Many people don’t consider what will happen to their own debts when they die until they are faced with the arduous task of managing a deceased loved one’s estate. As they soon discover, understanding the process and implications of debt settlement after death is integral to both planning for the settlement of their estate and handling the estate of others. It is a sensitive topic that demands consideration of various legal, financial, and personal issues, many of which are complex.
When a person dies, their estate — the combined total of their assets and liabilities — must be settled. This process involves paying outstanding debts and, afterward, distributing any remaining assets to the will’s beneficiaries.
The will’s executor, defined as the person appointed to manage the estate, plays a key role in this process. They must identify and notify creditors, pay off debts using the estate’s funds, and see to it that the remaining assets are properly distributed according to the deceased person’s wishes. Understanding the executor’s responsibilities and the legal framework governing debt settlement can help avoid potential pitfalls and conflicts.
Not all debts are treated equally, and not all of them necessarily pass on to surviving family members. The responsibility for settling debts turns on factors such as the type of debt, whether there are co-signers, Washington state law, and whether the estate has sufficient assets to cover the liabilities. Here’s what you and the people handling your estate need to know about what happens to your debts when you die.
Debts After Death
If someone dies with unpaid debts, those debts do not magically disappear. Typically, the deceased person’s estate is responsible for settling any outstanding debts.
Debts can include first and second mortgages, lines of credit (i.e., HELOCs), property taxes, condominium fees, federal and state income taxes, vehicle loans (cars, boats, planes), personal loans (including student loans), loans secured by life insurance policies and retirement accounts, credit card bills, utility bills, cellphone bills, fees for storage units, medical bills, and more.
Generally, no one person, including an heir, will be legally obligated to repay a deceased person’s debt unless certain specific situations apply. For example, if there was a co-signer on a loan, the co-signer becomes responsible for the debt. Similarly, if there is a joint account holder on a credit card, that joint account holder is liable for the debt.
A surviving spouse may also be required to pay their spouse’s debt; in community property states, which include Washington state, the surviving spouse may need to use community property to settle their deceased spouse’s debts. If there is not enough money in the estate to cover any outstanding debts, the debts generally do not get paid.
The Role of the Executor
The estate’s finances are managed by the person appointed as personal representative, executor, or administrator, who uses the estate’s funds — not their own — to pay off these debts. To settle a decedent’s debts, the executor must identify and notify the creditors of the death. While Washington state does not require the executor to publish a notice of death in a local newspaper, they must act with reasonable diligence to identify all creditors.
To that end, there is an optional notice to creditors process in Washington state, where notice is filed with the court and published in a newspaper for three consecutive weeks. Notice must be sent out to all “reasonably ascertainable creditors,” the state, and all heirs and beneficiaries. If a creditor receives notice and fails to file a claim with the court, the debt owed to that creditor most likely does not get paid (this is not applicable to secured debts).
Once all valid creditor claims are identified, the executor will use estate funds to pay these debts and any final bills, including those incurred during the decedent’s last illness, if applicable. Given how executors are often laypeople and not estate planning attorneys, a Seattle estate planning attorney can help with the process.
Managing the Decedent’s Tax Obligations
In addition to their other responsibilities, the executor is responsible for preparing and filing the person who died’s personal income tax returns for the year in which they died. This includes gathering all necessary financial documents, such as income statements, investment records, and receipts for deductible expenses.
In addition to the personal income tax return, the executor must determine whether the estate owes any estate taxes. If the estate is subject to these taxes, the executor must prepare and file the appropriate estate tax returns. All taxes due are paid from the estate’s funds, ensuring that the decedent’s tax obligations are fully settled. Due to the complexity of Washington state’s tax laws, it is beneficial to have a financial professional assist. An experienced Seattle estate planning attorney should have a list of professionals they have vetted to recommend to you.
Distributing the Decedent’s Assets
Once all debts, taxes, and expenses are settled, the executor may go ahead and distribute the remaining assets, if there are any, to those beneficiaries named in the will. If the executor has been granted non-intervention powers, they can do this without a court order. However, if the executor does not have non-intervention powers, they must obtain the court’s permission, which usually requires submitting a complete accounting of the estate.
If there are bequests in the will to minors, the court will appoint a probate guardian ad litem to protect their interests. The executor must prepare and file the necessary deeds and other transfer documents for adult beneficiaries with the applicable state or county administrators to finalize the bequests.
Find a Seattle estate planning lawyer for more information about how to plan for the disposition of your debts when you die.
By understanding the possibilities of what will happen to your debts when you die, you can better prepare for the financial and legal responsibilities that arise after a loved one’s death. Preparation is especially important, as you want your loved ones to have the space to grieve without having unnecessary stress or worry.
Settling an estate in Washington, especially where debts must be paid, is easiest with the support of an estate planning lawyer and one of the financial professionals on their team, who they work with often and trust. Even seemingly simple estates can encounter unexpected complications, and you don’t want to be caught without guidance specific to your individual circumstances. Call our Seattle office today or schedule a consultation.
