Will you be stuck holding the bag on your parents’ debt upon their death? It is not a pleasant subject by any means, but as everyone gets on in years, it is never a bad time to have a frank discussion with your parents about their finances and estate planning. After all, it will have an impact on you. For the most part, you can take comfort in knowing that if your parents rack up a bunch of debt, that burden typically will not fall directly on you. Unlike assets, which can be passed on, if the owner passes away, the creditor simply has to write it off. However, that does not mean that your parents' debts are meaningless to your financial future. Here are some potential impacts of generational debt and how to deal with them.
Co-signing mistakes
Generally speaking, the only case in which you could inherit the debt is if you are a co-signer on the original loan agreement. Just as if the primary guarantor were to default, if they were to pass away, the bank then has the prerogative to come after the co-signer to satisfy debt obligations. The safest best is not to be a co-signer, but if you must be for an aging parent, first quantify the total dollar amount you would be out should a default or death happen. Additionally, you should also confirm the primary guarantor has the appropriate amount of liquid assets to cover the obligation in the unfortunate event of default or death.Estate depletion
Although you will likely not get stuck with the bill, if your parents have accumulated a great deal of debt, the entire estate can be liquidated to satisfy the creditors. This can include everything from stocks, bonds, real estate (including primary residence), life insurance, and even family heirlooms, which may not be safe from a forced liquidation. If there is more debt than what the assets can be liquidated for, the creditors will take it all. Some creditors may make an attempt to collect the remainder from you, but they have no legal grounds for collecting, though they can certainly ask. It sounds painless, but the consequences of a forced liquidation can impact you significantly. You may have been expecting a piece of the estate or perhaps thought you would live out the remainder of your years in your childhood home -- that can be all gone in a flash if there are debts to pay.There are, however, some options -- but again, this requires a discussion with your parents about their financial situation. First, if you are aware of the debt, perhaps it can be extinguished before the death of your parents. However, if taking care of it beforehand is not realistic, simply knowing about it can put you in a position to discuss it directly with the creditor. The creditors only want to get paid, and they do not care how. Striking a deal to pay off the debt on your terms or using your means may allow for preservation of the estate. Or, maybe you can use the stocks from the estate and some of your cash, but keep the house. Even if you have to sell it all, if you can directly handle the creditor, you can likely find a buyer for the house and get a far better price than the forced liquidation price the creditor would get you.
Trust fund misconceptions
If your parents' entire estate is put into a trust, you might feel pretty confident that the trust will simply flow to you and your parents’ debt will just be forgotten. This is not the case. Certainly, trusts do have many asset-protection and estate-planning advantages, but in the event of a loan default (e.g., death), there are ways for this veil to be lifted. For instance, the creditor may learn about the trust and get a court order to open up the trust and reclaim any amounts owed, especially if the bulk of the trust was started by the original debtors (e.g., your parents). However, one item is that it can buy you time -- which could be good or bad. For instance, say you get the trust and liquidate it to pay for your dream home all without knowing of your parents’ debt. The money may all be spent now, but the creditor may have a valid case to present a claim against you.This is where discussion with your parents is crucial. Before spending a red cent of the inheritance, verify your parents do not owe anything. The good part is that with the added time, if you discover there are debts, the trust can provide some protection against a forced, involuntary liquidation of the trust assets.
debt protection
The best thing you can do is plan on how to maximize any estate or wealth built by your parents during their lifetime. You will not be directly responsible for paying off their credit cards, but if you want to retain as much of the assets as possible, have the discussion with your parents about their financial situation and liabilities. A nightmare scenario is having the estate cleaned out by creditors -- including life insurance -- and being stuck with the funeral bill (which is your expense, believe it or not).Simply put, just as in any money situation, addressing it upfront and handling it realistically will save you a great deal of headaches and will likely allow you to keep the things you want from your parents’ estate.
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