Claims against the estate may reduce your inheritance.
It’s the age-old bad joke of inheritance. Kids expect to get a lot assets, and wind up getting a lot of debt instead when they take over the estate. But is it true? And does it mean that you’ll be paying your parent’s Visa and MasterCard bills after they’re gone.
Just to be upfront, the answer to that last one is “No.”
But that doesn’t mean that your parents debts won’t have any impact on your inheritance. It’s just not as bad as you may be worrying it is…
Creditor claims to the estate
When a person passes away, they have what’s known as an estate. This is the sum total of everything they own in life – all of their assets that they generated that have to be distributed according to the terms of a will (hopefully). Note that an estate doesn’t include assets which have a name beneficiary themselves. So if you’re the beneficiary of a 401(k) or a life insurance policy, that has nothing to do with the estate, since it’s separate.
All of your parents creditors have a limited window of time to make claims on the estate. That window is usually between two and six months.
Fact: The time to make a claim against an estate varies by state.
If claims are made and approved, then money will be taken out of the estate or assets can be liquidated to settle it. This reduces how much each of the inheritors inherits. So in this sense only, children may lose something to pay off a parent’s debt.
You can’t inherit credit card debt
If claims aren’t made against the estate before the window closes or claims are rejected, then whatever remains of the estate gets split up according to the terms of the will and children get their inheritance. At this point, unless you were a cosigner on an account, you are under no obligation to pay anything to any credit card company.
Cosigners are a different story – in that case, your parents debt is your debt because you cosigned and agreed to pay if they couldn’t. So if you cosigned an account, then you have an obligation to repay the creditor and if you don’t, it goes to collections and damages your credit just as it would if you didn’t pay one of your debts.
But any account you didn’t consign and agree to pay on your parents behalf is 100% not your debt. Of course, collectors won’t always just throw in the towel and leave you in peace. They may try to trick you into thinking you’re obligated to pay the debt in your parents’ name. But remember, if they lie and threaten any legal action to collect a debt that isn’t even yours, you have the right to fight back.
A note on the benefit of trusts
One smart thing to do to ensure an inheritor will have something when you’re gone is to establish a trust. With a trust, any money you put in no longer belongs to you – it belongs to the trust being kept in that person’s name. So creditors and collectors can’t leave your children penniless if you’ve contributed to a trust instead of just leaving your wealth to them in a will.