait too long, and you may not be able. One woman persuaded her parents to purchase a long term insurance policy when her father was 68 and her mother was 54. Five years into the policy, her father was diagnosed with Parkinson’s disease. The policy covered almost the entire cost of his 24-hour care in the final months of his life. Her mother lived to 94, so the investment in the policy was well worth it.

Everyone approaching retirement needs a plan for long term care costs. That may be purchasing long term care insurance or purchasing a hybrid life insurance product with long term care benefits. If such products aren’t available, we can craft an estate plan which facilitates using government benefits in the future, like Medicaid, so that you and your loved ones get appropriate care while preserving as much of your legacy as possible.

Reference: Market Watch (July 19, 2019) “This is how much long-term care could cost you, and don’t expect Medicare to help.”

Who Pays Credit Card Debt when Someone Dies?

That Last Step: Trust Funding

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