Could You Inherit Deceased Parent’s Debts?

The death of a parent is a stressful experience made even worse by discovering that they passed away with large debts. Unless you cosigned one of your parent’s loans or accounts, it is usually the estate, not you that has to pay down the debts left behind. Usually, but not always, as the rules are complex and differ depending on the type of debt accumulated and where your parent lived. Creditors have a fixed period of time, commonly between two and six months, to make claims against your parent’s estate. If there are not enough funds in the estate to cover the debit, in many instances your parents debt will die as well. If there are funds or other assets available, they must be used to pay debts before anything is distributed to heirs. So although you may not be legally responsible to pay your parent’s debts, your inheritance could be reduced or wiped out to cover the payment of debts. CNN Money lists common debts that parents may leave behind and who is responsible for handling these.

·         Credit Card Debt: Unless you’re a cosigner on your parent’s credit card or the executor of the estate, you will not be held responsible to make credit card payments. Credit card companies are often low-priority creditors behind funeral homes, federal and state tax agencies and various lenders. If you are the executor of the account, credit card companies may be willing to negotiate lower payments.

·         Medical Debt: “If your parent received Medicaid, the insurance program for people who can't afford care, the state where your parent died can recover the payments it made from the time your parent was 55 until death. A house is the only substantial asset a person may keep and still qualify for Medicaid. So the state may place a lien on your parent's home to recover payments. Some states, however, may be willing to negotiate and let the executor pay less than the total due” (CNN Money).  States may not ask you to use your own funds to pay the bill, however, and they also are not allowed to pursue payments during the lifetime of the surviving spouse. If your parent was not on Medicaid but died with unpaid hospital or doctor bills, the estate is responsible for payment if funds are available. “But check state law. Close to 30 states have what's known as "filial responsibility" statutes. Those require adult children to pay for a deceased parent's unpaid medical debts, such as those to hospitals or nursing homes, when the estate cannot.”

·         Mortgage Debt: Generally, if you inherit your parent’s home and it still has a mortgage on it, the lender may not demand that you pay off the mortgage immediately, but you will be responsible for making payments on it going forward. If the mortgage is worth more than the property when you want to sell the home, ask the bank if it will agree to a short sale; if the bank will not agree, you can tell the bank to foreclose. Either way, you should not have to pay the bank the difference between the sales price and the money still owed on the loan. The foreclosure should not affect your credit score, so long as your name is not on the mortgage, but it all depends on how the mortgage company reports the transaction to the credit bureaus. You also have the option to disclaim your inheritance.

·         Taxes: The estate is responsible for paying any property and income taxes, delinquent or otherwise, and tax agencies are usually given top priority as creditors. If federal estate tax is due but property is distributed before it’s paid, the Internal Revenue Service may put a lien on the property and collect on it.

The article from CNN Money is linked here. If you have any questions about estate planning or managing, please contact us.