Do children inherit debt?

Lauren Enea

There is also a hierarchy under New York Law as to which debts are to be paid first.”

-Lauren C. Enea, Esq., Partner at Enea, Scanlan & Sirignano, LLP

“Am I responsible for my parents’ debts?”

That's a common question I receive from clients. Unfortunately, the answer is typically, “it depends.”

Debts can range from credit card debt, taxes, unpaid medicals bills to liens on real property and secured debts. Generally, any outstanding debts of a decedent will be paid from their probate or intestate estate. Their probate (if they passed away with a valid Last Will and Testament) or intestate (if they passed away without a will) estate consists of assets that are in the decedent’s name alone at the time of their death, including bank accounts, real property, cars, stock, etc. If there are assets in the decedent’s name alone, it is then the Executor or Administrator’s role to ensure that any outstanding debts are paid from the estate before any beneficiaries or heirs are given their inheritance.

There is also a hierarchy under New York Law as to which debts are to be paid first. For example, under New York Estate, Power and Trust Law (EPTL) Section 12-1.1, funeral expenses have first priority for payment followed by 1) debts entitled to a preference under the Laws of the United States and State of New York; 2) taxes assessed prior to death; 3) judgments and decrees against the decedent; and 4) all other bonds, sealed instruments, notes, etc.

These debts must be paid first and if there are no funds remaining in the estate to pay the other debts, then the other creditors may not have any recourse. For example, credit card debt are the last debts of the estate that should be paid. The executor or beneficiaries are not typically personally liable for the debts, according to the Federal Trade Commission (FTC); and the Fair Debt Collection Practices Act prohibits collection attempts for credit card debt against a surviving relative or beneficiary.

But, what if there is no estate? What if the decedent passed away with no funds in his or her name alone? For example, many individuals use probate avoidance mechanisms, such as joint bank accounts, beneficiary designations or trusts to avoid having a probate estate. In most cases, if assets have named beneficiaries and pass “by operation of law,” the creditor typically has no recourse in being paid out of that asset.

There are some exceptions to this rule in certain circumstances. For example, if the beneficiary accepted joint responsibility for the debt, then they can be held liable to the creditor for payment of the debt. We often see this with admission agreements to a nursing home or assisted living facility, where a family member or spouse signed the admission agreement for an ill or mentally incompetent family member or spouse. Additionally, medical debts can sometimes pass to a spouse because spouses have a “joint obligation of support.”

What about student loan debt and car debt? Student loan debt depends on the type of loan. Typically, if the loan is a federal loan, the loans will be discharged upon death. Private student loans depend on the terms of the lease agreement and may seek payment from a deceased person’s estate, or from the co-signor, if there is one. In regard to car debt and more specifically leases, one would logically think that if you die during the term of a car lease, that the leasing company would take the car back with all future lease payments being released. Unfortunately, that is not always the case. Many early termination clauses in lease agreements state that all remaining lease payments are immediately due and payable upon the death of the signor and the car must be immediately returned as well.

In a nutshell, protecting yourself from becoming responsible for the debts of a relative is important and can be avoided by not agreeing to pay debts of a deceased person during their life, keeping your personal finances separate, and if you are the executor or administrator, making sure you are following New York law for paying creditors in accordance with the proper hierarchy.

Lauren C. Enea, Esq. is a Partner at Enea, Scanlan & Sirignano, LLP. She concentrates her practice on Wills, Trusts and Estates, Medicaid Planning, Special Needs Planning and Probate/Estate Administration. She believes that it is never too early or too late to start planning for your future and enjoys working with individuals to ensure that their plan best suits their needs. She is admitted to practice law in New York and Florida. She can be reached at 914-948-1500 or at www.esslawfirm.com.