You probably don’t want to burden your kids or family with your debt when you die. Here, we’ll cover the ins and outs of debt and death, including an overview of what happens to your debt when you die and how to handle an estate with debt.

We’ll also cover when heirs do not inherit debt (with some exceptions), and why debt collectors keep calling heirs. Lastly, I’ll explain how your heirs can turn the table and actually increase their inheritance.

When Heirs do NOT Inherit Debt

Generally, debt dies with borrower, and the estate will pay, if it can. When someone dies, their assets and debts all get thrown into an entity called the “Estate.”

If the Estate is positive, then the heirs will inherit the assets. For example: Your aunt died with a $100,000 house having a $30,000 mortgage, no cash, and another $30,000 in credit card debt. The executor will need to sell the house and pay off the bills, but now the heirs will inherit the $40,000 remainder.

If the Estate is negative, then the heirs get nothing. However, the heirs DO NOT owe the difference. The creditors have to eat the loss, and usually cannot come after the heirs. For example, your Grandpa rented his home and pretty much spent what he had. He then died with $5,000 in his checking account, but also with $25,000 in credit card debt and medical bills. Now, Grandpa’s estate is $20,000 negative. Do his heirs have to reach into their pockets and settle the $20,000 difference? No. Credit card companies and hospital must eat that $20,000 loss.

There are some exceptions, however:

1. Co-signers and co-borrowers on mortgage will be held responsible because they were equally responsible when they took out the loan.
2. Another example is when parents guaranteeing private student loans (you can avoid this with federal loans which don’t require co-signers).
3. Some hospitals will nudge a spouse or family to co-sign medical bills (check with your attorney before signing). This happens when your loved one is in the hospital and you want to make sure he gets the best possible care. You’re not thinking about the dollar amounts in that emotional state when the hospital administrator puts a pile of papers in front of you to sign in order to continue his care. Your first thought probably isn’t to call your lawyer, but you may be co-signing something that you don’t really have to sign.
4. Joint credit cards (between husband and wife or business partners) are another exception. Some people make themselves joint signers for convenience (allowance cards for adult kids, or retired parents). Both parties might be liable for that line of credit, which might not be your intention. FYI: This doesn’t apply to authorized users, such as employees. So, you may want to make your child an authorized user rather than a co-signer.
5. Some states (California and Texas) have community property, meaning that spouses share everything even if the asset not co-signed or joint.

Given these pretty clear rules, you may be wondering why debt collectors keep calling heirs? Debt collectors can be pretty aggressive and cold in calling the surviving family. They do it because often, it works! They can guilt or trick heirs into paying debts that the heirs never had a legal obligation to pay. It’s horrible that debt collectors take advantage of grieving, disoriented families. It’s gotten so bad that the Federal Trade Commission has made rules that debt collectors can’t mislead family members into thinking they have to pay. As with all rules, there will always be loopholes.

So, how do you turn the tables on these debt collector bad guys?

Don’t just avoid getting scammed. If you negotiate HARD enough with estate creditors, you can significantly reduce the amount you pay on the bills. As a professional executor, I’ve settled debts for as low as 33 cents on the dollar. By negotiating hard, there were tens of thousands more left for the heirs. I increased their inheritance by knowing the law and flipping the script and getting aggressive with the creditors.

Knowledge is key! Most people don’t have the information they need for successful estate administration. If you want to learn more about probate, check out my book “How Probate Works”  on Amazon

It is helpful to know what happens to your probate vs. non-probate assets when thinking about your estate plan or your future inheritance. Do you really know how assets transfer upon your death? You may think there is a shortcut to use in your estate planning but read below to see what really happens.

First, there are in-court and out-of-court assets. In-court means that there is a type of asset that has to go through the probate court. Probate court is an extremely specific court that every county in the country has. Their job is to make sure that assets transfer properly. They make sure that the Will is correct and real, and that the proper heirs are notified. If someone dies with a Will, it’s called the probate process. If there is no Will, it is called the intestate process. By default, anything in your name or your name alone will go through probate.

What are the advantages of probate assets?

In general, the pros are related to a legal finality.

1. By going through the probate process there are safeguards in place. The court has procedures in place to protect people who may not be able to protect themselves. For example, if you are survived by minors (children) who don’t have the maturity to look out for their own interests, the court can appoint a temporary guardian. If you are survived by an heir with special needs, there is a procedure in place to make sure their best interests are protected.
2. Probate has processes to make sure final creditors and taxes are paid. If you close the estate properly, there won’t be lingering taxes. If you follow the probate procedure, you won’t be sued later by someone who comes after the estate. There is a 7-month statute of limitations against creditors once probate has taken place. If an executor is appointed on January 1^st, any creditor (including the IRS) has 7 months from January 1^st to submit their bill or claim. If they don’t do it during that time, they are out of luck.
3. Probate is all in a centralized place. If someone lived and died in Manhattan, and the next living heir lives far away, he might not know where the decedent stored his/her Will. However, if he knows that the person died in Manhattan, he can contact that courthouse to see if someone set up an estate.

What are the drawbacks of probate?

The cons are generally related to dealing with a government entity.

1. Probate process is slow. It can take from 9 months to a few years, and in some cases, even longer. It is long because there is a 7-month waiting period for creditors. There is a lot of paperwork to circulate among the heirs, executor, and court. Oftentimes these forms still need to be mailed, and sometimes these documents even have to be notarized. If multiple heirs have to get papers notarized, it can cause a lot of delay and friction. The process of using paper and wet signatures is unfortunately antiquated.
2. Another drawback are costs. You’ll need to pay court fees, attorney fees, accounting fees, Executor commissions, etc. All these things added up can be tens of thousands of dollars.
3. Probate is public. If you are a celebrity or a very private person, maybe having your private affairs accessible by the public is not desirable. For example, if you are in New Jersey, you can pull up James Gandolfini’s Will because his estate went through probate. This is also true for Prince and Frank Sinatra. If public access bothers you, then you may want to consider a non-probate method when planning your estate.

Examples of Non-Probate Assets

Probate means you have to go through court. The other option is having non-probate assets. These assets are anything with a named beneficiary or a named/joint owner. One example is life insurance. A life insurance company, for example, might require the beneficiary to turn in a claim form and death certificate in order to receive the money. This is a good thing to set up so there is some cash available while doing the rest of the probate.

Other examples of non-probate accounts are IRAs, retirement accounts, 401(k)s. There are tax benefits for naming your spouse or children as beneficiaries on IRAs and 401(k)s (talk to your tax advisor!).

If you are joint owners of real estate, the survivor automatically owns the whole thing. For example, a husband and wife own a condo in Manhattan. Husband dies, and the wife immediately owns 100% of the condo.

Even bank accounts can be set up as non-probatable assets. You can add a joint owner or use another method such as ITF (in trust for, TOD (transfer on death), POD (paid on death), Totten trust, and many other options.

Trusts are also non-probate assets. These can be revocable, living trusts, or grantor trusts. They act as a wrapper that you put around your assets so that they are no longer owned by you. Rather, they are owned by a trust with its own instructions with what happens when you pass away. These are used to avoid probate court.

You Can Change Your Assets from Probate to Non-Probate Anytime

Let’s’ say that I bought a house before I got married, and it is my name alone. Then I can update the deed to add my wife after we married. I can add my wife easily to a bank account, etc.

Beware: Non-Probate Assets Override Wills

This is extremely important to understand. Let’s say my wife and I have our first child and I go through all of our accounts and name the baby as the secondary beneficiary. Then we have more kids and I forget about the beneficiary designations. Now that I have a big family, I decide to have a Will drafted to leave everything to my wife. If she dies, then I leave everything to my kids. However, the Will only controls anything that comes through probate. So, those beneficiary designations naming my first child will not go through my estate. Then my other kids get nothing from those accounts, even though I named them in the Will. This happens all the time – people forget!

Making Everything Non-Probate is NOT Estate Planning

You might think that making everything non-probate will save time and money. Don’t do that. Here’s why: people forget! Your monthly bank statements do not list your beneficiaries; there are no reminders for updating! Unless you are one of the few conscientious people who remember to update all account beneficiaries, there will be something that doesn’t match your intentions when you die.

For example, Kurt was in love with Jasmine. They weren’t married, but Kurt added Jasmine as beneficiary to his savings account. Unfortunately, Kurt and Jasmine separated. Decades later, Kurt got married and had a daughter. He had a very long, fulfilling life and all the while he maintained that bank account. When he passed, his daughter was going through the estate assets and had to find out why someone named Jasmine was getting all that money!

Hopefully, my examples have been helpful to you in your estate planning or in administering a loved one’s estate. Please check out my book, “How Probate Works,” which covers this and a lot of other topics.

As we’ve discussed before, you don’t want the PA in charge of your estate. The PA may be competent, but they are probably not the best fit for your needs in estate administration.

Now that the co-op asked the court to appoint the PA, Lou can’t simply ask the court to become the executor instead. Now Lou and his sisters must fight off the PA (and the PA’s legal fees) if they want to keep control of their mom’s estate.