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What impact will your debts have on your estate plan?

When someone dies, the property that they own doesn’t automatically transfer to other people, in most cases. Ownership instead transfers after the instructions detailed in estate planning documents have been fully realized.

Unless assets have been placed in a trust, before beneficiaries receive any assets to which they are entitled, they become the property of the estate itself. Something similar happens with any debts that are still owed by an individual when they die. Student loans, credit card balances and even Medicaid benefits can lead to creditor claims against someone’s estate. As a result, those who don’t properly plan to address their debts in an estate plan could have a less valuable legacy to pass to loved ones when they die.

Debt takes precedence over inheritance rights

Someone’s obligations to others don’t automatically end when they die. Creditors have a right to seek repayment from the assets in an estate before someone’s property gets distributed to their family members and chosen beneficiaries. The personal representative of the estate needs to notify the known creditors and also publish a statement warning of probate administration for unknown creditors.

They then have to wait for the probate courts to review such claims before they distribute funds to creditors and then later to the beneficiaries of the estate. Mistakes in the process can lead to personal liability for the party handling estate administration.

How advance planning can help

There are two main ways in which advance estate planning can help someone address their debt when they die. The first is by helping someone evaluate how much debt they have and invest in life insurance to cover their obligations when they pass. The second is by changing how they hold certain property so that their assets don’t pass through probate court.

Assets moved to a trust or owned jointly with someone else will not always have to pass through probate court as part of someone’s estate. If it does not pass through probate court, it may not be vulnerable to claims by creditors. Advance planning to address debts can also protect someone from creditor activity when they are older and live on a fixed income. Their planning can also help them qualify for Medicaid when they require more extensive medical support later in life.

Addressing known concerns in an estate plan with the assistance of an experienced legal professional can help someone to protect themselves and leave meaningful resources for the people they love when they die.