Estate planning is a multi-layered process that involves not only deciding how assets will be disposed, but also protecting one’s estate from losses from liabilities against the estate. With more and more Americans carrying debt into retirement, it is becoming increasingly common for people to leave behind liabilities that can clean out their estate.
How common is the situation? According to a report released in January by a New York based police research organization known as Demos, middle income Americans age 50 and older are currently carrying more credit card debt on average than younger people. This is a reversal of the firm’s findings from 2008. The report says specifically that older households carried an average credit card debt of $8,278 in 2012, compared with $6,258 for those under 50 years of age. These stats don’t include mortgages, home equity lines, auto loans or other possible liabilities.
In addition to the amount of debt carried by older households, there is also the fact that the value of their assets has declined significantly.
Those who are insolvent when they die should know that their heirs will not inherit their debt directly, unless they live in a community property state, where the question is a bit more complicated. If the estate has enough assets to cover the liabilities, though, creditors will be seeking out their money and could potentially decimate the estate.
Not all assets are equally at risk, though. Those which don’t go through probate are not as easy for creditors to access and states may have laws that specifically shield certain assets from creditors. That said, it is important for folks to come up with a plan during estate planning to minimize the potential losses to their estate in the event that they carry liabilities.
In our next post, we’ll look at several general strategies.
Source: Fox Business, “Five Steps to Prevent Your Debt From Haunting Your Heirs,” Michelle Crouch, March 12, 2013