There are two common myths about what happens when parents die in debt, says a recent article “How your parents’ debt could outlive them” from the Greenfield Reporter. One is the adult child will be liable for the debt. The second is that the adult child won’t.
If your parents have significant debts and you are concerned about what the future may bring, talk with an estate planning attorney for guidance. Here’s some of what you need to know.
Debt doesn’t disappear when someone dies. Creditors file claims against the estate, and in most instances, those debts must be paid before assets are distributed to heirs. Surprisingly to heirs, creditors are allowed to contact relatives about the debts, even if those family members don’t have any legal obligation to pay the debts. Collection agencies in many states are required to affirmatively state that the family members are not obligated to pay the debt, but they may not always comply.
Some family members feel they need to dig into their own pockets and pay the debt. Speak with an estate planning lawyer before taking this action, because the estate may not have any obligation to reimburse you.
For the most part, family members don’t have to use their own money to pay a loved one’s debts, unless they co-signed a loan, are a joint-account holder or agreed to be held responsible for the debt. Other reasons someone may be obligated include living in a state requiring surviving spouses to pay medical bills or other outstanding debts. If you live in a community property state, a spouse may be liable for a spouse’s debts.
Executors are required to distribute money to creditors first. Therefore, if you distributed all the assets and then planned on “getting around” to paying creditors and ran out of funds, you could be sued for the outstanding debts.
More than half of the states still have “filial responsibility” laws to require adult children to pay parents’ bills. These are old laws left over from when America had debtors’ prisons. They are rarely enforced, but there was a case in 2012 when a nursing home used Pennsylvania’s law and successfully sued a son for his mother’s $93,000 nursing home bill. An estate planning attorney practicing in the state of your parents’ residence is your best source of the state’s law and enforcement.
If a person dies with more debts than assets, their estate is considered insolvent. The state’s law determines the order of bill payment. Federal taxes and any federal debts get top priority for repayment, followed by any debts owed to state taxes. Then, in Kansas, funeral and burial expenses are paid first, along with claims for medical assistance (like Medicaid). Legal and estate administration fees are paid second. If there are dependent children or spouses, there may be a temporary living allowance left for them. Third are judgments against the decedent during their lifetime. Secured debt, like a home mortgage or car loan, must be repaid or refinanced and secured creditors get paid in order of priority. Otherwise, the lender may reclaim the property. Finally, unsecured creditors are paid last, if there's anything left.
If the person was receiving Medicaid for nursing home care, the state may file a claim against the estate or file a lien against the home. These laws and procedures all vary from state to state, so you’ll need to talk with an elder law attorney.
Many creditors won’t bother filing a claim against an insolvent estate, but they may go after family members. Debt collection agencies are legally permitted to contact a surviving spouse or executor, or to contact relatives to ask how to reach the spouse or executor.
Planning in advance is the best route. However, if parents are resistant to talking about money, or incapacitated, speak with an estate planning attorney to learn how to protect your parents and yourself.
Reference: Greenfield Reporter (Feb. 3, 2022) “How your parents’ debt could outlive them”
