When parents die, their adult children not only must deal with their grief, but also tend to the practicalities of arranging their funerals and handling matters of their estates. Some Denver residents may be shocked to learn that one or both parents died heavily indebted.
As part of the estate administration process, debts must be paid out of the estate of the deceased. Unless adult children cosigned loans or shared accounts with them, they usually are not responsible for debts accrued by their parents. However, the complexity of debt regulations and different state laws have an effect on the responsibility.
According to one financial planner, when there is not enough money in the estate to pay off the debts, your parents' "debt will die with them." But assets of the estate and any cash must go to cover outstanding arrearages before heirs receive any estate distributions.
Creditors of the estate usually have several months to stake their claims. If you are the executor of your parents' estate, you may need to sell off assets to pay off claims. This could effectively wipe out small inheritances. Unless you were listed as a beneficiary on an IRA or 401(k), the monies in the account are not protected from an estate's creditors.
While debt collectors may try to convince you to pony up funds to pay off your parents' credit card bills, you bear no legal responsibility unless you are an account cosigner. However, the only one that creditors may call is the estate executor.
The family home may be in jeopardy if parents received Medicaid from the age of 55 until their death. A lien could be placed on the property to pay off Medicaid payments. Negotiations can result in allowing the executor to pay a sum that is less than the total owed, according to an elder law attorney. Adult children can't be forced to use their own money to pay off the bills, and surviving spouses are immune from the responsibility as well.
As there are many complex issues involved with successful estate administration, often an estate planning attorney can offer clarity and prevent an executor's confusion from causing them to unknowingly violate any state or federal laws.
Source: KWGN, "Can you inherit your dead parent's debts?" June 21, 2014