The loss of a family member is already one of life’s most difficult experiences. Unfortunately, in addition to mourning the loss of a loved one in the following weeks and months, this stressful period may also include uncomfortable discussions about money, which can strain family relationships during an already difficult time. These conversations become even more challenging if the deceased had unpaid debts, leaving the surviving spouse and/or executor with a number of complicated obstacles to overcome when handling the estate to satisfy creditors.
As a general rule, the estate of the decedent is required to pay the debt obligations. When the estate is not large enough to cover the debts, the responsibility to pay the remaining debt balance can fall to the surviving spouse. The level of debt transferred will include factors such as the specific state of residence of the deceased and the probate laws of that state. Key considerations include: whether or not the state is a community property state; whether or not the debt was acquired jointly or individually; and whether the property was acquired before or during marriage.
Currently, community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin and Alaska (in certain circumstances). In these states, surviving spouses will inherit the debts of the deceased that occurred while they were married, even if their name is not on the account. This is not the case if the debt was incurred before marriage, such as student loans. This same principle applies for property owned, income acquired and gifts received prior to marriage. Creditors can only go after assets in these states to settle unpaid debts of the deceased if income and property were gathered during marriage and the debts owed were acquired jointly. Financial advisors representing clients in community property states should work to determine what debt obligations exist and how to avoid this scenario. In non-community property states, the surviving spouse has no liability to anything his or her name is not on.
When both parties pass, the estate of the second death will be used to pay off any remaining debts and, in any state, the debt itself is not passed on to family members.