When a loved one passes away, there can be a lot of confusion about who’s responsible for what. And there’s a common myth that children can “inherit” the debts of their deceased parents. This isn’t the case, although the debts of a deceased loved one can have an effect on what you ultimately inherit. Here’s how it works:
When There’s Enough Property to Cover the Debt
The estate of a deceased person is responsible for paying his or her debts. And, valid debts get paid before property is distributed to heirs or beneficiaries.
So, if your loved one passes away owning enough money or other assets to fully pay off all his or her final debts, then his or her estate will pay those debts. Then, whatever is left over will be distributed according to your loved one’s estate plan, if there is one. If there’s no estate plan, then the remaining property will be distributed according to the requirements of state law.
When There’s Not Enough Property to Cover the Debt
If your loved one passes away owing more debt than he or she has money or other assets, then your loved one’s estate is considered insolvent. When this happens, the debts owed by the estate are listed in order of priority, and the estate assets are used to pay off as many of the debts as possible. Once the estate assets run out, the remaining debts go unpaid – family members are not required to pick up the tab. Unfortunately, this also means that there’s no property left to distribute to heirs and beneficiaries.
When Property is Collateral for Debt
What if you inherit your dad’s car and it still has a loan against it? The debt comes with the property, so you’ve also inherited a car note.