Handling the estate of a deceased loved one, whether they are a spouse, a parent or a friend, can create a lot of stress and confusion. There is a specific process that you should follow, but not everyone is aware of what is involved in the administration of an estate.
Some people become so fixated on the distribution of assets to family members and friends that they completely forget about the very important obligation to settle the debts of the deceased person before distributing assets to heirs and beneficiaries.
While it is true that creditors can only seek certain assets if they don’t receive timely repayment, the easiest way for you to handle an estate’s finances properly is to learn which debts you absolutely need to pay.
The kind of debt will determine your responsibility
Secured debts usually have collateral such as a home or a vehicle that a lender can reclaim if the debt is not settled as part of the estate. For some families, the best solution will be to refinance a property or vehicle to allow a beneficiary or heir to assume ownership of it. Other times, selling the asset and splitting the funds between the repayment of the loan and the beneficiary can be a good solution.
Unsecured debts can be more complicated. Certain debts have higher priority than others, and there are situations in which an individual is responsible for a debt that they think of as someone else’s. For example, if you are the spouse of the deceased, it is likely that you are responsible for any unpaid medical bills that they incurred. Spouses generally have an obligation to cover end-of-life care costs.
Other forms of unsecured debt, such as credit card debt, can vary depending on circumstances. If you co-signed for the credit card, meaning that you are a partial owner of the account, you are responsible for the total balance, even if your spouse used the card more than you. However, if you were only an authorized user or did not have access to the account at all, you may be able to avoid responsibility for those debts.
Don’t forget about your obligation to file taxes for the deceased
There’s one form of debt that you can pretty much never avoid paying, and that is tax debt. The government will expect their fair share of the deceased party’s income over the last year of their life. Filing the appropriate paperwork to inform the IRS of the death and ensuring that all income taxes were paid is an important obligation.
Additionally, there may be more tax obligations in the event that the estate is large enough to qualify for estate taxes. The greater the overall value of the assets in the estate, the more important it is to verify any tax liabilities and secured or priority debts before you begin distributing assets.
