As you create your estate plan, your focus is on providing for your family. Your estate plan is a way for you to transfer both tangible and financial assets to the next generation. This can be hugely beneficial to them as they move forward in their own lives.
But you may become concerned about certain debts that you have. You hope to pay them off before you pass away, but you know there’s always a chance you could pass unexpectedly. If so, are your children going to take on this debt? You don’t want to create a financial hardship for them.
The estate executor handles debt
On one hand, debt typically doesn’t transfer the same way assets do. If you have a child who cosigned a loan or something similar, they would be responsible for that loan. But if you took out a loan in your own name, your child doesn’t inherit that obligation.
However, your estate executor does have to use funds from your estate to pay back certain debts before distributing the remainder to your heirs.
For instance, if you had two children and intended to leave them each $50,000, but you still owed $20,000 in back taxes, your estate executor would have to pay off the $20,000 first. This may mean your children would only be able to inherit $40,000 each. In this sense, your debt can still impact their inheritance, which is why it’s so important to plan in advance.
A comprehensive estate plan can help you ensure that your wishes are met and create the best possible financial future for your family. Be sure you are aware of all the legal options at your disposal.