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Do you need to make an estate plan for your debt?

On Behalf of | Sep 1, 2022 | Estate Planning

Estate planning often focuses on distributing the assets that you own. People also use it to do things like making medical decisions in advance. But it’s important to remember that it also has to address debt.

Specifically, if you pass away with outstanding debt, that debt is supposed to be paid out of your estate. This is done by the estate administrator. They do not have to pay personally, so they’re not liable for your debts. But they have to remove the money from the estate, pay the debts, and then they can move forward with distributing the remaining assets to your heirs.

Why planning in advance can help

The reason that planning in advance for this can be beneficial is that paying the debt reduces the overall size of your estate. This may mean that the total amount of assets you wanted to leave to an individual heir no longer exists.

For example, if you have $200,000 that is supposed to be split between two heirs, but you also have $100,000 in debt, that debt has to be paid first. Your heirs will then only get half the amount they expected. Even if the will says they should each get $100,000, they can lose out if that money has to go to outstanding debts first. 

If you create a fund to pay off your debts or if you pay them off in advance, then your estate plan can simply just distribute the remaining assets. You can also set up portions of your estate to address debts while the other portions of your estate are distributed to your heirs.

The tactics you decide to use depend on your specific situation, but you can see why it’s so important to plan in advance.