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What happens to debt after someone dies?

On Behalf of | May 26, 2023 | Probate |

Anyone going through the probate process for a loved one has likely come up against this question. How do you manage debt that belonged to someone who has died? Although the exact answer will depend on the details of the situation, the following provides a general guide and starts with the first step — figuring out the estate.

Step 1: What is the estate?

The estate is the assets left behind by the Decedent. If the Decedent had an estate plan, such as a Will or Trust, either document will provide guidance as to what the estate is comprised of and who will benefit from the Decedent’s Estate. For example, a trust document may have a Schedule A attached showing the trust assets, and a Schedule B, showing the non-trust assets.

Other assets (including bank accounts, IRA accounts or life insurance policies) may be distributed to the designated beneficiaries directly, and may easily be collected by the named individual by providing a certified death certificate of the Decedent and by providing the beneficiaries Social Security number and/or showing his or her legal identification. More often, personal property items such as vehicles, jewelry, paintings and antiques are beneficiary-designated in the Trust document or in a Will.

Even if an asset is designated in the Trust, it may still require the use of a probate proceeding. And, regardless of whether there is a Will, if the gross value of assets in the name of the Decedent without beneficiary designations is over $184,500, pursuant to California law a probate more likely will have to be opened by the Fiduciary.

A trust is a legal document created by the individual (Settlor or Grantor) prior to death. The creator of the Trust, the Settlor, most likely designates himself/herself as Trustee and manages the assets that have been transferred to the Trustee. Once the Trustee is incapacitated and/or dies or resigns, the Successor Trustee takes over. At the death of the Trustee, the Successor Trustee handles the trust assets and distributes the trust assets as provided in the trust document. Retirement accounts, life insurance policies and bank accounts can be collected by the individual beneficiary. When opening a new account, the individual usually designates a beneficiary and alternate beneficiary when filling out the paperwork. Once the owner of the account dies, the transfer is essentially automatic to the listed beneficiary.

Step 2: What about debt?

Unfortunately, it does not just disappear. The estate itself is likely responsible for debt. The person managing the estate may need to use the estate’s assets to pay off creditors. There are specific state rules to help guide this process.

There are also instances when a creditor may expect another individual to take on this debt, such as if someone co-signed the debt. Also, in California, the Surviving Spouse may be liable for certain debts. But, even if expected to manage these debts, there are federal laws that protect against abusive debt collection efforts. The process can be difficult without the appropriate legal help.