After losing a parent, or losing both parents, the last thing most children want to hear is that they will have to shoulder the debt their parents owed. While this doesn’t happen often, it can be a very real possibility, especially if parents aren’t taking adequate steps to protect their assets from creditors.
As Household Debt Level As we continue to grow, protecting family assets is more important than ever.
Below we discuss what types of parental debt can be inherited and what assets are generally safe from creditors.
What kind of debt can I inherit?
Please note that all references below to children or children may refer to either adults or minors. When a parent dies, children usually do not inherit their parents’ personal debts. Examples of debts that children do not inherit:
- credit card debt
- personal loan debt
- student loan debt
- car loan debt
- mortgage debt
Unless the debt is from a joint account or a co-signed loan (more on that below), the debt is usually cleared when the individual dies.
What happens to debt if someone dies?
Unfortunately, the debt does not always disappear when the individual dies. Immediately after death, creditors can contact the executors of the deceased’s estate to actively pursue eligible debts owed to them.
In the case of unprotected money or assets, enforcers often needed to settle debt before distributing remaining funds and assets to beneficiaries named in the deceased’s will.
Please note that inheritance laws and regulations may vary from state to state and territory.
While this may not result in the child directly inheriting the parent’s debt, it may significantly reduce the expected inheritance.
According to a recent survey by Polara Strategic Insights, more than half of Gen Z and millennial Canadians claimed to rely on inheritance to reach their financial goals.
If the inheritance is depleted before it reaches your hands, the beneficiaries may find themselves in a less than ideal situation.
What kind of debt can I inherit from my parents?
However, the problem does not necessarily end there. In some cases, children may inherit debts from their deceased parent, which can further jeopardize them. Common debts that children of the deceased may inherit include:
Borrowing from a joint account
Children who have a joint account with their parents may be required to pay off any debts incurred by that account. Common examples of this include:
- joint credit card
- joint line of credit
- Joint loan for real estate
- joint investment account
- Negative Balance in Joint Checking Account
As joint guarantor, the child bears 50/50 responsibilities with the parent. When a parent dies, the child will be solely responsible for any remaining debts in the joint account.
Debt through a co-signed loan
The same applies to solidarity loans. It’s not uncommon for children to co-sign mortgages, personal loans, and even small business loans for their parents. If the parent dies before paying off the loan balance, the child will be responsible for paying the remaining loan balance.
Home equity loan from inherited house
A home equity loan allows homeowners to borrow money from a bank using the equity in their home as collateral. Homeowners often take home equity loans to improve their homes, pay for repairs, or cover other debts.
In many cases, parents may provide their children with a home. If the deceased still owes money on a home equity loan, the beneficiary may be held responsible for the remaining debt on the loan. For example, if your parents died after taking out a $100,000 loan from your home equity, the beneficiary of the home would be responsible for the debt.
If your child can’t pay off the home equity loan, you may have to sell the house to cover the remaining balance or rent it out until the loan is paid off.
What assets are safe from creditors?
Thankfully, some assets may be protected from creditors if a parent dies leaving them in debt.
RRSPs and RRIFs
Retirement savings plans and registered retirement investment funds may be protected against debt collection in some circumstances.For example, if the deceased named his children (or other family members) As a beneficiary of a registered accountit is passed directly to them.
However, if the deceased did not designate a beneficiary, the registered account would be included in the deceased’s estate. If RRSP or RRIF balances are issued against the property, creditors can pursue their obligations.
This is why it is important for individuals to start estate planning as early as possible.
life insurance benefits
A creditor cannot claim a life insurance death benefit paid to a beneficiary.
This may be possible indirectly if the beneficiaries have a joint account or co-sign the loan on behalf of their parents. In this case, the beneficiary may be required to pay the debt after receiving the death benefit. However, the death benefit itself is not seized and paid directly to the beneficiary.
For example, if you received a life insurance death benefit of $1 million after your parents died, that money will be paid directly to you. However, if you owe her $500,000 in joint account debt with her parents, you may have to use that money to pay off that debt.
When a living trust is created in the lifetime of a parent and the child is named as the beneficiary, the assets in the trust may be safe from creditors. A Canadian living trust, also known as a living trust, is a legal relationship that you set up during your lifetime in which the settlor transfers ownership of certain assets to a trust, which is administered by someone you trust (the trustee). will be Benefits of Others (Beneficiaries).
As an example, Mary and John are parents to two children, 10-year-old Bella and 7-year-old Ethan. Over the years, Mary and John have run a successful business and amassed a large amount of savings. They want their children to be financially cared for, even if something happens to them.
Mary and John decide to set up a living trust. They transfer their business and savings to this trust. This means that the business and savings are no longer in their name but belong to the trust.
They appoint longtime friend and business associate Lisa as trustee. Lisa is responsible for managing trust assets, including running the business and investing savings.
A properly structured living trust can protect children from creditors in the event of the death of a parent.
Seek professional advice if unsure
Whether you’re a child who recently lost both parents, or a parent planning their own estate, we encourage you to seek professional advice and guidance. Planning a legacy can be difficult, and if you want to ensure the safety of your legacy, you need to make sure it is properly structured.
Christopher Liew is a CFA Certified and former financial advisor. He writes his personal money tips on his blog for thousands of Canadian readers every day. Wealth Awesome website.