When a Loved One Dies Are You Responsible For Their Debt?

When a spouse or loved one dies, surviving family members are often faced not only with the emotional aftermath of dealing with their loss, but also with an avalanche of legal and administrative issues to deal with for which they are totally unprepared. And in these situations, the last thing that grieving family members may have expected is a barrage of phone calls from debt collectors seeking payment for the deceased’s outstanding debts. Often the surviving family members have no idea how to handle these issues. Should these debts be paid? Who is liable? Are other family members personally responsible? And are family members entitled to inherit any assets if there are outstanding debts?

The general rule in these situations, per the State of Ohio, is that the decedent’s “estate” is primarily responsible for their debts. But in many cases, creditors automatically assume that if the decedent had any assets when they died, these assets must be used to pay their outstanding debts before family members can inherit anything. But that’s not really the case! How is that possible? The reason is that it’s only the PROBATE estate that is primarily responsible for the debts. Assets that pass outside of probate do not fall into this category, and are often beyond the reach of creditors (there are some exceptions, discussed later). In cases where the decedent took the time to do probate planning, most or all of their assets could pass outside of probate and thus be exempt from their outstanding debts.

Here are some of the most common examples of assets that can be structured to fall outside of probate:

1) Assets that pass via designated beneficiary form, such as IRA accounts, 401(k)s, pensions, annuities, and life insurance. As long as the form names someone who outlived the decedent, these assets will not need to go through probate.

2) Assets that are titled Joint with Right of Survivorship. This typically applies to the residence owned by a married couple. The “right of survivorship” feature (shown on the title of the property) means that the house will pass to the survivor outside of probate.

3) Assets that are titled Payable on Death (POD) or Transfer on Death (TOD). This applies to any checking accounts, savings accounts, other bank deposit accounts, or automobile titles where the decedent had filled out a form making them POD or TOD.

4) Assets placed in a trust. These assets are considered as being owned by the trust, not the decedent, and pass outside of probate.

If the decedent did proper probate planning, there is often virtually nothing left to go through probate, and thus nothing for creditors to take, even if the decedent had sizeable assets such as IRAs, bank accounts, etc. This often comes as a surprise to family members, who may be approached by debt collectors trying to get them to pay quickly, before they learn these rules.

For example, the decedent may have signed a long-term lease agreement for an automobile shortly before passing away. In these cases, the leasing company may try to collect the payments for the entire contract from the surviving spouse and/or other family members, who may not realize that only the probate estate is liable (of course, in this case, the car itself would have to be returned because under a lease agreement the decedent never owned it in the first place). Another typical example is credit card debt, which is generally unsecured and thus “dies with the debtor,” meaning that it can be claimed only against assets in the probate estate, if any.

There are, however, some exceptions to these rules in which the spouse and/or family members can indeed be liable for some or all of the decedent’s outstanding debts. Here are some common examples:

1) In cases where a family member co-signed for a debt, they would remain personally liable for the entire debt.

2) In cases where the debt is secured by an asset, such as a mortgage on the house or an auto loan secured by the car, that particular asset would be subject to the debt.

3) In the case of medical expenses, Ohio law generally follows the “Doctrine of Necessaries,” which makes the spouse liable for the decedent’s unpaid medical bills.

4) If the decedent had any long term care expenses paid by Medicaid, the State will generally enforce collection from other assets even if they passed outside of probate, in particular the family residence.

As you can see, there are a myriad of rules that can apply when it comes to the question of who is liable for the debts of a decedent. The bottom line is that surviving family members should never make any assumptions, such as thinking they are personally liable for these debts, and/or that they can’t inherit any assets without paying these debts first. Instead, they should speak with a qualified professional and get good counsel before taking any actions in this area. As always, it pays to think before you act! Feel free to contact our office if you have any questions about these issues.