For some families, the way that elderly parents distribute their assets after their deaths can create friction among siblings and other heirs. But, some families have the opposite problem: Mom and Dad died broke.
What happens next can vary, of course, dependent upon your parents’ unique financial circumstances. Below are some common repercussions when an indigent loved one dies.
Their home has an underwater mortgage
People who die broke typically have led a chaotic financial life for decades. Often, they may have second or even third mortgages against their property, insuring that no heir will ever see a dime from its sale.
They have amassed great debt from credit cards
Debts in excess of $20,000 from credit cards and lines of credit are common. They may have taken out loans with finance companies and other shady lenders as well.
If your loved one had been living with a chronic illness or had a catastrophic illness at the end of their life, they may have a great deal of expensive medical bills when they died.
So, what happens next?
The National Bureau of Economic Research conducted research in 2012 that found almost 50% of senior citizens die with not even $10,000 in financial assets. At the same time, nearly a quarter of seniors 76 and older still have mortgages, which is four times as many as in 1989. Another 26% owe money on credit cards, which is a whopping 159% uptick.
All that can leave survivors with their heads spinning. But there is good news. Despite what many of your late parents’ creditors might allege, you are under no legal responsibility to pick up the tab for your parents’ debts.
Debts are owed by the estate
With solvent estates, executors must pay off the outstanding debts before the heirs see a penny of their inheritance. But if your parents left an insolvent estate, except for some family mementos and other sentimental items, there is nothing of value to sell to pay off these debts and creditors.
One exception could be if you co-signed for your parent’s loan or were on a credit card account with them. Then, you could bear liability for repayment.
Estate planning avoids this scenario
If your parents are still alive but have chaotic fiscal affairs, it may not be too late to get their finances in order. Life insurance policies and bank accounts that pay beneficiaries on the death of the account holders are ways to insure that heirs are not left with nothing. Both can keep the assets from being used to pay off the decedent’s debts.
There are other ways, as well, such as putting a home into a trust that passes directly to heirs and skips probate.
Taking the time to discuss basic estate planning matters with your aging parents is a good idea if you suspect that they may have resisted doing so on their own.