What Loans are Canceled When I Die?

Unlike corporations, individual lives do eventually end. When they do, their assets and debts become a temporary legal entity called an estate. How long the estate lives depends very much on what type of assets it holds and how they will be distributed. If the estate owns patent, the estate could be around for a very long time indeed.

In your estate, all of your assets and debts, including the lawyer’s bill, are lumped together. The assets are sold to pay the debts. If there is money left over, it goes to your heirs, either those in your will or those chosen by law. If there are debts left over, they disappear; all of them. This is the only way known to man to permanently elude the IRS.

Of course, since this is a legal matter, there are caveats and exceptions. Some of the issues depend on state law. None of this is to be construed as legal advice. It’s just general discussion.

Any loans that are made jointly or any assets that are owned jointly confuse the issue. If you are a guarantor on your elderly uncle’s credit card and he dies, you’re going to end up paying it off.

Check your credit report regularly to make sure that old attachments don’t catch you by surprise. If you are concerned about being stuck with a large debt, feel free to take out an insurance policy on the person.

On the other hand, if your spouse dies and you bought a house together, they can’t force you to sell it. In fact, many places won’t even allow the estate to take you furniture if you play your cards right. There are also special rules for apartment buildings. Partnerships often give surviving partners the right to buy the deceased’s share at a certain rate before it’s put up for auction, or to sell inventory and assets to simply cash it out.

Individual assets like houses and cars generally have loans specifically attached to them. So if your brother leaves you a car with a lien on it, you have to either keep making the payments or sell the car. Mortgages are the same. The estate won’t sell the house and pay off the mortgage and car loan, then give one of the heirs the car free and clear. The loans don’t need to be changed, but they do have to be paid.

Student loans are canceled too, but they have an interesting exception. When I took out my student loan, included in the cost was life insurance payable to the lender upon my death for the amount left on the loan. The main argument for term life insurance is to pay off all debts so that your family can continue to use your assets after your death. Life insurance benefits are NOT part of an estate, so they cannot be taken to pay off other debts.

Finally, if at all possible, get a will made. If you die, you’ll save your estate money and your relatives’ headaches. It is also wise to make sure that older members of your family have wills. Send a family friend or lawyer to talk to them about it. It will look bad if you go yourself.