If you have debt, you should not think that the debt will go away after you pass away or if you ever become incapacitated. Rather, your debt may drastically decrease or even destroy your estate and your loved ones’ inheritances. And, to be clear, “debt” means credit card debt, mortgage, car payments, medical bills, student loans, and others.
Not Just About Assets, but also Debt
People most often think about their assets when they think about estate planning, as well they should. However, debts are also part of your estate, albeit a negative one. You need to create a plan for your debts just as much as your assets.Knowing what your debts are is just as important as knowing your assets. Creating an estate plan that addresses your debts will help you create a plan now and for the future on how you want them addressed, thus helping maximize your loved ones’ inheritances and your financial security.
Generally, the two kinds of debts are secured (which uses collateral to protect the creditor) and unsecured (which does not have collateral and so does not protect the creditor). An example of a secured debt is a mortgage or car loan. Credit card debt is probably the most common unsecured debt. Knowing this difference is vital. you should also know that while some debts go away when you pass, like federal student loans, other debts, like mortgages, for example, do not go away. Creditors have a claim on your estate and can actually claim their debts before your loved ones can claim their inheritances.
Benefits of Estate Planning
Properly done, your retirement accounts and life insurance are protected from creditors. However, if there is no living beneficiary of these accounts, they become part of the probate process and are subject to creditors. Maintaining beneficiary designations is a vital part of your estate plan. Likewise, a comprehensive estate plan will identify other potential pitfalls and allow you to avoid them. This can do wonders to protect your family if something happens to you.
Another factor you need to understand is that joint owners are fully liable for the other owner’s debt. Parents often put their children on their accounts to help with management, not knowing that they have made their assets vulnerable. Co-signing also makes someone liable for another’s debts. For debts that are only yours, creditors cannot make family members assume those debts, but they can certainly try to get the family members to agree to do so. Knowing dynamics like these can protect your family and strengthen your financial and estate plan.
Contact a Professional
Some people think that because the general estate planning tools look the same that they act the same. That is not true, as wills, trust, powers of attorney, and other documents are personalized to the individual Contact The Rains Law Firm or schedule a complimentary initial meeting to address debts and protect your loved ones.