DENVER — For adult children, the death of a parent is a fraught experience. Adding to the stress: the unwelcome surprise that Mom or Dad died with big debts.
Who is on the hook to pay them?
Unless you cosigned one of your parent’s loans or accounts, it’s usually the estate, not you.
Usually. Not always. The rules are complex and differ depending on the type of debt and where your parent lived.
Creditors typically have a fixed period of time — usually between two and six months — to make claims against your parent’s estate.
If there’s not enough money to cover the debt, in many instances “[your parents’] debt will die with them,” said certified financial planner Mari Adam of Adam Financial Associates.
But if there is money or other assets, they must be used to pay the debt before anything is distributed to heirs.
So even when you’re not legally responsible to pay the debts, they may still reduce — or wipe out — what your parent intended to leave you.
For instance, an executor may need to sell some of an estate’s assets to satisfy creditors’ claims.
Or, say you expected to get the money in your mom’s 401(k) or IRA. It will only be protected from her creditors if she listed you as a beneficiary on the account itself.
If you are not listed as a beneficiary, the money will be rolled into the estate, and creditors can make claims against it, said Steve Hartnett, associate director of education at the American Academy of Estate Planning Attorneys.
Credit card debt: Unless you’re a cosigner on your parent’s credit card, his or her Visa bills are not your problem.
That’s not to say that debt collectors might not try to convince you otherwise.
But they’re only allowed to call you requesting payment if you’re the executor. (Here are federal rules governing who creditors may call regarding a deceased person’s debts.)
The credit card company is often a low-priority creditor behind funeral homes, federal and state tax agencies and various lenders. So it may be willing to negotiate a lower payment, Hartnett said.
Medical debt: If your parent received Medicaid, the insurance program for people who can’t afford care, the state where your parent died can recover the payments it made from the time your parent was 55 until death.
A house is the only substantial asset a person may keep and still qualify for Medicaid. So the state may place a lien on your parent’s home to recover payments.
Some states, however, may be willing to negotiate and let the executor pay less than the total due, said attorney Howard Krooks of Elder Law Associates PA.
The state may not, however, ask you to use your own funds to pay the bill. Nor is the state allowed to pursue payments during the lifetime of a surviving spouse.
The state is also barred from collecting if you or an adult sibling lived in your parent’s home for at least two years before his or her death and provided care that delayed your parent’s admission to a nursing home or other medical facility.
If your parent wasn’t on Medicaid, but died with unpaid hospital or doctor bills, the estate is responsible for paying them if it has the money.
But check state law. Close to 30 states have what’s known as “filial responsibility” statutes. Those require adult children to pay for a deceased parent’s unpaid medical debts, such as those to hospitals or nursing homes, when the estate cannot.
Mortgage debt: Inheriting a home with a mortgage is a very complex issue. So talk to an estate lawyer familiar with all state and federal laws governing the issue.
Generally, if you inherit your parent’s home and it still has a mortgage on it, the lender may not demand that you pay off the mortgage immediately. In other words, the bank can’t call the loan. But you will be responsible for making payments on it going forward.
If the mortgage is worth more than the property when you want to sell the home, ask the bank if it will agree to a short sale, said attorney and real estate expert Stuart Ebby. If it won’t, you can tell the bank to foreclose.
Either way, you should not have to pay the bank the difference between the sales price and the money still owed on the loan. But, Ebby noted, in the event of a foreclosure, “the bank could go after the estate for the difference.”
The foreclosure should not affect your credit score, either, so long as your name is not on the mortgage. But it all depends on how the mortgage company reports the transaction to credit bureaus. Wells Fargo, for instance, would not report the transaction under your name, even if it was listed on the title to the property, just so long as your name isn’t on the loan itself.
You may also choose to disclaim your inheritance, in which case the house would go to the person designated if you had died before your parent. If no one was named, in many states the house becomes part of the general estate.
Taxes: The estate is responsible for paying any property taxes and income taxes, delinquent or otherwise. And tax agencies are usually given top priority as creditors.
Also, if federal estate tax is due but property is distributed before it’s paid, the IRS can puta lien on the property and collect on it, said estate planning attorney Roger Levine.