Addressing Debt in Your Washington Estate Plan

Estate planning is often couched in terms of who receives what. However, it should also account for what a person owes. That’s because outstanding debts in Washington state do not necessarily disappear at death. Instead, they will be handled through the estate. In many cases, debt can substantially reduce or eliminate entirely what would have otherwise passed to a person’s loved ones.

We have seen situations where families expected to inherit something substantial, or even something, only to learn that claims from creditors, including a list of small ones that add up, consumed the entire estate. In certain circumstances, liability can also extend beyond the estate itself, depending on how those accounts and obligations were structured during a person’s lifetime.

This is why the subject of what will happen to debt after you die is such an important part of estate planning conversations. If you are concerned about how debt may affect your Washington estate plan, this discussion is for you. 

Most Debts Do Not Go Away When a Person Dies

As stated above, most debts do not disappear at the time of death. Rather, they are addressed during the estate’s administration during probate. Only after those obligations are settled can anything be distributed. That is, if there’s anything left. While some debts may be forgiven, such as many federal student loans and some credit card balances, many others will remain enforceable, with the estate left holding the bills.

In addition to credit cards, personal loans, mortgages, vehicle financing, and final medical bills will be paid from the estate. This may require using available funds or selling property to pay them. Regardless of which part of the estate they are paid from, the person responsible for administering it, the executor, must address each obligation before making any distributions in accordance with the testator’s (the person who created the will and has passed away) final wishes.

If the estate does not have enough in it to cover all the debts, creditors will generally be limited to what is available. There are exceptions to this. When a debt is shared, the surviving borrower will generally still be responsible for the full amount. Joint accounts and co-signed loans often continue beyond death. In some cases, a surviving spouse may share responsibility for a debt depending on how it was incurred.

Debt Can Mean Your Inheritors Will Receive Nothing 

When debts are high (or higher than the value of the estate), they can eat up its value before anything is passed on. Because creditors are paid first, what remains for your beneficiaries may be far less than they were expecting. Or it could end up being nothing at all.

This often comes as a shock to those who have focused their attention on a person’s assets rather than their debts. If you are unsure of your own financial picture, conducting a full review during your lifetime of what you owe alongside what you own will provide a much more accurate picture of how much there will be in your estate to pass on should you die today. 

Though the reality of what your estate is actually worth can be upsetting to learn, having this knowledge affords you an opportunity to make changes that could preserve more for your survivors to eventually inherit. This should provide you with greater peace of mind. 

Some Debts Can Be Passed to Surviving Family Members

Because not all obligations will remain part of the estate, in certain situations, your surviving spouse or co-borrower, upon your death, could become responsible for the full balance. This often applies to jointly held accounts, loans that were co-signed, and debts tied to shared property.

While many creditors cannot pursue family members beyond what the estate can pay, these exceptions can create a different outcome. The structure of each debt, therefore, matters, and slight differences in a promissory note’s wording, for example, can translate to a long-term, costly result. 

To prevent unwanted or unintended outcomes for your heirs, it can bn be helpful to review how your debts are titled and who will be legally responsible for them when you’re gone. Then, based on what you discover, you can make strategic changes with your estate planning goals in mind.   

Communication Can Help Prevent Unwanted Surprises

Just as important as assessing your current debt and how it is structured is being upfront about it. In life, there are no guarantees. Just because you are young and/or in good health right now doesn’t mean the unthinkable won’t happen. If it does, those who will handle your estate should not be left piecing a puzzle together. Missing information can slow down the probate process, not to mention create stress and discord for your family during an already difficult time.

Your executor and those holding other important roles in your estate plan, such as powers of attorney (financial and health care) and trustees, for example, should have a clear understanding of what you owe and to whom. They should know which obligations are yours alone and which involve another person, and how to respond if creditors reach out. Most importantly, they should know where and how to access the details they need. Getting organized helps avoid mistakes and protects against paying claims for which no obligation exists.

You Can Use Your Estate Plan Via a Trust to Control What Will Happen to Your Debt When You Die

You can also include a trust in your estate plan to direct how you would like certain debts to be treated. For example, you may instruct that certain obligations, such as a mortgage or car loan, be paid off from a trust you have earmarked for that purpose, or use a trust to protect certain assets from creditors altogether. 

Regardless of how you choose to use a trust in terms of debt, putting your instructions in writing will give your trustee clear direction and help prevent confusion during the estate’s administration. It also makes it more likely that your assets will be handled in a way that reflects your true intentions.

Speak With a Seattle Estate Planning Lawyer About How to Address Debt in Your Washington Estate Plan

Estate planning can be confusing, especially when it comes to how debt figures in. At Elise Buie Family Law, our team of Seattle estate planning attorneys has extensive experience identifying how existing debt can affect a Washington estate plan, developing strategies to address it, and handling it during estate plan administration. To learn more about how debt may affect your estate plan, call us today or schedule a convenient time to speak.