Amy & Dan Smith's Planning for Life: What Happens to my Debt when I Die?

A question often asked by an heir of an estate or a person who has been nominated to be the administrator of an estate is: Am I going to be personally liable for the debts of the decedent? The answer is that, unless you undertook joint liability with the decedent during his/her lifetime, as a general rule you will not be liable for his/her debts. Nevertheless, the debt of a decedent can affect the heirs significantly.

If husband and wife signed a mortgage as owners of the residence and one of them dies, the survivor continues to be liable for the mortgage debt. The survivor may be able to adjust payments to manage the debt burden, but failure to make the required payments could lead to foreclosure.

If the debt is owed by the decedent alone (that is, there is not a joint debtor), then the estate of the decedent is liable for the debt. This can affect the heirs in different ways. For example, assume that the decedent had a car loan. If the estate does not have sufficient assets to pay off the loan, the car may be repossessed and resold. To the extent that the value of the car is insufficient to pay off the loan, the creditor (e.g., the bank or other financing company) can attempt to recover the remainder of the debt from the estate. Secured creditors (e.g., the car lender) come before the priority list of creditors discussed below.

Creditors holding unsecured loans fall into the category of “General Creditors.” An example would be a credit card issuer. Assuming that no one was on the credit card except the decedent, the balance due at the time of death is a debt of the estate. Here’s how that works. Pursuant to statute, creditors have different levels of priority in their claims against the estate. Costs of administration of the estate, family and spousal statutory allowances, funeral expenses, federal and state tax liabilities, and some medical expenses are at the top of the priority list. At the bottom of the list are general creditors. After payment of the priority creditors, the general creditors share proportionately in whatever assets remain. Subject to some exceptions, only after all the creditors are paid do the heirs receive their shares. Thus, even though an heir is not personally liable for the debt of his/her decedent, such debt can directly affect his/her inheritance.

The term “estate” applies to assets passing under a will or by intestacy. It is important to note that the claims of creditors apply equally to the revocable trust of a decedent which he/she created during lifetime, even though assets transferred into that trust during lifetime avoid probate.

An estate administrator incurs no personal liability for the decedent’s debts simply by assuming the office of administrator. However, the administrator can incur liability by failing to administer the estate according to the rules and safeguards established under the Virginia Code. For example, paying a general creditor ahead of a priority creditor can generate personal liability for the administrator.

There are some circumstances (beyond the scope of this article) where the assets of the estate after passing into the hands of an heir can be recalled to pay debts of the estate. The heir is not personally responsible for the debt but the asset(s) he/she receives may be subjected to a claim of an estate creditor.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com).

Amy V. Smith Wealth Management, LLC is an independent firm.  Amy V. Smith, CFP, CIMA offers securities through Raymond James Financial Services, Inc., member FINRA/SIPC.  Her office is located at 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176.  (Tel: 703-669-5022, www.amysmithwealthmanagement.com). Any opinions are those of Amy and Dan Smith and not necessarily those of Raymond James.  Raymond James does not guarantee that the foregoing material is accurate or complete and does not provide legal advice.  Dan Smith is not affiliated with Raymond James.