Inheriting Debt
Can you inherit your parent’s bills when they pass away? Generally not. Careful planning can make sure you don’t fall prey to “Negative Inheritance”.
Normal secured debt (like car loans and mortgages) are backed by the asset, and by the people who signed or co-signed the loan documents. If you didn’t sign the loan documents on your parents secured debt, you don’t inherit the obligation. The creditor can repossess the assets - so after your parents pass away it pays to keep up the payments while planning your next steps.
Unsecured debt (like credit cards and medical bills) are likewise the obligations of the people who backed the debt. If your elderly parents want you to be able to use their credit cards, make sure that you are set up as an authorized signer, not as a joint account holder. By limiting your involvement you avoid inadvertently inheriting the debt.
Of course when a person passes away, their debts are paid ahead of any inheritance. So when the estate has a positive net worth the debt is inherited - by reducing the amount that is distributed to heirs. First the secured debt is paid, then unsecured debt, then what is left over (if any) is paid to heirs.
Sometimes assets are disposed of prior to death in an attempt to avoid paying off the bills. This possibility has created special powers for holders of debt - they can and do go to court to get the disposed assets back into the estate, even if they were gifted prior to death. So ‘gifting’ of cash and other assets prior to death in order to avoid paying debts doesn’t work.
Another way to accidentally trigger debt inheritance is to pay your parents bills directly from your checking account. Let’s say your elderly parent needs help in paying for rent, medicine, or medical services. If you want to help, give money to your parent and make sure the bills are paid from their account. Otherwise the creditor can make the case that you assumed responsibility for the debt, and collect from you after your parent has passed away.
Aging baby boomers are facing another challenge - expensive end of life care for their parents. Although the majority of boomers are happy to help their parents, the result is sometimes a serious financial burden. Paying for long term nursing care, moving in with parents, or quitting a job to care for them wreaks havoc with your own financial health. This negative impact can be avoided by talking through the possibilities with your parents and obtaining long term care insurance in advance of need. Avoiding this all too common form of negative inheritance should be a key part of any solid financial plan.
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