You may be aware that your parents have a significant amount of debt. Perhaps you have always been concerned about their spending habits or they have recently expressed trouble paying off large amounts of debt. It is possible this debt will remain unresolved when they pass away. They could still owe income taxes, for instance, or credit card bills.
As a beneficiary in their estate plan, you know you are set to inherit their assets, such as bank accounts, real estate, their home, life insurance policies, home furnishings, vehicles and items with sentimental value.
But will you also inherit their debt? Could this cause significant financial trouble for you, even though you never took out those loans or used those credit cards?
Debts are paid before asset distribution
You will not inherit the debt, but it may still impact your financial position.
Typically, the estate executor takes inventory of all debts and assets when someone passes away. The executor then uses the estate’s assets to pay down as much of the debt as possible. Only after debts are settled will the remaining assets be distributed to beneficiaries.
If your parents have so much debt that it consumes all of their financial assets, you may not inherit the money you expected. Debt must be paid off before assets are distributed. However, you will not inherit their debt directly or be obligated to repay any amount that the estate couldn’t cover.
Financial issues like this can complicate the estate administration process. As you and your family navigate this process, take the time to carefully consider all of your legal options.