How Debts and Taxes Fit Into Estate Plans

When people seek estate planning services, they often focus on passing their legacies on to the ones they care about. However, some folks less dear to your heart need to be in your estate plans. Naturally, that means it's time to talk about what you might owe to creditors and the government.

Debt Claims Against Estates

Creditors have the same rights to be paid by deceased parties as they do living ones. The major downside for estates, though, is that they're not legally allowed to file for bankruptcy. That means creditors can come at an estate with full force, and the executor or administrator won't have very much in the way of weapons to stop them.

If a court declares your estate insolvent, the duty of the executor moves to paying your creditors rather than distributing assets and proceeds to your preferred beneficiaries. When there are sufficient funds or sellable assets, the executor still has a duty to pay the creditors first. This can lead to massive downward modifications in what your loved ones get.

The Taxman Cometh

Arguably, the government has even more power than creditors. It has the ability to jump in front of the creditors in line. Likewise, the government can order the estate into probate until it is satisfied that all tax bills have been paid.

Retiring Debts and Taxes

Even if you don't have large outstanding bills at any given time, there's a good chance you'll have something hanging out there when you pass. People finance debts, and it's unlikely the timing will land perfectly to avoid an additional tax year.

It's a good idea to talk with an estate planning attorney about funding ways to retire your debts. Someone who has sufficient cash can simply set aside some of it in a low-risk account. It's also possible to set aside stable assets, such as real estate, that the executor can subsequently sell. Once all of the debts have been satisfied, then the executor may either distribute sales proceeds or the assets themselves to your beneficiaries.

Taxes on Beneficiaries

While it's great to inherit something, it also may incur a tax bill. If possible, try to set aside some funds to defray the potential tax bills your beneficiaries might face.

Estate Expenses

Few estates are resolved quickly. That means there will be new debts, and it's best to ensure an executor has sufficient resources to pay those expenses. Fortunately, the executor will have significant leeway to use funds to pay expenses.

Talk to an estate planning attorney to get more information.