Managing Estate Debts for the Good of Your Heirs

Very few of us manage to plan our finances neatly enough that we die with zero debt. Even if you live largely debt-free, timing alone will typically result in a least a few outstanding medical bills or an outstanding credit card balance you would have paid off at the end of the month. For most people, debts are more extensive, and may include mortgage loans, outstanding debt on car loans, personal loans, credit card debt and more. These debts may be even more extensive and more complex if you operate a business as a sole proprietor, or if a final illness results in large medical bills.

Posted on July 19, 2017

If you’re confident that you’re leaving behind sufficient assets to cover your debts and still provide for your beneficiaries, you may not have given much thought to the specifics. However, when cash reserves may have to be directed to the payment of debts, or assets may have to be liquidated to pay estate debts and expenses of administration, taxes, and other expenses, planning ahead can make all the difference to your heirs.

Executor’s Responsibility for Estate Debts

If you pass your property through a will, your executor will be responsible for identifying your creditors and settling your debts. When you die intestate, a court-appointed administrator will play a similar role.

Your first, and simplest, step toward easing the burden of settling your debts is to ensure that you keep up-to-date records of your outstanding obligations and keep them organized and in a place your executor knows about. Having a folder or a digital file with all creditor names, contact information, account numbers, payment schedules, and outstanding balances will make the process simpler and less stressful for your executor.  Accurate and well-organized records will also decrease the likelihood that a creditor may be overlooked and surface later, when making payment may be more complicated and disrupt beneficiaries’ expectations.

Determining Which Assets Will Pay Debts

Leaving it to your executor to sort out which assets should be used to pay debts can create conflict and confusion, particularly if you have multiple beneficiaries. In addition to making bequests, your will should include specific instructions about which assets are to be liquidated to pay your debts and costs associated with administration of your estate. Since it’s unlikely that you’ll be able to predict the exact value of your assets or amount of outstanding debt at the time of your death, this may mean creating a hierarchy of assets that can be committed, in sequence, until all debts are paid.

Taking the time to make this assessment and spell out how debts are to be managed will help your executor and your beneficiaries in that:

  • Your executor won’t be responsible for making tough calls about which assets to liquidate, risking conflict with beneficiaries
  • You will reduce the likelihood that the probate court will have to step in to resolve the issue
  • You will minimize the risk that specific bequests will be disturbed by obligations of the estate
  • Beneficiaries will know what to expect, rather than waiting to see which assets are liquidated and which remain for distribution

An Experienced Estate Lawyer Can Help You Plan

Determining how to allocate assets after death and which assets will be applied to outstanding estate debts and the costs of administration may be difficult, particularly since you likely won’t be able to accurately anticipate the precise nature and extent of assets and liabilities. An experienced estate lawyer can assist in creating a plan that will provide clarity for your executor and beneficiaries while allowing for the shifting nature of debts and assets.

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