Q: My close relative is getting on in years, and I’ve been wondering: What will happen to their financial accounts and debts after they die?
A: The state of your relative’s finances after their death will vary based on the steps they had taken while they were alive.
Here’s what you need to know about what happens to someone’s financial accounts, debts and more when they die:
What happens to financial accounts upon the account holder’s death?
The fate of a financial account after the account holder’s death depends on whether or not there is a named beneficiary on the account. An account with a named beneficiary is also known as a Payable On Death, or a POD, account.
A named beneficiary can collect the funds in the account upon the account holder’s death. There is no lengthy probate process or waiting period. To collect the funds, the beneficiary only needs to show the financial institution a form of photo ID and the deceased’s death certificate.
If there is no named beneficiary, or the beneficiary dies before the account holder, the financial institution will release the funds in the account to the executor of the estate, who will distribute it according to the deceased’s will. In the absence of a will, distribution is dictated by state law.
If you or your loved ones do not have a named beneficiary on a financial account, consider setting one up now. The process only takes a few minutes and can help relatives avoid a frustrating and costly probate process. Most institutions also allow account holders to set up multiple beneficiaries.
It’s important to note that ownership for the account will only transfer upon death. If the account holder becomes incapacitated or mentally unable to manage the account, the beneficiary will need to go to court to gain control of the account.
Also, an account beneficiary is not in place of a will and/or living trust. It’s always a good idea to write up a living trust, establish a power of attorney and draft a medical directive before any of these are needed.
What happens to credit card debt after the card holder dies?
When a family member dies, relatives generally will not have to pay off the deceased’s credit card debts; however, there are some notable exceptions.
A spouse or another family member might be accountable for the debts in any of these circumstances:
- They have co-signed for a credit card or loan.
- The debt is connected to a jointly owned property or a business.
- They live in one of nine community property states, including California, Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin.
Authorized credit card users will not be responsible to pay off the debts on the card after the cardholder’s death.
In the case of a joint credit card account, the surviving cardholder becomes responsible for the debt upon the death of the other cardholder.
How are credit cards and other debts paid after the debtor’s death?
If the surviving relatives are not responsible for the debt of the deceased, who is?
Here’s where probate comes in. Probate is the legal process of paying off the debts and distributing the assets of a deceased person. A probate court will determine exactly how this is done. A probate process can drag on for months, or even years.
If the deceased has left a will, the probate court will oversee and legalize the transfer of assets through an appointed executor.
If the deceased has left a living trust, the assets will automatically pass on to the beneficiaries without the need for an executor, or for lengthy court appearances and expensive attorney fees.
The beneficiaries of the deceased’s estate will not be allowed to take ownership of any assets if the deceased has outstanding debts. First, secured debts must be paid, then administrative and lawyer fees, and finally, unsecured debt, such as credit card balances and personal loans.
The creditors will need to submit their claims against the estate before the state’s given deadline. If the claim is submitted in time and the estate has sufficient assets or funds to cover the debt, it must be paid. If one of these conditions is not met, unsecured debt will need to be written off as a loss by the creditor.
Are any assets protected from creditors?
There are some assets that are off-limits to creditors. These assets are never part of the deceased’s estate and will bypass the probate process completely. These protected assets include life insurance policies, retirement accounts and POD accounts.
What happens to a deceased’s bills after they die?
If the deceased had automatic bill-pay set up for any of their monthly bills, they will likely continue to collect payments after the deceased has passed on. It’s best to contact all utilities and other providers as soon as possible after a relative’s death to notify them of the passing and ask them to terminate automatic payments. Of course, if you or someone else is still living in the home of the deceased, those utility bills will still need to be paid.
As always, it’s best to be prepared for this financial situation before it becomes relevant.