Estate Planning: What Happens to the Debts that are Left Behind?

Americans have more than $18 trillion in collective personal debt. As a best practice, any debt you hold should be considered as part of your estate plan. The right strategy can help to protect the financial interests of your heirs. At Poulos LoPiccolo PC, we provide solutions-focused representation. In this article, our New Jersey estate planning lawyer explains what happens to the debts that get left behind when a person passes away.

The Estate is Generally Responsible for the Decedent’s Individual Debts

First and foremost, it is important to emphasize that debts are not automatically wiped away when a person dies. Along the same lines, a person’s debts do not automatically transfer to children or other beneficiaries upon death. Instead, valid debts are ordinarily paid from property controlled by the decedent’s estate before the remaining assets are distributed under the will or New Jersey’s intestacy laws. In other words, the estate itself is still liable for the debts. Beneficiaries may receive a smaller inheritance, or potentially even no inheritance, if substantial creditor claims exist.

Note: A beneficiary generally becomes personally responsible only when there is an independent basis for liability, such as co-signing a loan.

Creditors Must Properly Present Any Claim Against an Estate

Under N.J.S.A. 3B:22-4, creditors generally must present claims to the personal representative in writing and under oath within nine months of the decedent’s death. The claim should state the amount owed and the underlying basis for the obligation. The nine-month rule does not necessarily extinguish every late claim. Rather, it protects the personal representative from liability for estate assets properly paid or distributed before the late claim was presented. A late creditor may still present a claim before the remaining estate assets are distributed when sufficient property remains.

Insolvent Estates Follow a Statutory Payment Priority

When the estate lacks sufficient assets to pay every obligation, the executor cannot simply choose which creditors receive payment. New Jersey law establishes a mandatory priority order. Higher priority obligations include reasonable funeral expenses, estate-administration expenses, certain services provided to the decedent, debts entitled to priority under federal or state law, and qualifying expenses associated with the decedent’s final illness. On the other hand, lower priority unsecured claims may receive only partial payment or nothing at all.

Secured Debts are Different (Tied to Specific Property/Asset)

Secured debts remain attached to the collateral. For example, inheriting a home subject to a mortgage does not eliminate the mortgage lien. The estate or beneficiary generally must continue payments, refinance, sell the property, or risk foreclosure. Joint debts may also remain enforceable against a surviving co-borrower.

Speak to Our New Jersey Estate Planning Lawyer Today

At Poulos LoPiccolo PC, our New Jersey estate planning lawyer is standing by, ready to protect your rights and your interests. If you have any questions or concerns about how to deal with debts as part of your estate plan, we can help. Please do not hesitate to contact us today to set up a completely confidential, no obligation initial consultation. Our firm provides estate planning services statewide in New Jersey.

Source:

newyorkfed.org/microeconomics/hhdc