When someone passes away, their assets are generally distributed based on what is in their will or, if they die without a will, according to the state laws of intestacy. However, in many cases there are outstanding debts which can complicate the situation, especially if the individual's estate planning documents do not address the issue.
An individual's estate becomes the owner of both debt and property, and the will's executor ensures that assets as well as debts are handled. Before an individual's property can be given to the heirs, debts must be settled, including credit card balances, taxes and other liabilities. Once this is done, the remaining assets may then be distributed, but there are some situations where a person's debt exceeds their property when they pass on.
In most cases, debt is not passed on to an individual's family or heirs. The two main causes of someone being obligated to pay off another person's debt after their passing are that the person had a joint account or responsibility or if they are the person's spouse in a community property state such as California. If someone was a co-signer on a credit card, car loan or home loan, they will still have to pay off a debt after the other individual on the loan passes away. In California, surviving spouses may also become responsible for debts, even if it was not in their name.
Proper estate planning can help prevent these types of issues from arising or becoming problematic for an individual's family. An estate planning attorney may be able to help someone understand which documents are required to ensure heirs are not left responsible for debts as well as drafting them.
Source: The Motley Fool, "What Happens to Credit Card Debt When Someone Dies", Peter Andrew, July 19, 2014