An inheritance can bring welcome financial freedom, but debt can put a damper on the excitement of inheriting. You generally dont have to worry about paying the decedents debt out of your own funds. However, if you default on your own debt, your creditors can take steps to seize what was left to you.
Decedents Debt
When a decedent dies with more debts than assets, beneficiaries often worry theyll have to pay the leftover debts out of their own pockets. While a decedents debt load might affect how much his beneficiaries will inherit, there is usually no requirement for a beneficiary to pay off a decedents excess debts. Instead, the personal representative of the estate uses estate funds to pay as many of the decedents debts as possible, and when the estate assets are depleted, the remaining debts are canceled.
There are a few common exceptions to this rule: If a beneficiary has agreed to pay a decedent's debt or has entered into joint debt with the decedent, the beneficiary will be responsible for paying the debt.
Inheritance
Unless your inheritance is held in a very specifically worded trust, your creditors can generally seize the funds you inherit. However, this cannot happen unless you default on your debt and your creditor files suit against you and wins. When a creditor wins a lawsuit against a debtor, the court issues a money judgment for the amount owed, and the creditor can use this judgment to levy your bank accounts. Once inheritance funds have been released to you and you have deposited them in the bank, a creditor can reach those funds.
Collateral
Another way to lose your inheritance to a creditor is to pledge inherited property as collateral for a debt. If you fail to repay as agreed, your creditor can seize the property to collect on the debt.
Considerations
Disclaiming your inheritance is one option for keeping it away from your creditors. A disclaimer is a written refusal to accept inherited property or any benefit of that property. When you make a valid disclaimer within nine months of the decedents death, your inheritance goes to the next beneficiary in line.
If you anticipate receiving an inheritance and you are concerned about losing it to your creditors, check with an attorney for advice on ways to shield your assets.
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