Everyone who creates an estate plan starts out by considering the assets that they want to pass on to their loved ones. This is only natural, but many people do not pay the same attention to what will happen to their debts when they pass away. This can leave your family in the position of having to pay creditors. Here is what you need to know about how the types of debts that you leave behind can affect your estate.
How Creditors Are Notified
If you leave behind a will or living trust that names an executor or trustee, the person is responsible for notifying creditors of your passing. Typically, the executor pays outstanding debts from the proceeds of an estate before distributing assets to the heirs named in the will. Unlike a will, a trust does not require creditors to be notified. However, giving adequate notice will reduce the time period that people who are owed money can come forward.
In the absence of an estate plan, the court will step in. The local probate court appoints an administrator to the estate, who will be responsible for notifying creditors and discharging debt. For help creating an estate plan, contact a New York probate attorney.
Once the public notice has been made, those who are owed money have a short time period to make their claims against the estate. If no one gives notice, the creditors have a period of several months to come forward. After the allotted time, new claims are invalid, and the representative of the estate is not responsible for those debts.
When Two or More People Have Debt
Married couples often carry debt jointly, as in the case of a mortgage. When this is the case, the debt becomes the responsibility of the survivor in the event of a death. If there is a co-signer with the deceased person, that person becomes responsible for the debt. In some cases, the proceeds of the estate are sufficient to cover outstanding debts. In other cases the creditors might agree to receive a reduced amount on debts that remain.
How Are Debts Paid?
First, debts will typically be paid out of liquid assets, including bank accounts or other cash reserves. If this is not enough to cover remaining debts, assets like personal property or real estate can be sold, and the proceeds can then be used to settle debts. Creditors are not permitted to seek payment from some assets within an estate, such as life insurance benefits or 401(k) retirement plans. If an asset is payable to your estate, it may be subject to the claims of creditors, so be sure to name a beneficiary.
Student loan debt can sometimes be discharged upon a death. If it is a federal student loan, then the debt is discharged when the primary borrower dies, even when a co-signer is present. Private student loans may not be forgiven when the primary borrower dies, however, and the co-signer will likely be responsible for paying them off.
For help understanding New York estate planning law, contact the law offices of Queens probate lawyer Richard Cary Spivack today, and plan with confidence.