What Happens to Debt When You Die?

Understand the financial side of death and 7 tips to protect your heirs.

Laura Adams, MBA
5-minute read
Episode #196

What About Secured Debts?

If you don’t have a will, your property goes to your relatives according to a formula determined by the state in which you live.

After your unsecured debts, like credit cards and medical bills are paid up, any remaining money and assets can be distributed to beneficiaries named in your will. It’s important to note that if you leave property that’s secured by a debt, like a house, car, or boat, to someone, they’ll be responsible for paying the debt.

I used to travel a lot for work and one time I overheard a conversation in an airport between two young women. One was telling the other that when someone dies and leaves you a house that the mortgage just gets wiped away. I could barely hold my tongue—because that’s not true—but I had to rush off to catch my next plane. Obviously, people are confused or misinformed about this issue. Here’s the quick and dirty truth: If you leave your sister your house or a fancy car and she can’t afford to make the monthly loan payments, she’ll probably be forced to sell it to get out from under the debt.

How Debt on a Joint Account Is Settled After You Die

Now let’s talk about how debt on a joint account is handled after you die. If you co-sign for a credit card or a loan with your spouse or boyfriend, they’ll be responsible for the debt when you die. Each person on a shared account is responsible for the full amount, even if you made secret credit card charges the other person didn’t know about. That’s why agreeing to co-sign for a debt can be a really bad idea.

[[AdMiddle](I wrote a previous article titled Should You Have a Joint Credit Card or An Authorized User? to explain the differences between these two credit card options. The bottom line is that an authorized user can rack up debt in your name, but they aren’t legally responsible for it if you die because they don’t own the account. Your estate would have to pick up the tab for a free-spending authorized user.)

7 Tips to Protect Your Heirs

It’s easy to create ways to transfer money and property to your heirs so it legally stays out of probate. Here are seven tips to avoid the complicated and expensive probate process:

  1. Create joint accounts. A joint bank or brokerage account passes directly to your co-owner.

  2. Set up payable-on-death (POD) accounts. You can designate a bank account or a retirement account to be payable directly to a beneficiary after you die. 

  3. Set up transfer-on-death (TOD) accounts. You can designate a security, such as a stock, bond, or a mutual fund, to transfer directly to a beneficiary upon your death.

  4. Set up transfer-on-death registrations and deeds. In a few states you can register a beneficiary for your vehicle and real estate so they’ll own it right after you die.

  5. Own real estate jointly. Hold title to property so it automatically passes to a surviving owner when you die. Depending on where you live and whether you’re married or not it might be called joint tenancy, tenancy by the entirety, or community property with right of survivorship.

  6. Set up a living trust. Property in a trust is not part of your estate for the purposes of probate because it transfers to a trustee. Then the trustee can easily transfer the property to your heirs.

  7. Give gifts. If you give property away while you’re alive it doesn’t go through probate.

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More Resources:
How Living Trusts Avoid Probate
Avoid Probate: The Small Estate
Probate Shortcuts in Your State
How to Avoid Probate
8 Things Cardholders Should Know About Community Property Laws

Debt image courtesy of Shutterstock


About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.