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If someone passes away with outstanding debt, who pays?

On Behalf of | Sep 1, 2023 | Estate Planning

There are certainly situations in which someone passes away without much debt outstanding. Maybe they intentionally worked on paying off what they owed before they passed away. Maybe they set up something like a trust fund for major expenses that they knew their heirs can’t cover. Parents will sometimes do this for vacation properties, for instance, if they still owe money and want the property to stay in the family.

But there could still be many different types of minor debt that remain outstanding when someone dies. They may still have to pay income taxes for the year, they may owe property taxes, they may still have debt on credit cards just from everyday purchases and things of this nature. It’s unlikely that every cent will already be accounted for, even if the deceased was particularly conscientious. Who must pay this debt after the individual in question is gone?

The estate executor

Adult children are sometimes worried that they are going to inherit their parents’ debt the same way that they would inherit an asset. But this doesn’t happen unless an heir or beneficiary cosigned a loan with the deceased. There should be any surprising debts that heirs need to pay. It is ordinarily the estate that is responsible for an individual’s debts, not the beneficiaries of that estate. This is one of the duties of the estate executor. They use the money from the estate to pay off the remainder that is owed, and they can then divide anything that is left between the heirs.

The heirs themselves do not have to pay, but they still may inherit less than they expected due to this order of events. For instance, perhaps two heirs were supposed to split $100,000, getting $50,000 each. If a parent had $40,000 of outstanding debt that had to be paid first, only $60,000 would remain to be divided. The heirs wouldn’t have to pay the debt directly, but they’d still get $30,000 apiece instead of $50,000.

Debt and estate planning are often intertwined and can be rather complex processes. It’s very important for all involved to understand what legal options they have available to them and to seek legal guidance whenever necessary accordingly.