Part of estate planning is considering how future repayment of debts, both owed to the person and debts they are responsible for, will impact inheritances received by beneficiaries. A recent article from Lake County News, “Estate Planning: Debts and Estate Planning,” explains how the process works.
Assets passing to a beneficiary directly, outside of probate, are not typically subject to paying a decedent’s debts. These are life insurance proceeds, joint tenancy assets, Payable on Death (POD) and Transfer on Death (TOD), to name a few.
The estate plan must consider how much debt exists and how it might be paid. One approach is to purchase life insurance made payable to the trust estate.
A person may specifically gift real property, which would be subject to repaying an outstanding debt, like a mortgage.
If the beneficiary who would otherwise receive the residence takes it subject to repaying the secured debt, other assets in the estate would need to be reduced to pay the debt.
This should be addressed when the estate plan is created and must be expressly documented. If not addressed, the default rule is that any secured debt goes with the gift. It’s not likely to have been the plan. However, this is how the law works.
Third, parents and children may loan money between themselves. This is usually between parent and child.
Such family debts merit attention during estate planning. For example, parents may wish to loan money to a child to pay higher education costs, to buy a home, or to launch a business.
Upon the death of the parent, should any unpaid balance be repaid by the child to the parent’s estate, or should the child’s debt be forgiven? This must also be clearly stated in the will or trust, whatever is relevant.
If the parent wishes the child to pay the unpaid balance, the debt obligation and its payment history must be in writing and updated. The debt may be assigned to the parent’s trust and enforced by the successor trustee.
At death, the unpaid balance would need to be added back into the estate’s value to arrive at the correct gross value necessary to assess each share of the total estate.
The unpaid balance is usually subtracted from the debtor’s share.
Children might also be owed money from a parent. For example, the adult child might provide at-home personal care services to their parent, or money may be lent to help with the parent’s cost of living. The debt and repayment history also needs to be in writing and updated regularly.
Debt must be acknowledged, and the means of repaying the debt must be made clear. An estate planning attorney will help document and build repayment into the estate plan.
To learn more about estate planning in the East Valley, Gilbert, Mesa and Queen Creek, schedule your free consultation with Attorney Jake Carlson by using one of the links above.
Reference: Lake Country News (April 29, 2023) “Estate Planning: Debts and Estate Planning”