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Will your children inherit your debt?

On Behalf of | Jun 6, 2024 | Estate Planning |

As you draft your estate plan, you begin by listing out the assets that you want to pass on to your children. You may have a significant amount of financial assets that you’ve saved up. You hope it can provide some financial stability to the next generation. Maybe you can help your grandchildren go to college or help your own adult children start businesses or buy family homes.

At the same time, though, you realize that you are probably going to have some debt left when you pass away. If you don’t plan for it at all, you could have significant debt like medical bills or a home mortgage. But even if you plan ahead, you’re likely just to have credit card bills, utility payments, property taxes and income taxes that will all have to be paid after you pass away. Are your children going to inherit these debts?

Your estate can pay off the debt 

Your children will not directly inherit your debt unless they co-signed with you on a loan or a financial account. But they’re not typically going to inherit your credit card debt or be personally responsible for your home mortgage.

That said, your estate has to pay off the debt before assets can be transferred to your beneficiaries, in most cases. This means money would have to be taken from your bank accounts, by your estate executor, and used to pay taxes or final bills. Your children would then inherit the money you intended – minus these costs. So their own inheritance totals can decline, although they are not taking on debt. 

Planning in advance can help things go smoothly for your family. Make sure you know what steps to take when drafting an estate plan.