If a Parent Dies Who Is Responsible for the Debt?

The death of a parent is a major event that can impact many areas of life including finances. If your parents have debt, creditors may attempt to collect debts when the last surviving parent dies. The debts of parents are generally not transferred to surviving children, but debts will reduce the size inheritance beneficiaries will receive.

Estate Basics

A child does not inherit debt accrued by a parent. When a person dies, an estate is created that encompasses all of the person's assets and liabilities. An executor is tasked with paying off debts and distributing assets to the deceased person's beneficiaries. The executor and beneficiaries are spelled out in the deceased person's will. For instance, if your parent has $100,000 of assets and $50,000 of debt, the executor must sell some of the assets to pay off the debt before giving the remaining funds to the beneficiaries as inheritance. If the outstanding debt exceeds the available assets, the executor must pay back as much of the debts owed with the assets available, but the remaining debt does not pass on to the children.

Co-signed Debt

While most debts do not pass on to children after a parent dies, certain types of debt, such as co-signed debt, may pass on to another party. A co-signed debt is a debt where two different people agree to be responsible for paying off the debt. Co-signed debt has a primary borrower that actually uses the lent funds and a co-signer that agrees to pay the debt if the primary borrower does not pay. If you have co-signed debt with your deceased parent, you will be liable for the debt.

Joint Accounts

Joint accounts are credit accounts held jointly by two different parties. Joint accounts are common among married couples, but in some cases, parents may have joint accounts with children. Both parties that hold a joint account are responsible for paying back debt balances. If one party dies, the other is still responsible for paying back the debt. This does not, however, apply to authorized users of a credit account. An authorized user is someone that has a credit card for a certain account, but is not responsible for paying back the balance on the account.

Considerations

The executor of an estate should have sound financial knowledge to deal with creditors and debts after a person dies. According to Liz Pulliam Weston of MSN, money in retirement accounts and gained from life insurance policies may pass directly to beneficiaries without becoming part of the estate.