8/20/2012 2:15 PM ET|
When your parents die broke
Inheriting your parents' debt is probably not what you anticipated. The good news is that you may not be legally responsible for it. Here's what you need to know.
Baby boomers and their kids are expected to inherit about $27 trillion in the next few decades, according to the Center on Wealth and Philanthropy at Boston College. Rebecca in Wisconsin doesn't expect to receive any of it.
She's already bailing out a 68-year-old father who spent all the life insurance money from her mother's death.
"I am resentful because he had received a large sum of cash after my mom died eight years ago and blew it all," Rebecca wrote on my Facebook page. "I even gave him my half of the insurance money."
Rebecca has plenty of company. Before the recession, one in seven households headed by people aged 65 to 74 was worth $10,000 or less. Among those over 75, it was one in 10, according to Federal Reserve statistics.
Even those with something now have less. The median net worth of households headed by people 65 to 74 dropped 18% between 2007 and 2010, according to the Federal Reserve's latest Survey of Consumer Finances. For near retirees, those aged 55 to 64, the plunge was nearly 33%.
Many have seen their savings pounded by bad markets and low interest rates. Shriveled home values and spiraling medical costs have also taken their toll. Even living longer than expected can cause a nest egg that once seemed adequate to run out.
The vast wealth transfer to come is a bit of an illusion, anyway. Most of the money will go from the richest families to their (likely already well-off) kids. Even among the affluent, however, fewer parents seem determined to leave an inheritance. A Merrill Lynch survey of people with $250,000 or more in investable assets found only 41% said preserving inheritances was a top concern, compared with 54% in 2009. Far more survey respondents said their top concerns were high medical costs (79%), ensuring their retirement assets would last a lifetime (60%) and being able to afford their desired lifestyles in retirement (55%).
For many people, hopes of receiving an inheritance someday have been replaced by hopes that they won't inherit their parents' bills.
"When my mother died, she had about $100 in the bank, $5,000 in debt, hospital bills and a small whole-life insurance policy that had been borrowed against and was practically worthless," another reader wrote. "I paid for most of her funeral."
The good news is that the younger generation typically isn't responsible for parental debts. But survivors may still have to deal with aggressive collection agencies and expenses from settling their parents' estates. They may have to scramble to take care of a surviving spouse or even dependent children. The family home and other assets may have to be sold. And somebody's got to pay for the burial.
If your parents are among this crowd, you need to know:
- Your responsibilities when your parents die broke.
- How insolvent estates are settled and how to deal with creditors.
- What you can do now to ease the burden later.
Read on for some practical advice.
What you owe when your parents go
Children aren't on the hook for their parents' unsecured debts -- credit cards, personal loans, medical bills -- unless they somehow agreed to take on the responsibility, said attorney Denis Clifford, a co-author of the Nolo Press guide "Plan Your Estate." You'll typically share liability for a debt if:
- You were a co-signer on a loan. A co-signer is just as responsible for paying off a loan as the primary borrower.
- You're a joint (not an authorized) account holder. If your income and credit history were used to get the loan or credit card, you're generally responsible for paying it off. If you were added as an authorized user of a credit card, though, you're not.
You abused a power of attorney or conservatorship. If you had responsibility for your parents' finances and spent their money on yourself, you're responsible for paying it back.
Michele in South Dakota said that's what her mother did. The older woman drained Michele's grandparents' savings accounts, borrowed against her grandfather's life insurance and racked up $20,000 on the couple's credit cards with "frivolous spending." Then she died.
By law, the mother's estate was responsible for paying the money back -- except Michele's mother died in debt. Collectors went after her grandfather, but he was essentially broke, too. Dealing with the collectors took its toll on all concerned.
"I am not bitter about my mom anymore. . . . I am sure the stress from the debt caused her heart attack. However, I am the steward of my grandfather's money and care, so I need to manage this debt mess and continue paying his long term health facility," Michele wrote. "I am a little overwhelmed."
Her troubles may not be over when her grandfather dies. A growing and lucrative market for old debt has led some collection agencies to pursue credit card bills even after an insolvent person dies.
One of my readers told me a collection agency insisted he had a "moral obligation" to repay his father's debts. If this happens to you, take a moment to savor the irony of being lectured about morals by a clearly unethical collector. Then hang up.
However, secured debts -- loans that are attached to an asset such as a house or a car -- are a different story. Those payments must be made, or the lender can take the asset. If your folks had any equity in a home or car, finding the money to make the payments may need to be a priority.
(By the way, if a surviving spouse is still living in a home, some or all of the equity may be exempt from creditors' claims, depending on state law. Otherwise, the house may need to be sold to pay debts.)
Also, if you're executor -- the one in charge of settling the estate -- you have a responsibility to find and inventory all debts and assets. Tax forms, bank statements, credit card statements and checkbook entries can give you clues where to look.
Then you must notify creditors, banks, brokerage firms and others of the death. (Read "What to do when someone dies" for an overview. For a more complete list of an executor's duties, check out a primer such as "The Executor's Guide," another Nolo Press book, by attorney Mary Randolph.)
What you shouldn't do, Randolph said, is rush to pay off the bills until you have a solid idea of your parent's entire financial picture.
"A mistake people make is they pay off things too quickly," Randolph said. "A credit card bill comes in and they pay it, not realizing there won't be enough money in the estate to pay for (higher-priority bills) like funeral expenses or medical expenses."
Another mistake: counting on life insurance or retirement accounts to cover the debts. These assets typically have designated beneficiaries; if that's the case, the money goes directly to those people without passing through probate or other estate-settling processes.
The beneficiaries of these accounts "walk off into the sunset," said Pasadena, Calif., lawyer Ruth A. Phelps, a certified elder-law attorney and member of the National Academy of Elder Law Attorneys. "That money is not subject to creditors' claims."
How estates are settled
If there are no assets at all, settling your parent's estate should be fairly simple. You'll send letters to the creditors explaining the situation and including a copy of the death certificate and that -- probably -- will be that, although you may still have to deal with a random debt collector who refuses to get the message.
If your parent had some assets, just not enough to pay all the debts, your state's probate court has a distinct list of what bills get priority. The details vary somewhat by state, but California's list is fairly typical:
- Expenses for administering the estate, which can include court costs, attorney's fees and executor's fees.
- Mortgages, tax liens and other secured debt, to the extent that the sale of the asset can pay off the loan. Leftover debt generally drops to the bottom of the priority list.
- Funeral expenses.
- Expenses from the last illness, including hospital, doctor, caregiver and pharmacy bills.
- A family allowance, which is typically a stipend that allows a surviving spouse and any minor children to pay essential living costs.
- Wage claims by any employees.
- All other debt.
Tax debt is typically considered to be among the highest-priority debts, equivalent to a lien on any property the dead person owned. Phelps handled one case where a woman with dementia failed to file tax returns for several years, and her entire $50,000 estate was eaten up by taxes, penalties and interest.
Also, hospitals and other caregivers may be fairly aggressive about trying to collect their share, knowing that they're high on the priority list, Phelps said. She recommends trying to negotiate settlements with them once you've inventoried all the debts and available assets, particularly if your parent wasn't fully insured.
Unfortunately, the uninsured are often charged far more than an insurance company or Medicare pays for the same services.
"A doctor might charge $100 but accept $25 as full payment from an insurer," Phelps said. "You may be able to negotiate the bills down substantially . . . especially if you say something like, 'If you accept this (offer), I can send you a check today,' and then do it."
If there's anything left for the credit card companies and other creditors, you'll generally divide the remainder by the number of creditors, Phelps said.
What you can do before they die
If you or your parents find it hard to discuss finances, Phelps recommends setting up (and probably paying for) a session with an elder-law or estate-planning attorney who can review their financial situation and offer advice. Changing beneficiaries or the title to assets, for example, could help survivors better pay bills and protect property from creditors. If your folks are insolvent and struggling to pay their bills, a bankruptcy filing could be a better option than waiting to fend off creditors after their death.
If nothing else, try to scope out your parents' wishes about funeral services, keeping costs in mind. If they'd be happy with lower-cost options, like cremation, ask them to put those preferences in writing to avoid family battles later. If your parents can't prepay their burial expenses and there likely won't be any assets to tap, talk to your siblings about sharing the costs before the inevitable happens. Otherwise, you might find yourself entirely on the hook, since burial costs aren't one of the bills that can be put off.
"The funeral home," Phelps said, "is going to want to be paid."
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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