When Parents Leave Debt: How to Manage

shutterstock_102318856

Losing a parent is a traumatic experience, especially if you’re unprepared for the aftermath. Grief coupled with financial worries can overwhelm even the most responsible person. As you face estate management, keep the following questions in mind. Their answers will provide some clarity.

Am I responsible for my parents’ debt?

It depends. Unless you cosigned your parents’ loans, you are not directly responsible for their debts. On the other hand, you might be held responsible if you are listed as the will executor/executrix. For example:

Mira’s father recently died of cancer. As the executrix of his estate and sole beneficiary, she must pay his taxes and lawyer fees before she can inherit.

Which debts are cancelled after death?

Non-cosigned debts are usually cancelled after the account holder’s debt. These include:

  • Credit card balances
  • Federal and private student loans
  • Personal loans

Any creditors seeking debt repayment must petition your parents’ estate within 30 days. While they may try to collect, you are generally not required to comply. Talk to your family’s probate lawyer for additional information.

What if I inherit money?

If your parents had savings or life insurance when they died, you’ll qualify to inherit as next of kin or the listed beneficiary. Liquid savings accounts are part of the estate and usually go through probate before being distributed to the beneficiary. On the other hand, life insurance policies are not part of the estate and are distributed directly to the beneficiary. When it comes to paying off your parents’ debts, creditors may attempt to collect from liquid savings, but they cannot collect from life insurance benefits.

What if I inherit property?

If your parents left you their home, you have a few options:

  • Keep it. You’ll assume the loan and tax responsibilities and continue to pay off the mortgage.
  • Sell it. If you don’t want the house, you can choose to sell it to pay off the mortgage and property taxes and earn a potential profit.
  • Rent it. We’ve talked about the value of investment property. If you don’t want to live in the home but cannot sell it, consider finding tenants to help cover the mortgage.

Do I have to pay taxes?

Taxes are a major part of settling an estate and managing an inheritance. Responsibilities may include:

  • Inheritance tax. Only a few states—Kentucky, Iowa, Maryland, New Jersey, Nebraska and Pennsylvania—collect inheritance tax from beneficiaries.
  • Estate tax. The federal estate tax exemption for 2015 is $5,430,000. If you parents’ estate is valued for less, you won’t owe taxes.
  • State and federal taxes. As the executor/executrix of your parents’ estate, you’ll need to file their final state and federal income tax returns.

Other taxes vary by state and estate size. Talk to your probate lawyer about specifics.

Will my parents’ debt affect my credit?

It’s possible. Depending on your strategy, inheritance can help or hurt your credit score. For example:

After Mira settles her father’s estate, she decides to move into his large home. Although her father left property behind, he had little savings and no life insurance. Mira’s salary can’t handle the $2,600 per month mortgage, and she soon falls behind on payments.

Mira’s decision was an emotional one, and the aftermath hurt her credit score and put her father’s home into foreclosure. She could have sold the home for a profit; instead, she’ll face credit damage for up to seven years.

The bottom line: Death presents a myriad of challenges, but it’s possible to make wise decisions in the process. Don’t forget to consider your personal safety as you move forward.