Here are some considerations when planning your estate: Debt and ownership can be individual or joint; joint ownership is usually “with right of survivorship”; joint debt likewise will attach to both “borrowers.”
- No matter whose decision it was to lock in the season tickets or buy the new wardrobe, debt incurred jointly via credit card with a spouse becomes the personal obligation of the surviving spouse if the “buying” spouse dies. This is also true if you co-sign or guarantee a loan and the primary borrower dies – you become the primary obligor even though you never saw or benefited from the loan. Think student loan, employee loan, etc.
- An asset owned jointly with another can be used as security by either owner, and a creditor of either owner can place a lien on the jointly-owned asset while both owners are alive. That lien will remain valid after the death of the joint owner who incurred the debt.
- On the other hand, jointly owned, lien-free assets become the individually owned assets of the surviving owner when the joint owner dies. Those assets are not part of the deceased owner’s estate and generally cannot be used to pay their personal debts.
- Personal, unsecured debt of a deceased will die with the deceased who has no assets titled in their name only. Many surviving spouses pay off their deceased spouse’s debt (credit cards, medical expenses, etc.) using what had been jointly owned assets, but legally they may not be required to do so. Best to know your rights.
- Secured debt follows the same rule but can present additional challenges. If spouses own a home jointly and both are listed on the loan, at the death of one spouse, the surviving spouse becomes the sole owner and sole borrower/obligor, which may or may not be a good thing. If a child is later added to a deed as co-owner with a surviving parent, the surviving parent may inadvertently become liable for the debts of the child by virtue of the child’s interest in the home.
- If your employee convinces you to co-sign a loan for business school but later dies, you are probably going to have to pay off the loan balance. Of course, you can make a claim against the employee’s estate for the amount you paid, but that takes time and you’ll have to get in line behind other creditors.
- A business loan guaranteed by an induvial who is also a joint owner with a spouse of a home puts that home at risk if the business defaults on the loan, there is a judgment entered with a lien placed on the house, and then guarantor-spouse dies unexpectedly. Even though the title passes to the surviving spouse, the lien, if placed prior to the guarantor’s death, survives and can be enforced against the home equity. Not good.
A thorough plan is essential to understanding how best to structure debt. Please contact me for a consultation about planning to avoid unnecessary expense for your loved ones should something unexpected happen to you.