Most people will die with at least some debt to their name. The average total balance of debt for U.S. consumers in what is considered to be the “middle to upper middle class” is $290,000.
What happens to these debts when you die?
In short, when you die, debt incurred by you during life belongs to your estate and sometimes, your trust. When you die with enough assets to cover your taxes and debts, your taxes will be paid first. After your taxes are paid, your debts are paid. Your beneficiaries or heirs will receive what is left after those payments.
If there isn’t enough to cover your debts, taxing authorities will get paid first. Creditors may then get some – but not all – of what they're owed. Michigan law provides an “order of priority” to determine which debts should be paid and the order in which debts are to be paid, if there are not enough assets to pay all of the debts.
In Michigan, family members generally don't become legally responsible for a deceased relative’s debts, but many worry they might. Regardless of this fact, creditors and debt collection agencies often contact family members to attempt to collect the debts of the deceased. It is very important to discuss any of these collection attempts with an attorney before paying them on behalf of a deceased family member.
In Michigan, if you leave behind personal or business debts, when your estate is opened in Probate Court, your creditors have the right to file their claims against it. If a Probate Court case is not opened for you within a specific period of time, the creditors actually have the right to go into Probate Court and open your estate and file their claims against the estate. If you have a will and a living trust, this is much less likely to happen because there is not a clear target to bring claims against.
If there aren’t enough assets in your estate, under Michigan law, your trust may have to transfer funds to your estate to pay off debts and taxes. This is what is known as the “permeable membrane” between estates and related trusts.
There can be complex factors, though, depending on the type of debt and the value of your estate and trust.
- If credit cards are held jointly, then the survivor on the account continues to be fully responsible for the debt.
- Federal student loan debt is eligible for cancellation upon death, but private student loans typically don't offer cancellation. These lenders may collect from your estate and trust.
- If other people live in your house, the house may be used to satisfy your debts — whether it's the mortgage or line of credit debt. The people who live there may have to qualify for a new mortgage or sell the home to pay off your creditors.
- Debts incurred by you as co-signer or co-applicant can result in a claim against your estate.
- If you die with a financed or lease vehicle in your name, the financing company or leasing company may file a claim for the difference between what your vehicle brings at auction and the total remaining payments owed under the finance/lease agreement.
It is critically important to remember that estate planning is not just about you or what you want to have happen when you die. It’s also about protecting those you leave behind, including protection from creditors and collection agencies.
There are ways to protect beneficiaries from certain debts and to plan for handling known debts that will remain payable upon death. Your estate planning attorney can help you with this planning and ensure these matters are handled properly.