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When someone passes away leaving debts behind, you might be wondering if you have any personal liability to pay them. If you have aging parents, for instance, you may be worried about having to assume responsibility for their mortgage payments, credit cards or other debts. If youâve asked yourself, âCan I inherit debt?â the answer is typically no, even though those debts donât automatically disappear. But there are situations in which you may have to deal with a loved oneâs creditors after theyâre gone.
How Debts Are Handled When Someone Passes Away
Debts, just like assets, are considered part of a personâs estate. When that person passes away, their estate is responsible for paying any and all remaining debts. The money to pay those debts comes from the asset side of the estate.
In terms of who is responsible for making sure the estateâs debts are paid, this is typically done by an executor. An executor performs a number of duties to wrap up a personâs estate after death, including:
- Getting a copy of the deceased personâs will if they had one and filing it with the probate court
- Notifying creditors and other entities of the personâs death (for example, the Social Security Administration would need to be notified so any Social Security benefits could be stopped)
- Completing an inventory of the deceased personâs assets and their value
- Liquidating those assets as needed to pay off any debts owed by the estate
- Distributing the remaining assets to the people or organizations named in the deceased personâs will if they had one or according to inheritance laws if they did not
In terms of debt repayment, executors are required to give notice to creditors who may have a claim against the estate. Creditors are then giving a certain window of time, according to state laws, in which to make a financial claim against the estateâs assets for repayment of debts.
If a creditor doesnât follow state guidelines for making a claim, then those debts wonât be paid from the estateâs assets. But if creditors are less than reputable, they may try to come after the deceased personâs spouse, children or other family members to collect whatâs owed.
Not all assets in an estate may be used to repay debts owed by a deceased person. Any assets that already have a named beneficiary, such as a life insurance policy, a 401(k), individual retirement account, payable on death accounts or annuity, would be transferred to that beneficiary automatically.
Can I Inherit Debt From My Parents?
This is an important question to ask if your parents are carrying high amounts of debt and youâre worried about having to pay those bills when they pass away. Again, the short answer is usually no. You generally donât inherit debts belonging to someone else the way you might inherit property or other assets from them. So even if a debt collector attempts to request payment from you, thereâd be no legal obligation to pay.
The catch is that any debts left outstanding would be deducted from the estateâs assets. If your parents were substantially in debt when they passed away, repaying them from the estate may leave little or no assets for you to inherit.
But you should know that you can inherit debt that you were already legally responsible for while your parents were alive. For instance, if you cosigned a loan with them or opened a joint credit card account or line of credit, those debts are legally yours just as much as they are your parents. So, once they pass away, youâd be solely responsible for repaying them.
And itâs also important to understand what responsibility you may have for covering long-term care costs incurred by your parents while they were alive. Many states have filial responsibility laws that require children to cover nursing home bills, though they arenât always enforced. Talking to your parents about long-term care planning can help you avoid situations where you may end up with an unexpected debt to pay.
Can I Inherit Debt From My Children?
The same rules that apply to inheriting debt from parents typically apply to inheriting debts from children. Any debts remaining would be paid using assets from their state.
Otherwise, unless you cosigned for the debt, then you wouldnât be obligated to pay. On the other hand, if you cosigned private student loans, a car loan or a mortgage for your adult child who then passed away, as cosigner youâd technically have a legal responsibility to pay them. Federal student loans are an exception.
If your parents took out a PLUS loan to pay for your higher education costs and something happens to you, the Department of Education can discharge that debt due to death. And vice versa, if your parents pass away then any PLUS loans they took out on your behalf could also be discharged.
Can I Inherit Debts From My Spouse?
When marriage and money mix, the lines on inherited debt can get a little blurred. The same basic rule that applies to other situations applies here: if you cosigned or took out a joint loan or line of credit together, then youâre both equally responsible for the debt. If one of you passes away, the surviving spouse would still have to pay.
But what about debts that are in one spouseâs name only? Thatâs where itâs important to understand how living in a community property state can affect your liability for marital debts. If you live in a community property state, debts incurred after the marriage by one spouse can be treated as a shared financial obligation. So if your spouse opened up a credit card or took out a business loan, then passed away you could still be responsible for paying it. On the other hand, debts incurred by either party before the marriage wouldnât be considered community debt.
Consider Getting Help If You Need It
If a parent, spouse, sibling or other family member passes away, it can be helpful to talk to an attorney if youâre being pressured by debt collectors to pay. An attorney who understands debt collection laws and estate planning can help you determine what your responsibilities are for repaying debts and how to handle creditors.
The Bottom Line
Whether or not youâll inherit debt from your parents, child, spouse or anyone else largely hinges on whether you cosigned for that debt or live in a community property state in the case of married couples. If youâre concerned about inheriting debts, consider talking to your parents, children or spouse about how those financial obligations would be handled if they were to pass away. Likewise, you can also discuss what financial safety nets you have in place to clear any debts you may leave behind, such as life insurance.
Tips for Estate Planning
- Consider talking to a financial advisor about how to manage and pay off debts you owe or any debts you might inherit from someone else. If you donât have a financial advisor yet, finding one doesnât have to be difficult. SmartAssetâs financial advisor matching tool can help you connect with an advisor in your local area. It takes just a few minutes to get your personalized advisor recommendations online. If youâre ready, get started now.
- The Fair Debt Collection Practices Act caps the statute of limitations for unpaid debt collections at a maximum of six years, although most states specify a much shorter time frame. However, some debt collectors buy so-called zombie debts for pennies on the dollar and then â unscrupulously â try to collect on them. Hereâs how to deal with such operators.
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The post Can I Inherit Debt? appeared first on SmartAsset Blog.
A fiduciary deposit account is an account thatâs owned by one or more persons but managed by another. The owner is known as the principal, while the manager is known as the fiduciary. These accounts are sometimes used to handle estate or trust assets, among other purposes. Their legal status and their insurance coverage are determined by the Federal Deposit Insurance Corporation (FDIC). Hereâs what you need to know about this type of account.
Fiduciary Deposit Account, Defined
A fiduciary deposit account, also known as a principal account, is a deposit account that a person or other entity, acting as a fiduciary, establishes to benefit one or more persons who own the assets in the account, according to FDIC rules. The individual who opens the account doesnât have ownership of it nor any ownership interest.
Some examples of fiduciaries of these accounts are trustees, agents, nominees, custodians and guardians. Fiduciary accounts are used in various ways:
- Uniform Transfers to Minors Act (UTMA) accounts
- Uniform Gifts to Minors Act (UGMA) accounts
- Decedent estate accounts
- Real estate and other escrow accounts
- Brokerage deposits
- Accounts with a power of attorney
When FDIC Pass-Through Insurance Coverage Applies
All deposits managed by a fiduciary on behalf of the accountâs owner or owners are insured by the FDIC for the full $250,000 on a pass-through basis. This means that all the deposits are considered to be deposits made directly from the principal as long as three requirements are met:
- The owner of the funds must be the principal and not the fiduciary who set up the account. The FDIC may review the fiduciary and ownerâs agreement on the account as well as state laws to confirm this.
- The record of the insured depository institution (IDI) account must indicate the agency nature of the account. For example, the ownership of the account may read ABC Company as custodian, ABC for the benefit of (FBO) or Sally Rowe UTMA John Rowe, Jr.
- The IDI, fiduciary and third-party records must show the ownersâ identities and the ownership interest(s) in the deposit account.
For example, letâs say XYZ Brokerage firm establishes an account for Sally Rowe at ABC Bank. In this example, Sally Rowe is the owner, or the principal, of the money in the account. This account would then be added with any other single accounts she owns at ABC Bank, which would be insured as a single account for up to $250,000.
If we assume Sally has more single ownership accounts at ABC Bank, she will not receive additional coverage because XYZ Brokerage firm opened the account for her. With a fiduciary account, coverage is provided as though the actual owner opened the account at the IDI, assuming all responsibilities are met.
Pass-through coverage is also possible if a guardian retains part of the interest paid by the IDI as a guardian fee.
When FDIC Pass-Through Insurance Coverage Doesnât Apply
If requirements of a fiduciary account are not met, the account will be insured under the fiduciary, not the intended principal. In this case, the fiduciary will own the deposits and the account will be categorized as a single account or corporate account. These deposits will then be combined with other deposits the fiduciary holds in the same ownership at the IDI where funds are held. The total sum will be insured up to $250,000.
For example, letâs say a customer of a deposit broker is assured by the guardian (fiduciary) that he or she will earn 5% on a deposit when the IDI is paying only 3%. The guardian would not be a guardian then; he or she would be a borrower with an independent responsibility to pay 5%. In this case, the deposits are no longer eligible for pass-through coverage for the principal. Instead, the deposits are now considered corporate deposits belonging to the guardian.
A fiduciary deposit account is an account set up by someone for another person, who actually owns the money. The one who sets up the account and manages it is known as the fiduciary, while the owner of the money is known as a principal. This kind of arrangement is used to handle assets in trusts, escrow accounts, brokerage accounts and decedent estates, among other uses. Itâs important that these arrangements carefully follow all the FDICâs legal requirements, as well as applicable state regulations, to qualify as a fiduciary deposit account.
Estate Planning Tips
- Consider talking to a financial advisor about your estate plans. Finding a financial advisor doesnât have to be hard. SmartAssetâs free financial advisor matching service can connect you with several in your area in minutes. If youâre ready, get started now.
- If you have an agent, they may make decisions about your 401(k) account. Find out how much money youâll have in your account by the time you retire with our free 401(k) calculator.
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The post What Is a Fiduciary Deposit Account? appeared first on SmartAsset Blog.
A will is an important part of your financial plan. When you create a will and testament, youâre creating a legal document that determines how your assets will be distributed once you pass away. You can also use a will to name legal guardians for minor children. When making a will and testament, itâs important to follow the rules in your state to ensure the will is valid. One of those rules centers on the requirements for witnesses. For more guidance on the intricacies of wills and estate planning, consider enlisting the services of an expert financial advisor.
Why Wills Need to Be Witnessed
A will is a legal document but in order for it to be binding, there are certain requirements that need to be met. For instance, although state laws regarding wills vary, states generally require you to be of legal adult age to make a will. You must also have testamentary capacity, meaning you:
- Must understand the extent and value of the property youâre including in the will
- Are aware that youâre making a will to decide who will inherit your assets
- Arenât acting under duress in making the will
Having someone witness your will matters in case questions are raised over its validity later or there is a will contest. For example, if one of your heirs challenges the terms of your will a witness may be called upon in court to attest that they watched you sign the will and that you appeared to be of sound mind when you did so.
In other words, witnesses add another layer of validity to a will. If all the people who witnessed the signing of a will are in agreement about your intent and mental state when you made it, then it becomes harder for someone else to dispute its legality.
Who Can Witness a Will?
When drafting a will, itâs important to understand several requirements, including who can serve as a witness. Generally, anyone can witness a will as long as they meet two requirements:
- Theyâre of legal adult age (i.e. 18 or 19 in certain states)
- They donât have a direct interest in the will
The kinds of people who could witness a will for you include:
- Friends who are not set to receive anything from your estate
- Relatives who are not included in your will, such as cousins, aunts, uncles, etc.
- Your doctor
If youâve hired an attorney to help you draft your will, they could also act as a witness as long as theyâre not named as a beneficiary. An attorney whoâs also acting as the executor of the will, meaning the person who oversees the process of distributing your assets and paying off any outstanding debts owed by your estate, can witness a will.
Who Cannot Witness a Will?
States generally prohibit you from choosing people who stand to benefit from your will as witnesses. So for example, if youâre drafting a will that leaves assets to your spouse, children, siblings or parents, none of them would be able to witness the willâs signing since they all have an interest in the willâs terms. Will-making rules can also exclude relatives or spouses of any of your beneficiaries. For instance, say you plan to leave money in your will to your sister and her husband with the sister being the executor. Your sister canât be a witness to the will since sheâs a direct beneficiary. And since her husband has an indirect interest in the terms of the will through her, he wouldnât qualify as a witness either.
But married couples can witness a will together, as long as they donât have an interest in it. So, you could ask the couple that lives next door to you or a couple you know at work to act as witnesses to your will.
You may also run into challenges if youâre asking someone who has a mental impairment or a visual impairment to witness your will. State will laws generally require that the persons witnessing a will be able to see the document clearly and have the mental capacity to understand what their responsibilities are as a witness.
Note that the witnesses donât need to read the entire will document to sign it. But they do need to be able to verify that the document exists, that youâve signed it in their presence and that theyâve signed it in front of you.
How to Choose Witnesses for a Will
If youâre in the process of drafting a will, itâs important to give some thought to who youâll ask to witness it. It may help to make two lists: one of the potential candidates who can witness a will and another of the people who cannot act as witnesses because they have an interest in the will.
You should have at least two people who are willing to witness your will signing. This is the minimum number of witnesses required by state will-making laws. Generally, the people you choose should be:
- Responsible and trustworthy
- Age 18 or older
- Younger than you (to avoid challenges presented if a witness passes away)
- Free of any interest in the will, either directly or indirectly
- Willing to testify to the willâs validity if itâs ever challenged
When itâs time to sign the will, youâll need to bring both of your witnesses together at the same time. Youâll need to sign, initial and date the will in ink, then have your witnesses do the same. You may also choose to attach a self-proving affidavit or have the will notarized in front of the witnesses.
A self-proving affidavit is a statement that attests to the validity of the will. If you include this statement, then you and your witnesses must sign and date it as well. Once the will is signed and deemed valid, store it in a secure place, such as a safe deposit box. You may also want to make a copy for your attorney to keep in case the original will is damaged or destroyed.
The Bottom Line
Making a will can be a fairly simple task if you donât have a complicated estate; it can even be done online in some situations. If you have significant assets to distribute to your beneficiaries or you need to make arrangements for the care of minor children, talking with an estate planning attorney can help you shape your will accordingly. Choosing witnesses to your will is the final piece of the puzzle in ensuring that itâs signed and legally valid.
Tips for Estate Planning
- Consider talking to a financial advisor about will-making, trusts and how to create a financial legacy for your loved ones. If you donât have a financial advisor, finding one doesnât have to be difficult. SmartAssetâs financial advisor matching tool can help you connect with professional advisors in your local area in just a few minutes. If youâre ready, get started now.
- A will is just one document you can include in your estate plan. You may also opt to establish a living trust to manage assets on behalf of your beneficiaries, set up a durable power of attorney and create an advance healthcare directive. A trust can help you avoid probate while potentially minimizing estate taxes.
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The post Who Can and Cannot Witness a Will? appeared first on SmartAsset Blog.