Surviving Spouse

What Happens to Debt when You Die?

When a person dies, it’s not unusual for them to leave behind some unpaid debt. What happens to that debt depends upon how their estate was organized, says the article “This is how your unpaid debts are handled if you pass away” from CNBC.com. The estate consists of whatever is owned, whether the person was wealthy or not. It includes financial accounts, real estate and personal possessions.

For surviving spouses, this can be worrisome. In most instances, they are not responsible for their spouse’s debt, but there are some exceptions. Here’s how it works.

Paying off all debts and then distributing the remaining assets is part of the probate process. Every state has its own laws regarding how long creditors have to make a claim against the estate. In some states, it’s a few months, in others it can last a few years. An estate planning attorney in your state will know how long the estate is vulnerable to creditors.

In most states, funeral expenses take priority, then the cost of administering the estate, followed by taxes and hospital and medical bills. However, not all assets are necessarily part of the estate, and this is where estate planning is important.

Life insurance policies, qualified retirement accounts and other assets with named beneficiaries go directly to the beneficiaries and do not pass through probate. The same goes for assets placed in trusts, as does jointly owned property, as long as it has been properly titled.

With the right planning, it is possible that an entire estate, including one that is insolvent, could be passed on to heirs outside of probate, leaving creditors high and dry. However, there are a handful of states that have “community property laws” that make debt more complicated.

The law in these states views both assets and certain debt accumulated during the marriage as being owned by both spouses, even if it is only in the decedent’s name. That includes debt like medical expenses or a mortgage. However, that’s not the final word. A well-structured letter with a copy of the death certificate can sometimes lead to the debt being discharged. During the probate process, the company holding the debt should be advised that the estate has little or no assets to cover the debt and ask that it be forgiven.

This does not apply to co-signing on a loan. Although the request can be made, it is not likely to be honored. Federal student loans are forgiven if the student dies, which seems a matter of kindness. Parent PLUS loans, which are loans taken out by parents to help pay for education, are usually discharged, if the student or parent dies.

Your estate planning attorney can help structure your estate to protect your surviving spouse and family members from creditors.

Reference: CNBC.com (July 31, 2020) “This is how your unpaid debts are handled if you pass away”

Preparing for the Inevitable: The Loss of a Spouse

Becoming a widow or widower at a relatively young age puts many people in a tough financial position, says the article “Preparing for the Unexpected Death of a Spouse” from Next Avenue. At this point in their lives, they are too young to draw Social Security benefits. There is no best time to lose your spouse, but this is a particularly hard time.

Women are more likely than men to lose a spouse, and they are typically left in a worse financial position than if their spouse dies before they are old enough to take retirement benefits.

One of the best ways to plan for this event, is for both spouses to have life insurance. This can replace income, and term life insurance, if purchased early in life, can be relatively affordable. The earlier a policy is purchased, the better. This can become a safety net to pay bills and maintain a lifestyle.

Another key component for surviving early widowhood, is being sure that both spouses understand the couple’s finances, including how household bills are paid. Usually what happens is that one person takes over the finances, and the other is left hoping that things are being done properly. That also includes knowing the accounts, the log in and password information and what bills need to be paid at what dates.

Having that conversation with a spouse is not easy, but necessary. There are costs that you may not be aware of, without a thorough knowledge of how the household works. For instance, if the husband has done all of the repairs around the house, maintaining the yard and taking care of the cars, those tasks still need to be done. Either the widow will become proficient or will have to pay others.

Couples should work with an estate planning attorney and a financial advisor, as well as an accountant, to be sure that they are prepared for the unexpected. What survivor’s benefits might the surviving spouse be eligible to receive? If there are children at home age 16 or under, there may be Social Security benefits available for the child’s support.

Discuss what debt, if any, either spouse has taken on without the other’s knowledge. Any outstanding medical bills should also be discussed. The last thing a loved one should have to cope with when a spouse passes, is a tangle of debt. However, this often happens.

If the spouse was a veteran, the surviving spouse might be eligible for benefits from the Veterans Administration. Find out what information will be needed to apply for benefits.

Talk with your estate planning attorney to make sure that all proper documents have been prepared. This includes a last will and testament, power of attorney, health care proxy and any trusts.

Reference: Next Avenue (Dec. 18, 2019) “Preparing for the Unexpected Death of a Spouse”

Do-It-Yourself Will Leads to Disaster

This is a cautionary tale of what can happen when people create a do-it-yourself will without the help of an estate planning attorney. As Ms. Cockrum told News 2 in the article “The power of a will and trouble without one,” she’s going from court procedure to court procedure, and feels overwhelmed. The entire issue would have been prevented with a properly prepared will.

Work with an estate planning attorney to avoid the many pit-falls of the do-it-yourself will

Without a valid will, a judge must determine how to divide assets in an estate. In this case, the biggest issue concerns the family home. The mortgage for the home is in her late husband’s name, even though they bought the house and maintained it together.

Here’s the problem: his children from a previous marriage are legally entitled to half of his assets.

Without a will, battles among family members are common. One purpose of the will is to name an executor (also known as the personal representative) who takes charge of distributing assets, including selling a home, paying off any debts and making sure that final wishes are carried out, as the decedent wanted. Without an executor, the first battle is over who will be in charge. That can take months and delay any resolution to the estate.

If there are minor children and no will, the opportunity to determine who will take care of the children is left to the court. Someone who does not know the family will make a decision to appoint the person who becomes their guardian. It may be someone you would not have wanted to raise your kids.

The will also outlines who gets what possessions from the estate. Family heirlooms and artifacts, like china, jewelry, collections and all kinds of items hold emotional and financial value. Fighting over who gets what, happens often when there’s no will. That takes time to resolve.

Without an estate plan to help manage tax liabilities, there may be taxes that could have been minimized. The cost of attorney’s fees to settle an estate without a will is typically going to be much higher than working with an attorney in the first place to create a will and other important documents.

Another surprise that families run into when there’s no will is that people think the surviving spouse inherits everything. However, this is not always true. Without a will, the state law determines what happens to the estate’s assets. Depending on the state, your spouse may get 50% and your kids may get 50%, or the surviving spouse might get everything. In other states, the surviving spouse receives a third.

The simplest way to avoid the troubles associated with a do-it-yourself will is to make an appointment with an experienced estate planning attorney and have an estate plan created that will protect your surviving spouse and your family. The attorney will also help you prepare for incapacity, with a power of attorney and healthcare power of attorney. This is not a do-it-yourself task.

For information about working with Mastry Law to insure your will transfers your assets how you want, visit our website and request a consultation.

Reference: News 2 (Jan. 29, 2019) “The power of a will and trouble without one”

estate planning for married couples

Getting Married Again? Protect Your Spouse and Your Children

One of the goals in estate planning when one spouse moves into the home of another spouse, is to ensure that if the owner spouse dies first, the new spouse will be permitted to remain in the home, while preserving the value of the home for the owner spouse’s children. It’s not always an easy situation to resolve, according to an article in the Times Herald-Record, titled “How to preserve your home’s value when remarrying,” but with good planning and a solid estate plan, it can be done.

With poor planning, however, your assets could go to your second spouse and then, to his or her own children, leaving your own children empty-handed.

A common approach is to leave the surviving spouse the right to use and occupy the residence, with a provision in a trust or a will that the surviving spouse pays taxes and home insurance costs and maintains the house. The right to live in the house can be for a limited number of months or years or until they pass away or enter a care facility. When the surviving spouse dies, or the time limit is reached, he or she leaves the house, the house is sold and the proceeds are divided among the children of the owner.

There are other ways to provide more flexibility to the surviving spouse. If the house is too large or expensive to maintain, he or she may be given the right to use and occupy a substituted property, which may be purchased with the proceeds from the owner spouses’ home. Another arrangement allows the owner spouse’s home to be sold with the surviving spouse using the income from the proceeds of the sale of the house to pay for a rental. When the surviving spouse dies (or when the term expires), the children of the first spouse inherit what is left.

A few important things to consider:

  • How well the surviving spouse will be able to maintain the house, either for financial or physical reasons.
  • If the surviving spouse is not taking care of the house and it falls into disrepair, the children may have to file an eviction proceeding.
  • If the trust or will does not specifically instruct the surviving spouse to pay for home maintenance, the children of the owner spouse could be responsible for those costs, and depending on how long the surviving spouse lives, that could be a large burden for a long period of time.

This situation requires thoughtful planning, with many “what if’s” to be asked. An experienced estate planning attorney, who has worked with second marriages and home ownership issues, will be able to provide an objective view of the issues and the solutions.

In addition, bringing family members in for a meeting to discuss the situation, may go along way to prevent, or at least attempt to prevent, larger issues in the future.

Reference: Times Herald-Record (Sep. 22, 2018) “How to preserve your home’s value when remarrying”

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