When you start drafting your estate plan, you begin by looking at all the assets that you own and taking an inventory. You then decide on what you want to do with those assets, whether you’re looking to leave them directly to your heirs or to put them in a trust. Either way, the goal is to pass the assets down, so they need to be in your plan.
However, you probably also have debt to go with your assets. Do you need to put this debt in your estate plan and make some sort of a plan for how to divide the debt between your heirs so that they can take care of it?
Your estate will pay your debts, not your heirs
The good news for your heirs is that your debt is not going to pass directly to them unless they co-signed on some of your loans or something of this nature. If you simply took out a loan or a line of credit on your own and then used it to create debt for yourself, your heirs do not have to pay back the creditors. If you pass away, the creditors cannot come to your heirs and ask for the difference.
Instead, your estate has to pay those debts. In this sense, you’re still taking care of as much of your own debt as you possibly can, even if you have already passed away and you’re not around to do it yourself. This is one of the jobs that the estate executor has to handle as they go over everything, settling up debts, paying taxes and dividing assets that remain.
The bad news for your heirs is that they could end up with less than they expect if you have more debt than you’ve planned for. For instance, if you’re trying to leave a million dollars to your heirs but you have $500,000 worth of debt, that $500,000 may have to be paid out of the total, cutting in half what your heirs will actually receive. They do not have to pay your debt directly, but they may still feel that they’re losing out on money that they expected to inherit because of your debt.
Creating the right plan for your family
If you have a complex mix of assets and debts, it’s very important to have the right plan created in advance so that your family gets the maximum possible amount of your wealth. Make sure you know exactly what steps you can take to make this happen.