What’ll Happen to Your Debts When You Pass?

Steve McDonald By Steve McDonald, Bond Strategist, The Oxford Club

Two-Minute Retirement Solution

Everyone knows at least one couple who’s having the time of their lives spending their children’s inheritance. They typically believe – and I agree to a certain degree – that inherited wealth is not a good thing.

Here in Florida, or the “retirement belt” as I like to call it, this type of estate planning should be called the “I’ve never seen a hearse pulling a U-Haul” plan.

Proponents of the “no U-Haul estate plan” want to leave as little as possible when they finally check out…

In some cases, not even funds to cover the cost of their funerals!

Many will balk at this “zero balance” exit plan. And since we don’t know when we’ll check out, it does present a few timing and debt issues.

But leaving very little when you leave this world actually solves a lot of estate issues…

  • No estate tax issues – a big plus and a cost saver
  • No infighting between heirs – a nightmare we’ve all seen unfold
  • No issues about asset division (or “who gets what”) – more family problems avoided.

And a big chunk of cash won’t end up in some car dealer’s, real estate agent’s or funeral director’s pocket.

If leaving nothing behind is the goal, consider this story. A friend of mine, who recently passed, was the king of the “no U-Haul plan.”

He didn’t leave anything, except a mountain of debt…

Three mortgages on his primary home, a big mortgage on his second home, a huge load of credit card debt, several personal loans, and virtually zero cash or investments!

He truly was the king of the zero-balance exit strategy.

But here’s where he set a new standard – even for the “spend the children’s inheritance” crowd.

He charged his own funeral on his American Express card before he died. He had been fighting cancer for several years, and since he knew he had a limited amount of time left, he planned his own funeral.

He just had no intention of paying for it.

Which brings me to the purpose of this piece: What happens to our debt after we move on?

I’m not a lawyer, and I can’t give legal advice, but what I learned after my friend died is this… If the person is insolvent, then their debt goes away when they pass.

Unless your name is on the mortgage, credit cards or loan documents, you (the heir or relative of the deceased) aren’t responsible for any of it.

But the credit card companies won’t tell you that. They try to guilt you into paying the balances, and they can be rude, insulting and incredibly mean. Not what you need if you just buried a relative.

In my friend’s case, he left no money or assets of any kind. American Express had to eat his funeral costs and a lot more… $35,000 more.

And believe me, his heirs had some interesting conversations with American Express about the funeral costs.

He died with multiple credit cards, all maxed out, and no money to pay any of them. The banks that gave him the personal loans got nothing. His home was so underwater, the bank actually lost about $250,000 when it was repossessed.

There was so much debt and so few assets, the estate was never opened.

But if a person leaves equity, cash or assets in his name when he passes, the folks who are owed money (credit card companies, banks, etc.) can force the sale of the assets to make good on those debts.

In some cases, if someone is still living in a home that’s left with a mortgage, you can usually work out a deal to pay the mortgage so the home doesn’t have to be sold to satisfy the creditors.

Being debt-free in retirement is a lofty goal for most. In fact, a debt-free retirement appears to be a thing of the past. Most seniors carry lots of debt, mostly mortgages, into their golden years.

Between 2001 and 2013, debt carried into retirement increased by 83%.

Credit card balances alone for those over 65 now average $6,300. It’s a growing problem, and one that’s being left to our heirs.

With that in mind, in some cases, the “no U-Haul plan” with only one name on the debt could have some upside.

Good investing,