You may feel relieved to know that your adult children will probably not inherit your debts when you die unless they have co-signed on a loan or credit line. However, this is not to say that your debt will not affect them.
During probate proceedings, one of the duties of the personal representative (also known as the executor) of your estate is to pay off your debts using the assets you have left behind. But which debts will be a drain on your children’s inheritance?
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Credit card debt
Most credit card companies will make a claim on the estate after the borrower dies. So, if you have considerable debt and not many assets, your children may not see any of the inheritance you intended for them to have.
Mortgages
If one of your children is a joint borrower on your mortgage, then the debt will remain his or her responsibility after you die. If you are the sole owner, then there may be many factors that affect whether the executor must sell the house or pass it on to your children. The law provides that in certain cases an adult child can assume the loan and keep the house, for example.
Student loans
ABC News reports that federal student loans go away when the borrower dies. The government discharges the debt and cancels the loan. However, the estate may be responsible for taxes on the forgiven debt because this amount typically counts as income.
Student loans from private lenders depend on the policies of the specific lender. Some may offer loan forgiveness, but many others will attempt to collect the balance from the estate.
The good news is that there are many ways to protect your assets from creditors. One common method is to set up a trust that allows the transfer of your assets directly to the beneficiaries you name so that the inheritance does not have to go through probate. An estate planning attorney can help you determine the best way to ensure that your children and not your creditors receive your assets after you die.