When your parents die broke

Blogger John Schmoll’s father left a financial mess when he died: a house that was worth far less than the mortgage, credit card bills in excess of $20,000 — and debt collectors who insisted the son was legally obligated to pay what his father owed.

Fortunately, Schmoll knew better.

“I’ve been working in financial services for two decades,” says Schmoll, an Omaha, Nebraska, resident who was a stockbroker before starting his site, Frugal Rules. “I knew that I wasn’t responsible.”

If your parents are among those likely to die in debt, here’s what you need to know.

• You (probably) aren’t responsible for their debts. When people die, their debts don’t disappear. Those debts are now owed by their estates. Some estates don’t have enough assets (property, investments and cash) to pay all of the bills, so some of those bills just don’t get paid.

Spouses may have the responsibility for certain debts, depending on state law, but survivors who aren’t spouses usually don’t have to pay what’s owed unless they co-signed for the debt or applied for credit together with the person who died.

What’s more, assets that pass directly to heirs often don’t have to be used to pay the estate’s debts. These assets can include “pay on death” bank accounts, life insurance policies, retirement plans and other accounts that name beneficiaries, as long as the beneficiary isn’t the estate.

• You need a lawyer. Some parents hope to avoid creditors or the costs of probate, which is the court process that typically follows a death, by adding a child’s name to a house deed or transferring the property entirely. Either of those moves can cause legal and tax consequences and should be discussed with a lawyer first.
• After a parent dies, the executor must follow state law in determining how limited funds are distributed and can be held personally responsible for mistakes. That makes consulting a lawyer a smart idea — and the estate typically would pay the costs. Don’t believe what debt collectors tell you.

Some collectors told Schmoll he had a moral obligation to pay his father’s debts, since the borrowed money might have been spent on the family. Schmoll knew they were trying to exploit his desire to do the right thing and he advises others in similar situations not to let debt collectors play on their emotions.