Bay Area Estate And Tax Planning Law Firm

What happens when you inherit debt in California

On Behalf of | Jan 16, 2023 | Probate And Estate Administration |

When California residents pass away, they usually do so with some assets and some debt. When possible, the estate’s assets pay debts left behind. However, in some cases, the situation may be more complicated than that, especially for the surviving spouse.

Inherited debts

One of the rules of estate administration and probate is that settling debts happens before beneficiaries receive their inheritance. Because of this, in most cases, debts aren’t inherited. In ideal circumstances, the estate plan left behind makes this process as smooth as possible. However, if their assets don’t cover the debts, surviving spouses may inherit debt in a few circumstances.

As a community property state, surviving spouses in California can inherit debts. In this case, community assets may need to pay off remaining debts.

Cosigned or joint accounts for credit cards or loans are often inherited debts. Note that an authorized user on a credit card is not responsible for the debt.

If you inherit a home with a home equity loan, you will be responsible for paying off the remaining balance.

Protected assets

One of the benefits of estate planning is that there are laws in place that help protect some assets, specifically those considered non-probate assets. This is because creditors cannot collect these assets to pay off debt. Examples of non-probate assets include retirement accounts, living trusts, and life insurance. In these cases, the assets are passed to the named beneficiaries.

There are laws surrounding debt collection meant to protect beneficiaries and surviving spouses. If you feel a creditor’s behavior is inappropriate, you will want to learn more about debt collection laws to protect yourself and your assets.