As the pandemic continues to wreak havoc with many experiencing the loss of a loved one, unemployment or reduced income and higher levels of debt, many are now asking which of their debts will continue after death and which will be forgiven and the resulting impact on beneficiaries.
1. Debts Part of Probate Estate:
One common misunderstanding is that the only reason for probating a will is transfer assets of the deceased to the beneficiary or beneficiaries. Not only are your assets part of your estate, but so are your debts. It is the executor’s duty to pay the bills owed by the deceased. If the executor distributes assets of the estate to the beneficiaries and there are inadequate funds to pay the bills, the executor could incur personal liability. Of course, the court must approve the will before an executor has the authority to act.
Under Texas law, the executor or administrator of an estate (within thirty (30) days of appointment) must publish a notice regarding presentment of claims in a newspaper or general circulation in the county where letters testamentary or administration (“letters”) were issued. The notice should be provided to any claimant.
The executor or administrator must (within sixty (60) days of appointment) also give notice of the issuance of letters to any secured creditor of estate property.
At any time before an estate administration is closed, the executor or administration may give notice (“Permissive Notice”) to any unsecured creditor who has a claim for money against the estate. If the creditor does not present a claim within four (4) months after receipt of the notice, then the claim is barred.
2. Debts if cash account has a beneficiary designation:
If you name an individual as a beneficiary of an IRA or other retirement account or a life insurance policy, then the beneficiary is protected from claims of unsecured creditors of the estate. However, if there is no beneficiary named or the beneficiary is deceased and there is no contingent beneficiary named or the Estate is names as the beneficiary, then the funds would either pass by intestacy (if the deceased has no will and thus by the laws of the state) or by the will of the deceased and would be subject to the claims of creditors. The executor or administrator would be responsible for paying the claims of the creditors. It should also be noted that just because one is the beneficiary of an account such as a checking or investment, it does not mean the funds are protected from creditors. If there are insufficient funds in a probate estate, the executor or administrator could sue the beneficiary of the cash account (exclusive of retirement accounts and life insurance policies) to collect the funds to pay to creditors.
3. Student loans – federal loans are discharged, but private student loans are not:
Whether the student or the parents of a student who receives a federal student loan is the borrower and the borrower dies, then the federal student loan is forgiven under federal law. However, there is no such requirement if it is a private student loan.
4. Home loans – Reverse Mortgages must be paid, but other home loans the beneficiary receives is subject to mortgage:
If the borrower has a reverse mortgage at the time of death, then the loan would have to be paid (unless survived by a spouse who is living in the home). However, under federal law, an heir or beneficiary of a borrower who dies who has a traditional loan against the home can inherit the property subject to the existing loan. The heir or beneficiary does not have to qualify for the mortgage.
5. Spouse Responsible for joint taxes and debts:
Since Texas is a community property state, a surviving spouse is not only responsible for joint taxes due but also community debts such as credit card debt.
6. Joint account holders or applicants of credit card liable for debt of deceased:
Someone who is a joint account holder of a credit card or made a joint application for a credit card with someone who subsequently passed is liable for the credit card debt. Also, the surviving spouse may be liable for the credit card of their deceased spouse since Texas is a community property state. Otherwise, credit card debt is owed by the Estate of the deceased. If someone uses the credit card of the deceased after that person’s passing, it could be considered fraud.
If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming virtual Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.