You are probably going to die with some debt to your name—most people do. In fact, according to Credit.com, 73% of people had outstanding debt at their death. These people carried an average debt balance of $61,554, which includes mortgage debt. Without the mortgage debt, the average balance was $12,875.
Of the 73% of people who had debt when they died, about 68% had credit card balances, followed by mortgage debt (37%), auto loans (25%), personal loans (12%) and student loans (6%). Average unpaid balances: credit cards – $4,531; auto loans – $17,111; personal loans – $14,793; and student loans – $25,391.
That is a lot of debt, and it just doesn’t disappear when someone dies. So, what does happen to debt after you die? Debt belongs to the deceased person’s estate. If someone has enough assets to cover their debts, the creditors get paid, and beneficiaries receive whatever remains. In some cases, there isn’t enough assets to satisfy debts and creditors lose out or may only get a portion of what is owed.
The type of debt you have, where you live and the value of your estate significantly affects the complexity of the situation. Community property states, where spouses share ownership of property, handle debts acquired during a marriage differently and it varies by state. Accounts with co-signers or co-applicants can result in the debt falling on someone else’s shoulders. Federal student loan debt is eligible for cancellation upon a borrower’s death, but private student loan companies tend to not offer the same benefit and can go after the estate for payment.
How can you avoid burdening your family? One way to make sure debt doesn’t make a mess of your estate is to stay out of debt and stick to a budget that helps you live within or below your means. Poor planning can leave your heirs with significant stress. For example, if you don’t have a will or designate beneficiaries for your assets, the law in your state of residence decides who gets what. State laws and your wishes can be very different. Estate planning is not a pleasant task, but it is critical that you implement it before you need it.
Estate planning is the process of establishing a framework to manage your assets upon disability, incapacity or death. It involves creating documents that outline your wishes.
Drafting a will is an important step in estate planning, but there’s a number of other documents that are important in the creation of a well-devised estate plan.
- Last Will & Testament. The purpose of a will is to outline who will receive your assets upon your death and to specify guardianship for any minor children. It is important to understand that a will does not become effective until the date of death and does not provide any benefits during your lifetime. A will can be amended or revoked by writing a new will. It can also create a trust upon your death. If your estate is large enough (over $5.49 million in 2017) you may also need to incorporate estate tax planning into your documents.
- Trust. A trust is a legal instrument that provides ongoing management for your assets. It is a good idea to leave assets in trust if the beneficiaries are minors, incapacitated, or if they are simply not fiscally responsible.The trust document names a trustee who has the responsibility of managing the assets in the trust and determines when and how much of the trust assets to distribute, subject to the terms you have written in the trust. You can specify at what age a minor child can either act as their own trustee, or the trust can terminate and distribute the assets to the child outright.
- Power of Attorney. A Power of Attorney allows you to empower someone else to act on your behalf for legal and financial decisions. A Durable Power of Attorney becomes effective immediately, or a Springing Power of Attorney can be triggered by a specific event such as becoming disabled or mentally incompetent. It is critical that you completely trust the person to whom you provide this power, as he or she can legally act on your behalf.
- Healthcare Power of Attorney. A Healthcare Power of Attorney (also known as a Medical Power of Attorney) gives a trusted individual the authority to make decisions about your medical treatment should you be unable to do so yourself. No financial authority is granted in this document, only medical power.
- Living Will. While the Healthcare Power of Attorney authorizes another person to make medical decisions on your behalf, a Living Will (also known as a Directive to Physicians) sets out your wishes regarding end-of-life care should you become terminally ill or permanently unconscious. This document takes the sometimes very difficult end-of-life decision out of the hands of your family and medical providers and assures your wishes are respected.
- HIPAA Release. This document allows your medical providers to legally share and discuss your medical situation with whomever you specify in the document. Without this legal authority to share medical records, your family may not be able to obtain important information regarding your medical condition and treatment if you were to become incapacitated.
- Letter of Intent. A Letter of Intent is a simple, non-binding personal letter expressing your desires and special requests. It may include burial information or a special bequest of collectibles or personal items. It typically does not have legal authority, but it can clear up any confusion regarding your personal preferences.
Estate planning can be complex and the laws vary widely by state, and your accountant and attorney need special estate planning expertise. Contact Olsen Thielen Tax and Estate and Trust Principal, Adam Thielen, CPA, for more information on how to get started on your estate plan.