When a person dies, his or her financial obligations do not simply vanish. Parties owed money by the deceased may continue to seek repayment under certain circumstances. If the deceased has left behind a will or a living trust that names another person as the executor (will) or trustee (trust) of his or her estate, it is the executor or trustee’s responsibility to see that all creditors are notified and, if necessary, repaid. In a few situations, a relative or acquaintance of the deceased may be required to cover an outstanding debt, though some states provide protections that reduce the amount owed.
Executors and Trustees
If an individual dies with a will, a relative or acquaintance (usually the person named executor) may choose to submit the document to a probate court, which will supervise the distribution of assets and make the deceased’s will public record for a fee. Involving a probate court can be both costly and time-consuming (some estates may take years to close), so a person may choose to establish a living trust instead. A trust is a written agreement that goes into effect while the original owner of the assets is still alive. Upon the asset owner’s death, all property is transferred to the trustee to distribute in a manner similar to an executor. If neither a will nor a trust exist, the probate court will assign an administrator to perform the duties of an executor, including notifying creditors and settling outstanding debts.
A will submitted to a probate court must include the identities of all known creditors to whom the deceased still owes money. The executor or trustee must notify those creditors of the situation. Creditors have a window of time (usually months) during which they may present a claim. The length of this period varies by state. After the window expires, no new or additional claims may be presented.
The deceased is still required to pay his or her outstanding federal or state taxes if the assets to do so exist. One of the executor or trustee’s duties is to establish a federal identification number for the estate, which is treated as an individual taxpayer.
Paying Off Debts
Debt repayments are generally collected from the deceased’s cash assets, including money that the will identifies as being intended for distribution to family and friends. If cash is short, other assets may be “liquidated” (sold off) to raise additional funds. These assets include homes, cars, boats and other valuables.
In most cases, only the deceased’s assets may be seized by creditors, and only the estate is responsible for repaying outstanding debts. One prominent exception is any loan for which a promissory note was co-signed by another person, in which case the co-signer could be held responsible for repaying the full amount. The same holds true for any written agreement that guarantees payment of any debt that the original borrower can no longer cover. Joint accounts, including mortgages and credit cards, become the sole responsibility of the surviving account holder.
Untouchable Assets and Forgiven Debts
A few of the deceased’s assets cannot be seized by creditors. These protected assets include 401(k) plans, brokerage accounts, and life insurance policies that name a beneficiary other than the deceased’s estate. Some states also protect varying amounts of home equity. Creditors may choose to waive an outstanding debt or voluntarily settle for a reduced sum. Federally subsidized student loans, such as Stafford Loans, are automatically forgiven upon the borrower’s death.