During the estate planning process, your main focus will likely be on the best ways to protect the people closest to you and the property you want to leave for them. Making clear beneficiary designations and ensuring that an inheritance will be a blessing, not a burden, is absolutely an important part of estate planning. You may need to plan for taxes and to prevent conflict among your beneficiaries.
However, focusing too much on your property or family might mean that you don’t pay enough attention to your debts. The money that you owe to creditors, ranging from student loans to hospital bills, will play a role in how much property your loved ones actually inherit.
Which of your debts could affect the estate you leave behind when you die?
Your estate is responsible for all of your debt
Everything that you own becomes part of your estate when you die. Your financial obligations also pass to your estate. The executor of your estate must notify creditors about your passing and give them an opportunity to make claims for repayment in probate court.
Every debt that you owe, no matter how small, can diminish the value of your estate. Your executor cannot hand out the property you leave behind to the people you name in your will until they first pay all of those creditor claims. If those claims require that your executor sell off your property, there may be very little left for your beneficiaries.
You can plan ahead for debts
There are several ways for you to address your financial obligations in your estate plan. You can set aside resources to repay those debts, such as a portion of your life insurance policy. You could also make adjustments to your ownership arrangements or estate plan so that there is very little property in your name subject to creditor claims when you die.
People frequently use trusts for this purpose. A trust that holds your primary residence and other major assets could also protect you from debt lawsuits later in life when you are on a fixed income. Learning more about the rules that apply to your property when you die can help you create an estate plan that actually achieves your goals.