Children often inherit a parent’s assets. This can be done in a variety of ways. If the parent dies intestate and the children are the closest living relatives, they will likely inherit. Assets can also be left to them via a will, a trust or other such estate planning tools.
But most people who pass away don’t only have assets. They also have some debts. They may have car loans, student loans or mortgage loans. They could have outstanding business debt. They may owe income taxes and property taxes. Even if all of their major debts have already been taken care of, they may need to pay for utilities or pay off their credit cards.
When a parent passes away, does a child simply inherit all of this debt? Do they have to take care of it in the future?
Estate funds
Children do not inherit debt. It stays with the estate. The funds from that estate are generally used to pay off the debt before those funds are distributed to the beneficiaries of the estate plan.
In this sense, children may receive less money than they expected, even though they are not directly paying off the debt.
For instance, say that two adult children are supposed to split up $50,000. But, the parent who passed away still has outstanding debts that total $10,000. The beneficiaries wouldn’t need to personally pay off that $10,000, but the estate executor would need to pay it down before distributing the remaining assets. This would leave only $40,000 in the estate, so each beneficiary would get $20,000 – $5,000 less than they expected.
You can see how administering an estate can become complicated, and it sometimes even leads to litigation. Those working through this process must understand all their legal rights.
