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What happens if a parent dies in debt?

As Americans live longer and have to stretch their retirement savings farther, many people die owing more money than they have. Increasingly, older Americans are in debt -- sometimes substantial debt. Almost a quarter of people over 75 are still making mortgage payments. When people who have more debt than assets die, their adult children are forced to deal with their parents' debt as they manage their estate.

When someone dies, his or her debt transfers to that person's estate and is paid out of the estate. However, if there aren't enough assets in the estate to cover those debts, the deceased's survivors (with the exception of spouses) usually aren't responsible for the debt if they aren't co-signers on it.

That's one piece of good news. Another is that if your parent named you as a beneficiary on a bank account, retirement plan, insurance policy or other asset, you aren't required to use that money to pay that parent's debt. You're free to take it without obligation.

Sorting through a parent or other loved one's debts can be labor-intensive. However, it's essential to know how much that person owed and to whom. Generally, if you notify creditors of the death and inform them that the state is insolvent, they will cancel the debt.

Unfortunately, sometimes creditors will try to manipulate loved ones by telling them that it's their responsibility to pay the debt, particularly if they inherited money. That's why it's essential to consult with a California estate planning attorney. He or she can advise you of the proper course of action and let you know what your rights and responsibilities are as you settle the estate.

Source: Washington Post, "When your parents die broke," Liz Weston, AP, March 05, 2018

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