Many people plan ahead to pay off their debts when they pass away. If someone gets a serious medical diagnosis, for instance, they may make a concerted effort over the next few years to pay down things like a mortgage, business loans or other types of debt. Even if they are unsure what the future holds, they could set up a trust fund to address any remaining debts.
But not everyone has a distinct plan in place, and this can be concerning for some beneficiaries. If a parent passes away with substantial debt, what happens to it? Does it pass on to the next generation as inherited debt?
Paying taxes and paying debts
The good news for beneficiaries and direct descendants is that the debt is not inherited. If a child cosigned on a mortgage with their parent, then they would still be responsible for those payments. But if their parent simply had an outstanding mortgage balance when they passed away, the child is not obligated to take that on. The same is true with final taxes that are owed by the estate, such as income taxes or property taxes.
These do need to be addressed, however. This is a job for the estate executor. They are the one who can access financial accounts, inventory assets and follow the instructions in the estate plan when distributing assets. But before they can transfer financial assets to the beneficiaries, they often have to use the funds from the estate to pay down the debts. Only after this is done can the remaining assets be moved on to the next generation.
Financial issues are a common cause of conflict during probate and estate administration. It is important for people to plan in advance to address this and to know how to resolve these disputes when they arise.