Research shows that 73% of Americans had outstanding debt when they died, according to December 2016 data reported by Credit.com. The Richmond Free Press says in a recent article, “Dying with debt: Advice from experts,” that those consumers had an average balance of more than $61,000, including mortgage debt. The average balance was $12,875, without a home loan.
Among the consumers who had debt when they died, about 68% had credit card balances. Here’s the rest of the list:
- Mortgage debt 37%
- Auto loans 26%
- Personal loans 12%
- Student loans 6%
In most states, debt isn’t passed on to your spouse and children when you die. Debt typically belongs to the deceased person or that person’s estate. But if your spouse or someone else co-signed or was a co-applicant on a credit card or a loan, they’ll be on the hook for any debt when you die. They may also not inherit anything because your estate becomes liable for your debt. Creditors can try to take any funds you leave behind to pay off your balances. If you have enough to pay the debts, the creditors get paid and beneficiaries receive whatever’s left. The creditors will get paid at the expense of the heirs.
If there’s real estate in the mix, it can be sticky. If a home’s your only asset, and it’s where your spouse or children also live, creditors can ask for a sale to cover your outstanding liabilities. Your surviving spouse or other relatives might have to sell the house to pay debts, such as outstanding mortgage payments—or they’ll have to assume your debts to keep the house.
One way to avoid this type of hardship is to purchase life insurance to help with your debts. In addition, you should draft a will. You may also consider setting up a trust to provide ongoing management and assurance that children or others will end up with your assets.
While you’re working with your estate planning attorney on the will and the trust, ask for two powers of attorney, if you become disabled or mentally incapacitated before you die. One POA is to allow a trusted party to make decisions on your healthcare needs, and the other to allow a trusted individual to handle your financial affairs. You should also sign a living will, so your doctors will follow your instructions on end-of-life decisions, if you’re not able to communicate because of illness or an accident. Finally, top off the package with a written HIPAA release, so someone can have access to your medical records.
Reference: Richmond Free Press (March 24, 2017) “Dying with debt: Advice from experts”