It’s a topic nobody likes to talk about, but that doesn’t make it any less important.
What happens to our money, property, and debt when we die?
While there isn’t one answer for everyone’s situation, there are some common rules of thumb when it comes to a person’s finances after they die.
Wills are a very important document if you wish to have some control over what happens to your assets (money, investments, property, etc.) when you die. This is especially true if you have children, grandchildren, or even siblings who might disagree over certain aspects of your estate (which is what your assets are called upon your death).
So how do you get a will? Well, if you can afford to, hiring an estate attorney is the best option for ensuring that your will has both your and your family’s best interests. If money is an issue, there are tons of online tools and software that you can use to help you create a will.
The worst thing you can do is try to create a will by yourself. Even Supreme Court Justices, who are well-versed in the law, have made the mistake of attempting to create their own will only to end up costing their families thousands of dollars in taxes that could have been avoided.
When you create a will, one of the main components is the executor. This is the person you elect to ensure that your assets are distributed according to your will, so worry more about choosing someone who is responsible, not someone you are close with. It also might be a good idea to elect a backup executor in the event that your first choice is unable to fulfill their duties.
If you choose to use a bank or lawyer as your executor, there is a fee involved — if you choose a family member or friend, you may choose whether or not they are compensated with a set amount or percentage of your estate. Your executor will be responsible for the task of distributing your estate according to what you want, so it might be a good idea to repay them.
If you choose not to create a will, or if you die before you are able to create one, what happens to your property when you die becomes a decision made by your state laws. These laws, called intestacy laws, differ greatly from state to state. But they do have some similarities.
Typically, the order in which your estate is divided is as follows: your spouse is first in line, then children, grandchildren, parents, siblings and half-siblings, nieces and nephews, grandparents, uncles and aunts, first cousins, and any other living relatives.
To whom your estate is given depends largely on whether or not you are married, whether or not you have children, and which relatives are still alive.
- Single without Children: Your parents receive your entire estate. If only one parent is living, it is divided between your siblings or half-siblings and the surviving parent. If both parents are deceased, it is split among your siblings and half-siblings. If you have no living siblings or half-siblings, it is split among any nieces and nephews. If there are no living parents, siblings, half-siblings, or descendants of siblings, half of your estate will go to relatives on your mother’s side of the family and the other half will go to relatives on your father’s side of the family. If no relatives are found, your estate goes to the state.
- Single with Children: Your estate is split among your children. If any of your children are no longer living, their share will be given to their children. If there are no surviving children or grandchildren, the estate then goes through the same order of heirs as a single person without children.
- Married without Children: Depending on your state laws, your assets will either go entirely to your spouse or be split between your spouse and your parents, or your spouse and your siblings if your parents are deceased.
- Married with Children: If your children are the children of the surviving spouse, all of your estate will go to your spouse. If your children have a parent other than your spouse, your estate will be divided among your spouse and your children.
- Unmarried Couples: Unfortunately, if you are unmarried, there is no way for your estate to be passed on to your partner unless any of the assets were co-owned by them.
- Domestic Partners: Unlike unmarried couples, domestic partners might receive a portion of your estate depending on whether your state recognizes domestic partnerships. Domestic partners, where recognized, will typically receive the same treatment as a spouse in terms of inheriting your estate.
It’s important to note that every state is different, so while these situations are most likely what you might experience, you should familiarize yourself with your state laws so that you are aware of where your estate would go in the instance that you die without a will.
If you are not yet ready to create a will, or if you decide not to create one, you might want to consider discussing with your heirs (according to your state laws) what your wishes are — though it will ultimately be up to them to decide what they do with the portion of your estate they receive.
Unfortunately, regardless of whether or not you create a will, your estate will most likely be used to pay off any debts you still owe before it can be distributed to your heirs. With only around 20% of Americans debt-free, it’s no surprise that many people still owe some amount of money after their death.
How your estate is used to pay off these debts depends largely on the type of debt you owe. There are four main types of debt, and different ways that they are handled:
- Credit Card Debt
- Auto Loans
- Student Loans
Credit Card Debt
According to a Gallup poll, a little more than 70% of Americans own a credit card. But of those users, less than 50% of them pay off the full amount of their credit card balance each month.
That means that millions of Americans have some amount of credit card debt, and there are some that will die before they have the chance to pay off those balances. What happens to that credit card debt after they die?
Well, if your card was co-signed by someone else, that debt now falls on them to repay. If it was solely yours, any cash in your estate will be used to pay off that debt. If there isn’t enough cash, your assets will be liquidated to cover that debt.
Some credit card companies might still try to get beneficiaries, especially spouses, to pay the debt if your estate doesn’t cover the full amount — but unless their name is on the account, they are under no legal obligation to do so.
Now, this doesn’t mean you should max out your credit cards before you die or take out cash advances for your loved ones — credit card companies can still petition the court to reverse any purchases or gifts you made before death, and your family could end up in hot water.
When it comes to mortgages, it’s actually pretty simple. As long as someone assumes payments on a mortgage — either the other occupants of the home or a beneficiary who was left the home — nothing will happen. If payments stop, however, the bank will eventually foreclose on the home.
Auto loans are similar to mortgages — as long as someone takes over the payments, they can keep the car. If not, the car will be repossessed by the bank.
The good thing about mortgages and auto loans is that, if the beneficiary decides they don’t want the home or car, they are under no obligation to make payments. Foreclosures and repossessions will have no effect on them financially because even though they technically own the property, they do not own the debt associated with it.
When it comes to student loans, the main deciding factor for what happens to the debt is whether or not the loans are federal or private, as well as whether or not there is a co-signer.
If you die with nothing but federal loans, those loans are automatically canceled and the debt is discharged by the government. If you die with private loans, that’s a completely different story — and what happens to that debt depends largely on the institution to which the debt is owed.
Some institutions offer debt forgiveness in the case of the death of the borrower, but not all. Companies that don’t offer this forgiveness will typically go after a person’s estate first, then any co-signers, and then the spouse, depending on the community property laws in your state.
Do Your Research
Hopefully, this has given you some insight into what happens with your finances when you die, but this advice is broad and likely won’t fit every situation. To figure out what might happen to your finances specifically, here are a few things you should consider researching wherever applicable:
- Your options for getting a will.
- Your state’s intestacy laws.
- Your state’s community property laws.
- Your state’s domestic partnership laws.
- Your credit card company’s policies regarding your debt if you die.
- Your mortgage lender’s policies regarding debt if you die.
- Your auto loan lender’s policies regarding debt if you die.
- Your student loan lender’s policies regarding debt if you die.
When you’ve done your research, it’s important to discuss with your beneficiaries anything you learn that will be applicable to them so they can be prepared.