Estate planning is not only to describe how to pass your assets to your loved ones, but it can also explain how you want to deal with your debt. When you die, your debts do not necessarily die with you. In fact, creditors may seek payment for your outstanding amounts from your estate.
Hopefully, your estate will be able to pay off your debts while retaining all the assets that you want your heirs to receive. Your heirs might lose out on their inheritance if your estate becomes insolvent.
How an executor deals with debt
Your executor must disperse your estate assets to your heirs according to your will. However, your executor must first deal with creditor claims against your estate. Your executor may choose to challenge claims that might not have merit or have passed a statute of limitations. Smart Asset explains that in the event the claims are valid, your executor will pay the debts out of assets from your estate.
When an estate becomes insolvent
There are instances when estates run out of money to pay off creditors. This means that the estate is insolvent. An executor may have to make some difficult choices at this stage, like taking money from assets intended for an inheritance to pay creditors. The executor might also sell off estate assets to make debt payments. These steps could reduce inheritances or perhaps eliminate them altogether.
Planning ahead for possible insolvency
If you believe your debt could be a problem after your death, consider steps to pay off the debt that avoid dipping into the inheritance of your loved ones. Some people take out a life insurance policy that pays off outstanding balances after they die. You might also protect your family’s inheritance by placing it in an irrevocable trust. Consider available options that may provide for your family despite any remaining debts you have following your death.