Handling the Debt of One's Estate

By Ronald A. Fatoullah, Esq. and Debby Rosenfeld, Esq.

{3:00 minutes to read} Drafting and overseeing the execution of wills are standard activities in most elder law and estate planning firms. The main purpose of a will is to direct how an individual's assets shall be distributed after he/she dies. Nonetheless, a will can also be used for other purposes. Through a will, an individual ('testator") can provide instructions as to how his/her debts should be paid and disposed of. Typically, a beneficiary or heir cannot inherit another person's debt; but if an individual dies with debt, it ultimately reduces the amount that each beneficiary receives. Articulating and clearly delineating how the debt of one's estate should be paid is ultimately very helpful to the various beneficiaries.

If a person dies (the "decedent") with outstanding debt, the executor appointed in the will is responsible for making sure those debts are paid. Paying off a decedent's debt may require the executor to sell some of the assets held by the estate, and the decedent may have wanted to specifically leave such assets to designated beneficiaries. There are two types of debts that a person can leave behind:

• Secured debt, which is debt that is attached to a piece of property or an asset, such as a car loan or a mortgage. If the debt is not paid off, the lender can ultimately pursue the actual asset in order to be made whole; and

• Unsecured debt, which is any debt that is not backed by an underlying asset, such as credit card debt or medical bills.

If an individual owns an asset that is subject to debt and leaves such asset to beneficiaries, the debt remains with the property. The beneficiary can then decide whether to continue to pay on the debt or sell the property to pay off whatever is outstanding. If a person believes that an inheritance encumbered by debt would cause a burden for his/her heirs, language can be added to the will to specifically address these concerns.

If for example, the estate is comprised of real property, the testator can designate that one specific property is sold in order to pay off any debt attached to other properties. In the alternative, the testator can indicate that each beneficiary is responsible for any debt attached to the property received. By clearly instructing how debt should be handled, the testator can avoid any bad feeling or misunderstandings upon his demise. Instructions allow for a peaceful and uneventful distribution of assets.

Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Debby Rosenfeld, Esq. is a senior staff attorney at the firm. The law firm can be reached at 718-261-1700, 516-466-4422, or toll-free at 1-877-ELDER-LAW or 1-877-ESTATES. Mr. Fatoullah is also a partner with Advice Period, a wealth management firm, and he can be reached at 424-256-7273.