What Happens to Debts on Death?
Hopefully, you realize debts do not just “disappear” on death. Generally, the deceased person’s debts must be paid out of their remaining assets – cash accounts, real estate, or other investments. However, when there is no money remaining in the person’s name, the debts may go unpaid.
When you may be responsible for someone else’s debt:
You are not typically responsible for repaying the debt of someone who has died, unless:
- You are a co-signer, or guaranteed payment, on a loan with outstanding debt.
- You inherit property that has an outstanding loan against it, such as a car loan, mortgage or home equity loan. When payments aren’t made, the loan holder can enforce the security interest, but cannot hold you personally responsible.
- You are a joint account holder on a credit card, even if you didn’t rack up the balance on the card. Note: this is different from an authorized user.
- You are a surviving spouse, where you may be required to pay particular types of debt, i.e., for necessities such as medical or nursing home care.
What about Nursing Home Care, Medicaid and Spousal Refusal?
You may recall from a prior column that Medicaid is the program that pays for about 70% of nursing home care in New York. Qualification requires a program worker review of the income and assets of both the ill person and his/her spouse. Where the ill person and/or his spouse has “too much”, they typically will “spend down” assets to qualifying levels, and then have a monthly income contribution to care costs. Alternatively, the spouse might formally refuse to contribute income or assets to the ill spouse’s cost of care. Medicaid will open the case and start paying towards the care of the ill person, but the spouse is not “home free”. The Department of Health may later begin a court proceeding against the spouse for the ill spouse’s care costs as late as 6 years after the ill spouse passes away.
Additionally, where income or assets were properly payable to the nursing home but instead were withheld and transferred to the spouse or children, or the family failed to complete the Medicaid application, the nursing home may sue the spouse or children for the assets or income they received.
What about Taxes?
Tax debt does not disappear when you die. Typically, the executor of the estate must file final personal and fiduciary income tax returns, and your estate must pay whatever is owed from the proceeds of sale of your assets.
Additionally, any inherited tax-deferred retirement accounts come with a requirement that the money be withdrawn within a limited number of years. As the money is withdrawn, income taxes are payable.
Hopefully you now understand that debt does not go away and can have a very big impact on the spouse and other family after death. It is important to do an in-depth review as part of the planning and post-death administration so good decisions can be made. We are here to help.