When you start estate planning, you’ll need to look at your assets. You know you’re going to pass away while you still own some of those assets, and you want to leave them to your children and other heirs. Your estate plan gives you a way to make arrangements in advance by writing a will, creating a trust, etc.
But while you’re doing this, you may realize that you are also going to pass away with outstanding debt. How should you address this reality and what is going to happen as a result of it?
You may be able to prepare for it in advance
Just like your assets, you may be able to take care of some debts in advance. For example, you could set up trust funds that are specifically to be used to pay off any remaining debt. This way, even if you don’t know exactly how much debt you’ll have outstanding, there will be a fund in place to handle it.
Your estate pays anything that remains
Some people will pay down most of their debt before they pass away, which is a great option. But you may still have credit card debt, property taxes, income taxes, bills for utilities and other small amounts of debt that you cannot fully anticipate.
In a situation like that, your estate is supposed to pay the debt before distributing assets to your heirs. So your heirs themselves do not actually have to pay what you owe, but your estate administrator simply uses the funds that are left to eliminate that debt. As long as the debt level is relatively manageable, this should be easy even without a trust fund or other financial accounts in place. But it is certainly worth considering as you put your plan together.
Looking into your options
Estate planning can certainly be complicated, and debt is just one thing to think about. Be sure you know about all of the options at your disposal and the steps that you can take to set up a plan that is going to work for your family in the future.