Most people realize that they can use their last will and testament to set out who should receive particular assets or income. However, few people understand that they can also describe how they would like specific debts paid off in their will as well. Unfortunately, many of your debts do not just disappear when you pass away; they are often passed on to your loved ones to address.
Thankfully, some careful planning and forethought now can help your family and friends deal with these issues much more efficiently in the future, cutting down on confusion and stress.
Types of Debts You May Leave After You Pass
Generally speaking, there are two types of debt. Which kind you have will affect how you can pay these items after your death.
1. Secured Debt.
Debt that is connected to an object is considered “secured debt.” That is, the debt is attached to some object or real property. The most common examples of these types of debts are a mortgage or a car payment. If you do not pay these debts, you could lose whatever property is associated with the debt.
2. Unsecured Debt.
Unsecured debt is much more fluid. It is not associated with any particular object, even if you used credit to purchase the object. Credit card obligations and medical bills are two of the most common unsecured debts.
Leaving Loved Ones Property (and Debt!)
If you leave a loved one an object that is connected to debt, then that debt will also move with the property. For example, if you bequest your loved one your house, but you still owe $30,000 on your home, then your loved one has not only gained a house, but he or she now has a $30,000 debt as well.
Many people overlook these debt obligations when they craft their will or trust documents. Failing to account for how that debt will be repaid can put unnecessary strain on your loved ones if you fail to plan properly.
You can explicitly state whether you want your loved one to take on the debt in your will. Otherwise, your loved one may simply sell whatever property you have provided to obtain the equity from it, instead of taking on your debt obligation.
Setting Out How Debts Will be Paid
You can state how you would like debt to be paid in your will. Generally, your debts must be paid before your executor can make a payment to beneficiaries. However, you can state, for example, that you would like a specific bank account to be used first to pay debts. You may also indicate which particular property you would like sold to pay debts, instead of having that property pass on to your heirs. You can get creative with how you want to address your debt obligations.
No matter what you do, it is crucial that you do something. Sticking your loved ones with debt or using your entire estate to pay debts is not practical or beneficial for anyone. Your estate planning attorney can help you craft a plan that will work for your particular situation.