After you pass away, who pays your debts?
According to the Ramsey Solutions, 77% of American households are in debt, and the average American adult is $58,604 in debt. Many people plan to have no debt when they pass away, but that does not always happen. This frequently begs the question: “After death, who pays my debts?”
The simplest answer is your estate. Unfortunately, death does not release you from your debts, and they must be paid from your estate assets. Your estate is the property that you own at death. If there is not enough cash in your estate to pay all your debts, the executor of your estate may have to sell real or personal property to raise funds to pay all your debts. If you do
not have enough assets in your estate to pay all debts (i.e., insolvent estate), your creditors may divide up your remaining estate and leave nothing to pass on to your beneficiaries or heirs.
However, the Texas legislature has adopted laws to prevent such harsh consequences from befalling the families of an indebted deceased person. First and most importantly, if you are married or have minor or adult incapacitated children and own a home at death, the homestead must be set aside for your surviving spouse’s and/or children’s use and benefit, and cannot be seized to pay debts. If you do not own a home at death, an allowance of $45,000 may be set aside for your surviving spouse and/or minor or adult incapacitated children.
In addition to the homestead and if you have a surviving spouse and/or minor or adult incapacitated children, other assets exempt from creditor’s claims include but are not limited to: home furnishings, wearing apparel, jewelry, two firearms, one vehicle per licensed driver in the household, and any retirement accounts. If you do not own any other exempt property at death, an allowance of up to $30,000 may be set aside for your surviving spouse or minor or adult incapacitated children. Also, in addition to the above exemptions and allowances, the probate court may set aside a family allowance in the amount necessary for the maintenance of your surviving spouse and/or minor or adult incapacitated children for one year after the date of death.
It is commonly believed that designating a beneficiary on an account or making an account payable on death will prevent your creditors from reaching those funds because the account will pass outside of your probate estate as a “non-probate asset.” However, under certain situations, Texas law allows creditors to access those non-probate assets to pay their claim for money against your estate. One exception to this rule is life insurance. Life insurance proceeds are fully exempt from seizure by any legal process used to pay a debt of either the insured person or a beneficiary under the policy — even if your estate is the beneficiary.
After your estate is probated, one technique that may be used to reduce the total amount of unsecured debt (not secured with collateral such as a mortgage or vehicle loan) is that the executor of your estate can contact your creditors and offer a settlement to reduce the debt owed in exchange for immediate payment. Creditors, particularly credit card companies, are often willing to sell their debts to debt collectors for pennies on the dollar anyway, so they are likely also willing to settle your debt for less than the amount owed.
A well-qualified probate attorney can help navigate through the above rules and techniques — and additional strategies not discussed in this article — to settle a loved one’s estate and maximize the inheritance that is passed on.
You may visit the website at www.wrightabshire.com . Nothing contained in this publication should be considered as the rendering of legal advice to any person’s specific case but should be considered general information.