Are You Going to Saddle Your Kids With Your Debt?

You want to leave your kids many things: the house, the trust fund, your aunt's tea set. Debt, though, is not one of those things. How can you make sure your personal red ink doesn't spill over into your kids' lives after you die? 

According to the Federal Trade Commission, family members typically are not obligated to dip into their own assets to pay debts of a deceased relative. Family members are also protected by the federal Fair Debt Collection Practices Act (FDCPA), "which prohibits debt collectors from using abusive, unfair, or deceptive practices to try to collect a debt." 

Generally, unless your kids co-signed a loan or some other financial obligation (such as a credit card account) with you, your debts will be paid out of your estate. Though debts get paid before beneficiaries' inheritances, "the estate of the deceased person owes the debt," the FTC website adds. "If there isn't enough money in the estate to cover the debt, it typically goes unpaid. But there are exceptions."

"My impression is that individuals with modest estates, say $500,000 or less, have a poor understanding of what debts will be paid from their estate," says Eve Kaplan of Kaplan Financial Advisors in Berkeley Heights, N.J. "The knowledge level generally increases as potential estates grow, due to the involvement of estate attorneys, elder care attorneys and so on."

To explain the importance of the beneficiary designation to clients, Taylor Schulte, CEO of Define Financial in San Diego, "gently" presents a hypothetical scenario if something happened to clients without appropriate documentation in place. For instance, the default option for some IRA custodian agreements says if an IRA account owner dies without a beneficiary listed on their account, the estate inherits the assets, Schulte says.

If you liked this article you might like

Does Socially Responsible Investing Pay?

How to Pick a Financial Adviser

How to Lower Your High Investment Fees

Best End-of-Year Tax Moves for 2016

What to Expend When You're Expecting