Do you know what happens to your debt and taxes when you die? Do you think it will be forgiven or that the government automatically pays for them? You might find yourself surprised.
Taxes and Debts upon Death
Everybody dies, but not everything perishes with you. That includes your taxes and debts. However, how you – or your executor or family, in case you’re no longer around – deals with each will differ.
Let’s begin with your debts:
• Your student loans will be discharged, which means you or your family or estate will no longer have to pay the remaining balance. If you’re a parent who applied for a student loan on behalf of your child, they will not have to pay the rest as well, although this depends on the loan program. They need to present proof of your death to the loan servicer.
• The mortgage doesn’t end when you die. Lenders can run after your assets (which will now be called estate) to pay off the remaining loan. Your family can also sell the house and use the funds to settle the repayments. Usually, when the down payment is below 20 percent, the lender will request that you get private mortgage insurance (PMI) as a security if you default. When you die, it can kick in, especially if your family cannot pay the remaining balance.
• As to credit cards, the lenders cannot run after the family, although your family can use your assets to pay the remaining balance.
If you have a creditor, then it depends on the business structure. If the company is a sole proprietorship, usually, the business dies with the owner. This means that it will dissolve and that the family will be responsible for liquidating the assets and paying the debt.
It’s good news if the business assets are enough to settle the company debts. If they’re not sufficient, the creditors can run after personal assets or stake a claim on the part of the estate.
If your business is a partnership, the creditor will deal with the surviving partner, who will have to pay the debt. The company doesn’t have to die along with you.
If you desire to continue the business operations after you die, you can consult an estate attorney to help you write a will. This legal document can indicate who will take your place upon your demise and even how to pay your debts to help protect your assets.
Effects of Your Death on Taxes
How about taxes? If you have back taxes, the IRS will still collect the amount against the estate. If you have tax refunds, the agency will distribute or give the money to the heirs of the deceased. It then becomes part of the estate.
Some states will also collect estate tax, which is levied on your assets upon death. If you live in Florida, then you’re in luck. The Sunshine State doesn’t collect any inheritance or estate tax. It will also not tax any income that your estate, such as a rental property, generates.
There’s a federal estate tax, which is huge at 40 percent. Fortunately, your heirs can claim an exemption. Right now, it is up to $11.7 million per person. In other words, if your total assets fall below this amount, your heirs or beneficiaries won’t have to pay any federal estate tax. Otherwise, the 40 percent applies to the balance (total assets less tax exemption).
Note, though, that this amount is not set in stone. Sometimes it increases to account for inflation, and sometimes it declines. By 2026, it will go down to half.
If you have considerable assets with a total value of over $6 million, now is an excellent time to take estate planning seriously. Talk to a lawyer and learn ways to be more tax-efficient, such as gifting assets to your heirs.
Besides estate planning, consider paying your debts as soon as you can. It’s better to take care of things ahead of time instead of waiting until the last minute, especially when the situation means you cannot decide properly. For instance, you are deathly sick or lose your mental capacity.
Not only will you not have to worry about it later on, but your loved ones won’t have to deal with it once you pass away, so they can focus on other matters.
As early as now, appoint an executor who will be responsible for handling all financial affairs. This person should also be aware that certain creditors may refuse to wait for what is owed, so don’t expect them to offer any leniency under these circumstances. You’ll want to identify approximately how much is owed and which debts need immediate attention to best determine how to pay off these debts.