When someone passes away, their adult children often inherit their assets. This may occur because they are the natural descendants or next of kin if the deceased dies intestate. Typically, however, individuals create an estate plan naming their children as beneficiaries and specifying how their assets should be divided.
But do debts work the same way as assets? If parents still have a home mortgage or outstanding credit card bills, do their children have to take on those obligations? What about things like property taxes or unpaid income taxes at the time of death?
The estate pays down the debts
Adult children generally do not have to worry about directly inheriting their parents’ financial obligations. That would only happen if they are cosigners on a loan. For example, if a child and their parent took out a mortgage together, the child would remain responsible for the payments after the parent passes away. However, if the mortgage is solely in the parent’s name, the child is not obligated to make payments. They had no involvement in taking out the loan.
Instead, the estate is used to pay off remaining debts. This responsibility typically falls to the estate executor. The executor will settle outstanding taxes, pay off credit cards and handle other obligations. Once all debts are satisfied, the remaining assets are distributed to the beneficiaries.
As such, beneficiaries may inherit less money than anticipated. If the estate has more debts than assets, the available funds will be depleted. However, the children will not inherit any unpaid debts.
Creating a clear plan for addressing both assets and debts is one of the best reasons to develop a comprehensive estate plan. Understanding the legal options and steps involved can provide clarity and peace of mind.