Ever heard the phrase: “The only thing certain in life is death and taxes?” Well, it’s true! When you die, it doesn’t mean your taxes or debt just disappear. In fact, your estate is responsible for these things. And a will (a legal tool you use to devise assets) can help you address your debts, taxes, and other liabilities to ensure the right assets are being used to pay off the right debts. And, no, a will cannot magically make debts and taxes disappear. Let’s dive into everything you need to know in terms of adding debts and liabilities to your will.
Understanding debts and liabilities in estate planning
First, let’s discuss the common types of debts and liabilities that you should consider when estate planning:
- Credit card debt
- Mortgages
- Personal loans
- Medical bills
- Taxes
- Co-signed loans
- Lawsuits
- Student loans
- Unpaid child support/alimony
- Business debts
It is also important to understand the difference between secured and unsecured debt because it affects how these debts are handled during the probate process and how they might impact the distribution of your assets to your beneficiaries.
A secured debt is backed by an asset (think: mortgage backed by a house). Lenders may have the right to seize those assets (i.e., the home) if the debt isn’t paid. In estate settlement, these secured debts often take priority. Unsecured debt (not backed by a specific asset—think: credit card debt) lacks this asset link and is paid from the estate’s remaining funds after secured obligations are met, potentially going unpaid if assets are insufficient to cover the debt. The distinction between secured vs. unsecured significantly impacts how assets are distributed to beneficiaries.
How debts are generally treated after death
So, how do debts actually get paid when you die? Well, for starters, whoever is appointed as your personal representative or will executor will generally be handling the payment of your debts. This will require the will executor to gather all inventory of all the assets and all debts/liabilities and then begin paying off the debts one by one from the available assets through the estate.
One key misconception is that beneficiaries are responsible for the debts of the estate. For example, if their parent dies with an exorbitant amount of credit card debt, it doesn’t pass to the children (the beneficiaries in the will). Instead, the estate will pay it off first. Then, any leftovers will be passed down to the children. This will diminish the children’s inheritance, of course, but the children won’t need to dip into their own funds to pay it off. One exception to this is if the beneficiary was also a co-signer on the debt. Then, the beneficiary may be responsible for the debt.
If the estate lacks sufficient funds to pay off the debts, then it is considered insolvent. In this situation, the will executor must follow state laws regarding the priority of debt payments. For example, secured debts and taxes are typically paid first. Then, unsecured debts may be paid partially or not at all, depending on the remaining assets.
What your will can (and can’t) do regarding debts
Let’s talk about what your will can and can’t do regarding debts. First, your will can appoint an executor, who is responsible for managing the estate and handling debts. The executor will ensure that debts are paid from the estate before distributing assets to beneficiaries. Your will *can* designate specific assets to cover certain debts. For example, if you want to pay off your mortgage, you could specify that funds from the sale of a specific property be used for that purpose. Your will can also provide instructions to your executor regarding how you’d prefer debts to be managed, such as prioritizing certain debts over others or providing guidelines for negotiating with creditors. In addition, if there are any co-signed loans, you can determine how they will be taken care of.
Now, let’s talk about what your will cannot do. Your will cannot be used to avoid debts or prevent creditors from pursuing payment from your estate. If your estate doesn’t have enough assets to cover your debts, creditors may not receive the full amount they’re owed, but they are still entitled to be paid. Just because you devise a certain asset to a beneficiary doesn’t mean that the debt disappears and the beneficiary’s inheritance takes priority over the creditor.
Also, debts owed to government agencies, such as tax liabilities (income, estate, or property taxes) or child support obligations, must be paid from the estate, regardless of what your will says. These obligations are not easily bypassed by provisions in a will.
Life insurance can be a great way to cover funds for any debts once you pass. Establishing a will that declares any funds from life insurance are meant to cover debts and liabilities first can help ensure your estate remains intact for your beneficiaries.
Why it is important to address debts in your will
You may be wondering what the big deal is with addressing debts—they have to be paid anyway, so why do I need to address it? Great question. First of all, it offers clear guidance for your executor and beneficiaries. By addressing debts in your will, you provide clear instructions for your executor about how to handle outstanding debts. This helps reduce confusion and potential conflict among family members or beneficiaries, who may otherwise be unsure about whether debts need to be paid.
Probably the best reason to address debts in your will is that you may want to dictate which assets cover which debts. For example, if you really, really want your beloved home to pass on to your children, you may want to direct your will executor that any mortgage debt should be covered by other assets, such as investments or checking account funds. This way, the mortgage lender doesn’t seize the property or make it more difficult for your children to inherit your cherished home.
The bottom line on debts in your will
The bottom line is that you can use a will to make sure certain debts/taxes are covered by certain assets. However, wills are not a way to avoid legitimate debts or liabilities. Without a will, state law will generally dictate which debts take priority over the other in terms of how they are paid off. It is still important to address debts in your will to ensure the right assets are diminished in the estate and that your beneficiaries receive what you want them to. The peace of mind that comes from proper planning is truly unmatched!
Katherine (Kathy) Bakes is the founder and managing attorney of Bakes Law LLC. Her eleven years of practice involves all aspects of family law, including the formation of prenuptial and postnuptial agreements, divorce and legal separations, child custody, child support, and visitation agreements, spousal support and financial settlements. Kathy also engages in the practice of estate planning including the formation of wills, revocable and irrevocable trusts, durable powers of attorney, health care proxies, HIPAA authorizations and living wills. Kathy is a member of both the Connecticut and Massachusetts state bars after receiving her Juris Doctorate degree from New England Law | Boston. Kathy lives in Southport, CT with her husband and toddler. Outside the office, Kathy enjoys playing the piano and teaches music education to students of all ages.
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