If you have a lot of debts, you’re far from alone. The average American household now has a debt load of $137,063 — and that’s probably not going to change any time soon. For people who are in their senior years, that often leads to a lot of worry about what happens to those debts when they die.
Here are some things to know:
- Your mortgage may have a pay-off clause. Check the loan documents you signed when you took out the mortgage on your home. Many banks and credit unions offer insurance that will pay off a property if the homeowner dies before the loan is repaid. Lacking that, your mortgage will have to be paid off through your estate before the rest of your assets are distributed.
- Credit card debt and other bills may also pursue your estate for payment. However, the credit card companies, doctors and hospitals that probably hold most of your debts can only pursue what’s actually in your estate — not anything that bypasses it.
- Some debts die with you. Federal student loans are a big concern for a lot of people, but your executor can have them dismissed by providing proof of your death to the appropriate party. (Other student loans, including those with cosigners and private loans, are handled like other debts. Creditors can pursue your estate for payment.)
- Assets that transfer directly to your heirs can’t be taken to pay your debts. For example, if you have an insurance policy that names your adult child as your beneficiary, that policy will pay directly to your child — and it doesn’t matter what kind of debts you left.
Ultimately, if you’re worried about your debts when you die, the good news is this: Your children won’t inherit them. However, they can take a sizable bite out of your estate. Proper estate planning, including the use of trusts, can help you minimize that issue and leave more for your heirs.