When you’re making an estate plan, you look at all of the assets that you have and you divide them between your heirs however you choose. You can put money in a trust, you can leave the money directly to an heir or you can use some combination to set up a plan that works for your family.
But what about your debts? Say you have $10,000 in outstanding credit card debt. If you pass away today, will your heirs need to pay off that debt for you? Do you have to add this to your estate plan the same way that you would add an asset?
Debt that belongs to you, stays with you
Generally speaking, if you have any debt, you are the only person who is responsible for it. The exception to this is if you’ve co-signed for that debt with someone else, such as a spouse. But if you are single and you just have debt on a credit card that only you can access, then you are the only one who needs to pay that off. The debt will not be passed to your children and they will not have to deal with it.
That said, your creditors can go after your estate to get paid back for the debt. If you have $50,000 in your bank account, for instance, and you have listed in your will that it has to go to your heirs, the $10,000 of debt might need to be taken out first. In this sense, your children may still feel that they are paying for your debt, but it is really your estate that is paying it off.
As you can see, estate planning can raise some very complex questions and it is important to get it right, so make sure you carefully consider all of the options at your disposal.