It’s not hard to think about passing assets on to your heirs after you die, but what about your debts? Are you leaving them money that they’re going to owe?
Your heirs are not going to take on your debt, but your estate might. Essentially, while your heirs aren’t expected to pay out of pocket, that debt can still cut into what they get from you. In this sense, they may feel like they are paying.
For instance, maybe you are leaving your heirs a home that is worth $200,000. You have two children. You figure that they can sell the house at market value and each take $100,000 from the sale. Maybe you’ve even spoken to them about it so that they know how much they should expect to get.
However, you also have to pay your property taxes for the year. You may have outstanding credit card debt. Maybe you took out a loan to put a new roof on the house, and you haven’t fully paid it off yet. The creditors may expect to be paid out of the estate, and money earned from selling your house is money in your estate. If your heirs find that you still owe $50,000, the value of that house suddenly drops to $150,000 and they are both only going to get $75,000. This can come as a shock to them if they did not realize that you had so much debt or if you did not even realize how much you would owe when you passed away.
When doing estate planning, make sure you consider debt and other expenses along with your assets.