If something were to happen to one of your parents tomorrow, would you know what state their finances are in?
For many people, the answer is no. I watched this happen when a beloved aunt passed away, and only after she was gone did my cousins realize that she had made no plans for her estate nor did she have any organized system for her finances.
The problem went deeper: as my cousins began pulling on the threads of information they could piece together, they realized my aunt wasn’t leaving them much after all her outstanding bills were paid. In fact, they ended up owing money when it turned out she still had a mortgage on her home.
I learned a valuable lesson at that time, which is that you can, in a sense, inherit debt and financial problems from your parents. Whatever they leave behind can become your mess to clean up, which is why it’s best to be proactive in learning your options for debt relief.
What Kinds Of Debt Can You Inherit?
Certain kinds of debt are more likely to be a problem you have to deal with than others. Typically, it is the deceased person’s estate and the executor’s responsibility to authorize payment to creditors. Of course, many of the debts you could be responsible for are those likely to have higher balances or interest rates, so you may need to look into debt relief options for added help.
1. Home Mortgage Debt
When a parent dies, and they still hold a mortgage on their home, you have a few options to get rid of that remaining balance quickly:
- Take over the existing mortgage at the current terms
- Refinance the mortgage for more preferential terms
- Use any estate money to pay off the mortgage
- Ask the bank to agree to a short sale if the mortgage is more than what the home is worth
- Walk away
However, if your parents have a reverse mortgage, you will be liable for paying off the accumulated interest and remaining balance. Creditors won’t come after your assets directly, but they can make a claim to your parent’s house or other property.
2. Medical Debt
Medicaid is allowed to recoup any payments made between the time your parent was 55 through their death. Because assets must be disclosed before a person can qualify for Medicaid, states will typically come after the one asset that is discounted from qualification – a house.
You won’t have to use your funds to pay for any Medicaid bill, but they will come out of the estate. The same goes for any other unpaid medical debt, including doctors and hospitals. However, when it comes to filial responsibility, discussed below, you could actually be on the hook for any nursing home payments.
If your parent owes property taxes or the federal estate tax hasn’t been paid before assets have been allocated, you may be affected. Local or national agencies can put liens on any property, including homes, which can hold up any attempt to sell or get rid of specific assets.
The good news is, not all of your parent’s debts will be passed onto you.
Luckily, you won’t inherit your parent’s credit card debt unless you were a cosigner. Instead, those debts will come out of any remaining assets in the estate, so if you were expecting an inheritance, it might be less than you think. If you were a joint account holder on the card – not just an authorized user – then the debt is shared, and you’re responsible.
However, many credit card companies and collections agencies still try and go after any remaining balances, so keep in mind that you are legally protected from these activities.
Can You Protect Yourself From Inherited Debt?
If a parent owed money when they died, any creditor would come to recoup losses from the parent’s estate, including any cash funds, assets, or investments.
However, there is also a current law in 28 states that address the “filial responsibility” of the children of aging parents. Should a parent in one of these states pass away, any shared property or funds is susceptible to being recouped by Medicaid. In some cases, even if a parent does not die, you could still be held responsible for covering costs of care. In 2012, an older woman left her nursing home to move to Greece, leaving behind a $93,000 bill. The courts ruled that the woman’s son, who hadn’t signed anything or been involved with his mother’s residence, was liable for covering the bill given their relationship.
How To Prevent Inheriting Debt From Your Parents
The best thing to do if you are concerned about your parent’s finances is to bring up the conversation with them now. Be proactive and bring in the help of a lawyer who handles estate planning if needed, to help you and your parents rest easy that the entire family is protected from unwanted debt.
Approaching your parents about their finances can be intimidating, but there are certain questions you can ask to help sort out their situation:
1. Do you have retirement savings?
An estimated 29% of Americans over the age of 55 have zero funds allocated as retirement savings. That means many of these individuals are going into debt just to pay for their later years. In fact, when my aunt died, this is the exact situation that my cousins discovered; she had no savings, and everything was being paid through credit cards or loans.
This is also an opportune time to ask your parents about the beneficiary for their retirement accounts. If your parent names you as the beneficiary to a 401k or IRA, only then can they protect it – and you – from any creditor claims in the future.
2. Do you have a budget?
Whether your parents are retired or not, ask them about their budget. Do they allocate money to specific categories like bills and entertainment, or are they spending without thinking about it? If they’re not tracking their cost of living, they could easily find themselves in a financial bind down the road.
3. Do you have credit card debt?
Credit card debt is one of the hardest debts to get rid of because of high-interest rates – the average is over 60%. While you won’t inherit it, it’s still crucial to know how much interest your parents are on the hook for, and what their current balances are. Help them budget for credit card expenses, so they pay off as much as possible and look into options like balance transfer cards or consolidation loans for more help.
4. Do you have a mortgage?
After the 2008 real estate crash, many older folks found their mortgages wouldn’t be paid off as quickly as they may have anticipated. In fact, many older adults began turning to reverse mortgages to pay for living expenses. However, reverse mortgages are appealing because they don’t require any payments – but they do accumulate interest. And when a parent dies, you become the one responsible for paying for that mounting cost. If your parents still carry a hefty mortgage, consider helping them downsize or even invite them to live with you.
Getting rid of debt can feel like a full-time job, and it may not be one you are up for after the loss of a parent. Know what debt relief options are available for you, and help your parents sort out their finances now to make things easier for everyone in the future.