What to do when your par­ents die broke

Austin American-Statesman Sunday - - BUSINESS SUNDAY - Liz We­ston Per­sonal Fi­nance

Blog­ger John Sch­moll’s fa­ther left a fi­nan­cial mess when he died: a house that was worth far less than the mort­gage, credit card bills in ex­cess of $20,000 — and debt col­lec­tors who claimed the son was legally ob­li­gated to pay what his fa­ther owed.

For­tu­nately, Sch­moll knew bet­ter.

“I’ve been work­ing in fi­nan­cial ser­vices for two decades,” says Sch­moll, an Omaha, Ne­braska, res­i­dent who was a stock­bro­ker be­fore start­ing his site, Fru­gal Rules. “I knew that I wasn’t re­spon­si­ble.”

Baby boomers are ex­pected to trans­fer tril­lions to their heirs in com­ing years. But many peo­ple will in­herit lit­tle more than a pile of bills.

Nearly half of se­niors die own­ing less than $10,000 in fi­nan­cial as­sets, ac­cord­ing to a 2012 study for the Na­tional Bureau of Eco­nomic Re­search. Mean­while, debt among older Amer­i­cans is soar­ing. It used to be rel­a­tively un­usual to have a mort­gage or credit card debt in re­tire­ment. Now, 23 per­cent of those older than 75 have mort­gages, a four-fold in­crease since 1989, and 26 per­cent have credit card debt, a 159 per­cent in­crease, ac­cord­ing to the Fed­eral Re­serve’s lat­est data from the 2016 Sur­vey of Con­sumer Fi­nances .

If your par­ents are among those likely to die in debt, here’s what you need to know.

Sort­ing through their debts: When peo­ple die, their debts don’t dis­ap­pear. Those debts are now owed by their es­tates. Some es­tates don’t have enough as­sets (prop­erty, in­vest­ments and cash) to pay all of the bills, so some of those bills just don’t get paid. Spouses might have the re­spon­si­bil­ity for cer­tain debts, de­pend­ing on state law, but sur­vivors who aren’t spouses usu­ally don’t have to pay what’s owed un­less they co-signed for the debt or ap­plied for credit to­gether with the per­son who died.

What’s more, as­sets that pass di­rectly to heirs of­ten don’t have to be used to pay the es­tate’s debts. These as­sets can in­clude “pay on death” bank ac­counts, life in­sur­ance poli­cies, re­tire­ment plans and other ac­counts that name ben­e­fi­cia­ries, as long as the ben­e­fi­ciary isn’t the es­tate.

“You take it and go home,” says Jen­nifer Saw­day, an es­tate plan­ning at­tor­ney in Long Beach, Cal­i­for­nia.

Hire a lawyer: Some par­ents hope to avoid cred­i­tors or the costs of pro­bate, which is the court process that typ­i­cally fol­lows a death, by adding a child’s name to a house deed or trans­fer­ring the prop­erty en­tirely. Ei­ther of those moves can cause le­gal and tax con­se­quences and should be dis­cussed with a lawyer first. Af­ter a par­ent dies, the ex­ecu­tor must fol­low state law in de­ter­min­ing how lim­ited funds are dis­trib­uted and can be held per­son­ally re­spon­si­ble for mis­takes. That makes con­sult­ing a

lawyer a smart idea — and the es­tate typ­i­cally would pay the costs. (The costs of ad­min­is­ter­ing an es­tate are con­sid­ered high-pri­or­ity debts that are paid be­fore other bills, such as credit cards.)

At his at­tor­ney’s ad­vice, Sch­moll sent let­ters to his dad’s cred­i­tors ex­plain­ing the es­tate was in­sol­vent, then for­mally closed the es­tate ac­cord­ing to the pro­bate laws of Mon­tana, where his dad had lived.

A lawyer also can ad­vise you how to pro­ceed if a par­ent isn’t just in­sol­vent, but also doesn’t have any as­sets at all. In that sit­u­a­tion, there may not be a rea­son to open up a pro­bate case and deal with col­lec­tors, Saw­day says.

“Some­times, I ad­vise clients just to lay the per­son to rest and do noth­ing,” Saw­day says. “Let a cred­i­tor han­dle it.”

Take metic­u­lous notes: The fi­nan­cial lives of peo­ple in debt are of­ten chaotic — and sort­ing it all out can take time. As ex­ecu­tor of his dad’s es­tate, Sch­moll dealt with over a dozen col­lec­tion agen­cies, util­i­ties and lenders, of­ten talk­ing to mul­ti­ple peo­ple about a sin­gle ac­count. He kept a doc­u­ment where he tracked de­tails such as the names of peo­ple he talked to, dates and times of the con­ver­sa­tions, what was said and re­quired fol­low-up ac­tions as well as ref­er­ence num­bers for var­i­ous ac­counts.

Don’t trust debt col­lec­tors: Some col­lec­tors told Sch­moll he had a moral obli­ga­tion to pay his fa­ther’s debts, since the bor­rowed money might have been spent on the fam­ily. Sch­moll knew they were try­ing to ex­ploit his de­sire to do the right thing and ad­vises oth­ers in sim­i­lar sit­u­a­tions not to let debt col­lec­tors play on their emo­tions.

“Just don’t make a snap de­ci­sion, be­cause it’s very easy to say, ‘You know what? I need to think about it. Let me call you back,’” Sch­moll says.

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