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The intersection of debt and estate planning

When individuals age, their finances do not necessarily mature at the same rates as they do. As a result, it is certainly possible and increasingly common to reach the age of retirement and beyond while still wrestling with seemingly unmanageable debt. Frustratingly, if this debt is not dealt with in a constructive way, not only will those in debt be potentially plagued by creditor harassment but their loved ones could also be burdened with certain debts after the elderly debtors have passed on.

It is therefore critical to understand what kinds of debts are passed on after death when constructing an estate plan. It is also critical to understand your estate planning desires when contemplating bankruptcy or some other debt relief option. In the end, the choices you make may not only impact your life but the lives of your loved ones after you are gone.

Many debts generally will not pass to one's heirs after death. For example, federal student loans and credit card balances tend to be wiped out in the event of a debtor's death, unless the credit cards belonged in part to a co-signer like a spouse or parent. Ordinarily, any debt that is jointly held will pass in full to the other party in the event that one party dies. Credit card companies may also come after the estate if there are enough assets remaining to cover the debt.

Mortgage debt and car loan debt are not generally wiped out in the event of death. As a result, you can pass along your car or house, but the debt associated with that property will pass to whomever inherits it. When thinking about passing along any kind of asset still tied to secured debt, understand that there is a financial burden of payment being passed along as well. It should also be noted that private student loan debt does pass along to one's estate as it is not discharged automatically in the event of death.

When considering debt relief options and when constructing an estate plan, understand how debt impacts one's heirs and how estate planning may impact your ability to seek certain kinds of debt relief in accordance with your own unique financial situation and with the help of an experienced attorney.

Source: Daily Finance, "Inheriting Debt: How to Deal When You're Left a Money Mess," Adam J. Wiederman, June 24, 2013

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