Estate planning is the only way to ensure that your loved ones are provided for after your passing. Unfortunately, the debts you incur over your lifetime can live on after you die, and your creditors may come calling during probate to collect what they’re owed. Our estate planning attorneys explain how to list your debts ahead of time, protect certain assets from creditors, and reduce the burden of your debt on your beneficiaries.
Making a Comprehensive List of Your Debts in Your Estate Plan
Once you have made a list of your assets, you can itemize your liabilities (debts). This is essential for calculating your net worth, or the total value of all your assets minus your total liabilities. Some of your debts will already be accounted for in the listing of your property, such as the mortgage on your home, so make sure not to list them twice.
Your list of debts should include the following:
- Personal property debts. Any credit card, bank loan, car loan, mortgage, advance on a line of credit, or other debt in your name only will become the responsibility of your estate. You can also include shared debt, such as jointly-owned credit cards or a mortgage you and your spouse hold, although there are different legal considerations for shared debts.
- Personal debts. If you borrowed money from family or friends, include these amounts on your debt list. These types of debts are more difficult to collect during probate, but there may be ways to clear the debt that mutually benefit you and your creditor. For example, if your friend lent you $20,000 and she’s considering applying for Medicaid, she can forgive the debt and claim it as a gift, reducing the amount of her countable assets. Any debt can be dismissed as long as the creditor has the authority to do so. If you borrowed money from a married couple, you would need a written statement from both spouses that the debt has been forgiven. Otherwise, one spouse may make a claim against the estate to recover their share of the debt.
- Business debt. When a business owner passes away, their business debt can be handled in many ways. If the owner was the sole proprietor of a small business and didn’t form a legal entity, the company would likely go through probate as part of the owner's estate. Business debts will be treated the same way as the owner’s personal debts, which may be paid using estate assets. If the owner formed a limited liability company (LLC) or other corporate entity, their business creditors could only make a claim against business assets rather than the owner’s personal estate. If the business was part of a trust, company assets would not have to go through probate, and the debts may either be paid with business assets or become the responsibility of the successor trustee.
- Taxes. Any outstanding taxes must be paid from assets in your estate. This includes unpaid income or property taxes from years past and those currently due (you do not have to include future taxes or estimated estate taxes). If you owe a considerable amount of back taxes, a number of trusts could help you save on estate taxes and leave a larger portion of your estate to your grandchildren. Generation-skipping trusts allow you to transfer a significant sum tax-free to your grandchildren, while irrevocable life insurance trusts can distribute the proceeds of your life insurance policy as tax-exempt income to your loved ones.
- Other debts. Liabilities such as lawsuit judgments, accrued child support, or other court-ordered debts will likely have to be repaid during probate.
Let Us Help Create the Right Estate Plan for You
No matter how much you owe, the executor of your estate will have to pay debts as long as your estate has the assets to cover them. When combined with funeral expenses and final bills, paying off debts can significantly reduce—or even eliminate—the inheritances you intend to leave to your beneficiaries.
Landskind and Ricaforte Law Group, P.C. can determine the best way to preserve your assets and ensure that your heirs get the inheritances they deserve. Contact us today through our online form to get started, or read through our guide, Estate and Medicaid Planning in New York: What Everyone Needs to Know.