6/20/2012 3:08 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For many people, hopes of receiving an inheritance someday have been replaced by hopes that they won't inherit their parents' bills.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.
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