What Happens to Credit Card Debt when Someone Dies?

Credit card debt worries create sleepless nights for many. Will a surviving spouse or family members be burdened with the debt? A recent article titled “Here’s what happens to your credit card debt when you die” from CNBC explains how post-mortem credit card debt works.

Probate occurs after a person dies and their assets, aka their estate, is frozen by the court, until their will is validated, assuming there is a will. The debts are then settled and the beneficiaries are identified.

Credit card debt is “unsecured” debt, meaning it isn’t linked to any kind of collateral, like a car or a house. The state will usually mandate the person’s remaining assets to be used to pay off credit card debt.

Assets used to pay off the debt could include cash, or property with cash value. Certain types of accounts, including retirement or tax-deferred accounts, brokerage accounts and life insurance payouts, might be shielded from this process. Laws vary by state, so an estate planning attorney who practices in the state where the decedent lived will be the best source to address this issue.

Is the surviving spouse responsible for credit card debt?

If the person has no assets, then loved ones won’t be responsible for the debt. However, if someone is a joint account owner on the credit card, then in certain states, the surviving owner may be responsible. Authorized users are generally not held responsible for the deceased’s unpaid balances.

Heirs may not be legally responsible for paying the credit card debt, but all debt must be settled before loved ones can receive their inheritance. Workarounds, if possible, need to be done in advance of the person’s death, like creating a trust fund.

Probate laws differ by state, but any joint account holders on credit cards need to be aware of the debt and have a plan for when one of the owners dies. If paying off the debt is not possible, perhaps one of the joint owners may seek to remove themselves from the credit card, if the other person was responsible for creating the debt.

A frank discussion about the debt and how to manage it is definitely in order. One solution may be to purchase a life insurance policy and have the proceeds go to the person who may be responsible for the debt. A term policy might be a manageable way to do this, especially if both people depend on two incomes to manage their bills.

This won’t be the most pleasant discussion with a financial partner, but is necessary, along with planning for incapacity. Perhaps the best thing that can come out of the credit card problem, is a decision to have an estate plan created that includes addressing the debt and preparing for the future.

Reference: CNBC (Nov. 21, 2020) “Here’s what happens to your credit card debt when you die”

Despite Pandemic, Many Still Don’t Have an Estate Plan

It’s true—many people still believe that they don’t have enough assets so they don’t need a will, or that their money will automatically go to a next of kin. Both of these beliefs are wrong. While the title of this CNBC article is “More people are creating wills amid the pandemic,” the story’s focus is on the fact that most Americans don’t have a will. If you belong to this group, here’s what happens when you die.

The state you live in has laws about who will receive your assets if you die without a will, known as intestacy. Let’s say you live in New York. Your surviving spouse and children will receive your assets. However, in Texas, your assets will be entered into the state’s intestacy probate process, and your relatives will divide up your assets. Want to be in charge of who inherits your property? Have a will created with an experienced estate attorney.

Young adults think they don’t need a will, but Covid-19 has taken the lives of many healthy, young people. Every adult over age 18 needs a will. If you don’t have one, your loved ones—even if it’s your parents—will inherit a legal mess that will take time and money to fix.

If you have children and no will, there’s no way to be sure who will raise your children. The court will decide. Choose your guardians, name them in your will and be sure to name additional choices just in case the first guardian can’t or won’t serve. You should also appoint someone to be in charge of your children’s money.

What if you had a will created 10 or twenty years ago? That’s another big mistake. Your life changes, the law changes, and so do relationships. Life insurance policies, retirement plans, and transfer-on-death instruments are all legally binding contracts. The last will you made will be used, and if you haven’t updated your will or other documents, then the old decisions will stand. Remember that contracts supersede wills, so no matter how much you don’t want your ex to receive your life insurance proceeds, failing to change that designation won’t help your second spouse. You should review and update all documents.

Doing it yourself is risky. You won’t know if your will is valid and enforceable, if you do it from an online template. Your heirs will have to fix things, which can be expensive. The cost of an estate plan depends on the complexity of your situation. You may only need a will, power of attorney and advance directive. You may also need trusts to pass property along with minimal taxes. An estate planning attorney will be able to give you an idea of how much your estate plan will cost.

Talking about death and planning for it is a difficult topic for everyone, but a well-planned estate plan is one of the most thoughtful gifts you can give to your loved ones.

Reference: CNBC (Oct. 5, 2020) “More people are creating wills amid the pandemic”

That Last Step: Trust Funding

Neglecting to fund trusts is a surprisingly common mistake, and one that can undo the best estate and tax plans. Many people put it on the back burner, then forget about it, says the article “Don’t Overlook Your Trust Funding” from Forbes.

Done properly, trust funding helps avoid probate, provides for you and your family in the event of incapacity and helps save on estate taxes.

Creating a revocable trust gives you control. With a revocable trust, you can make changes to the trust while you are living, including funding. Think of a trust like an empty box—you can put assets in it now, or after you pass. If you transfer assets to the trust now, however, your executor won’t have to do it when you die.

Note that if you don’t put assets in the trust while you are living, those assets will go through the probate process. While the executor will have the authority to transfer assets, they’ll have to get court approval. That takes time and costs money. It is best to do it while you are living.

A trust helps if you become incapacitated. You may be managing the trust while you are living, but what happens if you die or become too sick to manage your own affairs? If the trust is funded and a successor trustee has been named, the successor trustee will be able to manage your assets and take care of you and your family. If the successor trustee has control of an empty, unfunded trust, a conservatorship may need to be appointed by the court to oversee assets.

There’s a tax benefit to trusts. For married people, trusts are often created that contain provisions for estate tax savings that defer estate taxes until the death of the second spouse. Income is provided to the surviving spouse and access to the principal during their lifetime. The children are usually the ultimate beneficiaries. However, the trust won’t work if it’s empty.

Depending on where you live, a trust may benefit you with regard to state estate taxes. Putting money in the trust takes it out of your taxable estate. You’ll need to work with an estate planning attorney to ensure that the assets are properly structured. For instance, if your assets are owned jointly with your spouse, they will not pass into a trust at your death and won’t be outside of your taxable estate.

Move the right assets to the right trust. It’s very important that any assets you transfer to the trust are aligned with your estate plan. Taxable brokerage accounts, bank accounts and real estate are usually transferred into a trust. Some tangible assets may be transferred into the trust, as well as any stocks from a family business or interests in a limited liability company. Your estate planning attorney, financial advisor and insurance broker should be consulted to avoid making expensive mistakes.

You’ve worked hard to accumulate assets and protecting them with a trust is a good idea. Just don’t forget the final step of funding the trust.

Reference: Forbes (July 13, 2020) “Don’t Overlook Your Trust Funding”

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What Happens to Credit Card Debt when Someone Dies?

Despite Pandemic, Many Still Don’t Have an Estate Plan

That Last Step: Trust Funding

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What Happens to Credit Card Debt when Someone Dies?

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