Many people have the misconception that they are responsible for paying their parent’s debts, particularly when the parent dies with outstanding bills. Unless you co-signed for your parent’s loan or are the joint account holder with your parent, you are not legally responsible for paying the debt. Any outstanding debt your parents have upon their passing will go against their estate. The home may be sold to pay their debts and assets will be used to pay off creditors. If there is a positive net worth, the heirs will get an inheritance. If there is a negative net worth, the heirs will not get anything.
So how can parents maximize the amount of assets going to their heirs and not to creditors? You can either have no debt when you die or you can use probate avoidance tools while you are still living. When a person dies, their estate property is transferred to beneficiaries through a Will or intestate succession (if no Will). The result is probate. Many use the probate process but I recommend avoiding probate if possible because it is expensive (5-10% of gross estate value) and time-consuming (18-24 months on average). It is possible to transfer property outside of probate using probate avoidance tools such as Will substitutes like living trusts or payable on death accounts. This way, property goes directly and quickly to your heirs. So what are some of the valid ways to transfer property and avoid probate? Some include:
-Pay on death (POD) accounts can be created using a simple form at your bank. Simply choose a beneficiary to receive the money in your account when you die.
-Life insurance/retirement accounts avoid probate by designating a beneficiary. You should check your accounts annually to make sure you have the correct people selected as beneficiaries.
-Joint tenancy is a type of property ownership that when one spouse dies, the surviving spouse automatically gets ownership.
Note: This article was originally posted in February 2011 but because of its popularity, I am reposting.