People sometimes joke that they would need to die to get away from their financial obligations. However, the unfortunate truth is that not even death actually eliminates someone's responsibility to certain creditors. Personal debts that remain outstanding at the time of someone's death will typically lead to claims against their estate.
Debt claims generally take priority over most other potential uses for estate resources, meaning that someone's debt can reduce what they're able to leave their loved ones. An executor could potentially end up selling off almost all of someone's property to pay off their debts, leaving little or nothing for their dependent family members.
How can someone who is concerned about their legacy and the needs of their loved ones effectively address their debts in their estate plan?
They can engage in asset protection planning
There are means of reducing the risk posed by personal debt when someone dies or has limited sources to repay it. One of the most common involves advance planning. Engaging in asset protection planning when someone is near the age of retirement will actually benefit them when they are older and must live on a fixed income.
By changing the ownership of their most valuable property, they can protect those assets from future claims by creditors while they are still alive. Those protections will persist after their death and will keep certain property out of probate court, thereby protecting it from estate claims.
Life insurance or credit insurance
Many financial institutions will offer coverage for a monthly fee to allow for either monthly payments in the event of incapacitation or full payment for outstanding debts when someone dies. People can also carry life insurance coverage specifically to help pay for their debts after their death. Mortgages, student loans and other large debts can demand a substantial amount of money from an estate, making life insurance necessary in many cases.
Those who recognize that their financial obligations could negatively impact the legacy that they intend to leave for their loved ones can plan to address those concerns proactively – and thereby maximize what they pass to others. In this way, addressing major financial issues, like personal debt, during the estate planning process can benefit both a testator and their chosen beneficiaries.
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