Will You Be Responsible for Your Parent’s Debt? It Depends

Children worry about their aging parent’s ability to manage money and are often concerned about what happens when their parent passes away and leaves a substantial amount of debt behind.

Kids know their parents all too well. So when your questions about credit card debt go unanswered, or if you get a vague “don’t worry, it’s nothing” answer, you may be right to be concerned. It’s not unusual for adult children to discover sizable credit card debt after their parents pass.

Kiplinger’s recent article, “Dealing With Debts After Death,” says that in one instance, an elderly father used the credit cards to help pay for his late wife’s time in an expensive nursing home.

In most instances, the child won’t be responsible for the debts of the parent.

With more seniors piling up debt, many children ask what happens to their unpaid bills when they die. Seniors have been taking on more debt in the last two decades. From 1989 to 2013, the Federal Reserve’s latest Survey of Consumer Finances says that debt loads nearly doubled for households headed by older people, from 21% to about 41%. Children sometimes discover a deceased parent’s unknown debts. They are also worried they’ve inherited them.

Some debts aren’t clear, like tax obligations that can impact an inheritance.

Typically, when a person dies, his or her estate owes the debt. Their estate’s assets are used to repay the debt. That will eat into the amount left for the heirs. If there’s not enough money to cover it, the debt goes unpaid. As far as unsecured credit card debt, children typically don’t inherit a parent’s unpaid balance, regardless of the amount or purpose of the spending. But a child who’s a joint holder on the credit card would be liable.

Retirement plans with a named beneficiary, such as a child, can’t be reached by creditors of the deceased. However, if the deceased parent named the estate as the beneficiary of an IRA or 401(k), creditors have access to it to collect the late parent’s debts.

For a parent’s federal student loan or Parent Plus loan, the outstanding debt is canceled upon death. However, the Education Department recently has required the borrower’s estate to pay taxes on the forgiven debt.

What if your parents owned a home and there is still a mortgage on the property? If you want to keep the house, one option is to contact the lender and try to take over the payments. Another is to sell the house and pay off the mortgage. If the house is underwater—that is, worth less than the amount of the mortgage—the creditor holds the debt, not the heir. An estate planning attorney will be able to help your family navigate this part of the estate.

Reference: Kiplinger (April 2017) “Dealing with Debts After Death”