Benjamin Franklin might have coined the phrase, ‘In this world nothing can be said to be certain, except death and taxes’, but debts also meet that mark of unavoidable conclusion. They do not simply disappear after the debtor has passed away.
For the next of kin or heirs, debt collections can become particularly more complicated and expensive when handling repayment of debt on deceased accounts. In these cases, it’s essential to understand how the process works and what law governs the payment of these debts. This understanding can go a long way in ensuring that you pay only the necessary debts to preserve as much of the decedent's estate as possible.
What Happens To A Decedent’s Assets When They Die?
After a person dies, their legal status morphs into an estate governed by the probate court's rules. To begin the probate process, a family or named executor will be required to file a petition in the probate court asking for estate status. In this petition, it will be necessary to list all known assets and their value. In most cases, the estate process will also require a list of known debts such as mortgages and credit cards known to the heirs and administrator at the time of death.
Suppose all named beneficiaries agree on the petition. In that case, an estate will then be opened by the court. The administrator will be able to step into the shoes of the deceased to handle the remaining financial affairs and distribute the assets as determined by the language of the deceased's will.
How Do Debts Get Paid After Someone Dies?
After the estate has been opened, most courts require a “notice to creditors” be posted in a local newspaper that will put all potential creditors on notice that they must file a claim to collect their debt within a prescribed period, typically 120 days.
The creditor’s claim must be filed in the probate court to be valid. If the creditor does not file the claim within the prescribed period, the court can exclude this debt from the estate. After it’s known how much debt the estate has, evaluating the debt versus the assets begins. During this time, the estate administrator can determine what assets may need to be liquidated and can also negotiate with the creditors to satisfy the debts for less than what is claimed to be owed.
In addition, an administrator can dispute a debt by filing a claim with the probate court, which will require the debt collector to request an evidentiary hearing so that the probate judge can determine whether the debt is, in fact, valid. This process can especially help when a debt collector has purchased the debt from another, as it may be more difficult for them to prove that they are the genuine holder of the debt.
Can Third Parties Be Held Responsible For Decedent’s Debts?
In some cases, yes.
A third party, such as a spouse or child can be held personally responsible for the decedent's debt. This risk is especially relevant regarding real estate if there is more than one name on the property, even if the mortgage is only in the decedent's name. Reviewing the mortgage contract may reveal that the debt will survive death and that the other owners or those who assume the property through the probate process will be required to continue to make payments or face a foreclosure action.
Are There Ways To Shield Some Assets From The Probate Process?
Consulting with a family attorney before a decedent’s death is one of the best ways to ensure that certain assets are protected from the creditor process after death. Certain legal instruments allow specific assets to be transferred outside probate. These transfer upon death designations are often found in a decedent’s retirement accounts and can even be accomplished through a real estate deed that allows the property to change names without a probate court order.
Are Unpaid Taxes Handled Differently than Debt on the Deceased?
Similar to other debts, death does not void unpaid taxes. If a taxpayer owes the IRS, tax debt is still owed and IRS’ collection efforts will continue after the death of the individual. The IRS will pursue a tax debt from the heirs of the estate including children or close relatives of the deceased. As tax laws do vary by state, it’s advised to have knowledge of wills, trusts and estate planning in your state. Heirs of the estate will want to settle unpaid taxes, as well as possible refunds due with the IRS and state. Seeking a good estate planner and attorney specializing in these laws is advised in determining how to deal with the outstanding tax debt to properly settle the estate.
The main goal in estate planning should be efficiency. This planning will ensure the estate's value is preserved as much as possible and that the assets are transferred to the beneficiaries in as little time and expense as required. Additionally, this process of pre-planning by the individual before death saves beneficiaries (usually loved ones) a substantial amount of stress during their period of grief. Additionally, valid creditors are paid while those with more difficult claims may be denied compensation,leaving more of the estate to family, loved ones, next of kin or heirs as planned.
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