The probate-avoidance strategy decedents use can determine if their heirs are burdened with debt. The heirs of a person who dies with debt are responsible for settling those debts. The estate is responsible for settling the final affairs (i.e., debts, tax obligations, etc.) of the decedent and the remainder is distributed to the decedent’s heirs in accordance with the decedent’s instructions or state law if there is no will. However, in some circumstances, the heirs can be saddled with the decedent’s debts.

The Standard Process

When a person dies, assets are collected into an estate. The estate process can occur outside of probate with a trustee through the terms of a trust or, if there is no will or trust, through Illinois intestacy laws. The executor or administrator of the estate accounts for all of the assets and debts and comes up with a plan to settle the debts based on their order of importance. Creditors are required to submit claims to the estate and heirs are not responsible for locating unknown debt-holders. If an unknown creditor misses a deadline, it is unable to collect on the debt. Typically, the estate settles the debts, and any unsettled debts are absorbed by creditors. However, a few assets can trace to the heirs.

Heirs Saddled with Debt

The following assets can attach debt to heirs:

1. Joint accounts (such as pay-on-death accounts and credit cards) can attach to heirs. Creditors are permitted to seek compensation from any party that accepts responsibility for an account, even if that person is subordinated to the primary account-holder.
2. Secured debts such as cars and homes can also trace to heirs. The creditor is permitted to continue receiving monthly payments (or satisfaction of the debt). If the payments are missed, the creditor can foreclose on the property even if the heir is the current possessor of the asset. Additionally, if heirs miss payments while they are in possession of the secured property, their credit will be affected.

Probate Techniques

The following assets are never reachable by creditors:

1. 401(k) accounts;
2. 403(b) accounts (401(k)s for government workers); and
3. Life insurance (although, creditors can reach life insurance that is payable to the estate).

These accounts are designated for specific beneficiaries, therefore, they pass directly to the heirs without first going through the estate. Decedents can avoid saddling their children with debt obligations by setting aside more of their assets into life insurance brokerage accounts.