Leaving Instructions in Your Will for Paying Debts
How do you want your debts to be paid when you die?
If you live owing money, chances are you will die owing money. If you do, your executor will be responsible for rounding up your property and making sure all your outstanding debts are satisfied before any of the property is put in the hands of those you have named to get it. In your will, you can leave instructions about how to take care of these obligations.
Types of Bills Your Estate May Have to Pay
When you die, your estate may be liable for a variety of debts, expenses, and taxes.
Debts You Owe
When you leave this credit-happy world, you will likely go out with debts you have not fully paid—personal loans, credit card bills, mortgage loans or income taxes. Here are the two types of debts you need to be concerned about when making a will.
- Secured debts. Secured debts are debts that give the creditor the right to take property pledged as security for the debt (collateral) if the debtor does not pay. Some common types of secured debts are car loans, business loans, and loans owed on real estate, like mortgages or deeds of trust. If you are leaving property in your will that is subject to a secured debt, you can state in your will whether the debt should pass along with the property. Because the property is usually worth more than any debt secured by it, a person who takes the property at your death but does not want to owe money can sell the property, pay off the debt and pocket the difference. However, if you think a particular beneficiary will need assistance with paying a debt owed on property, try to leave the necessary money or valuable assets to him or her as well.
- Unsecured debts. Unsecured debts are all debts not tied to specific property. Common examples are medical bills, most credit card bills, and utility bills. Your executor must pay these debts and expenses out of property from your estate. You can leave instructions in your will about how to pay off unsecured debts.
Expenses Incurred After Your Death
There are several expenses incurred after you die—including the costs of a funeral, burial or cremation and probate—which may take your survivors by surprise if you do not plan ahead for paying them. Funeral and burial expenses, for example, typically cost several thousand dollars. And for those who do not plan ahead, the costs may soar even higher. In addition, probate and estate administration fees typically run about 5% to 7% of the value of the property you leave to others in your will.
You can make your will online, quickly and easily, using Nolo's Online Will.
Estate and Inheritance Taxes
Most people do not have to worry about estate or inheritance taxes, either because their estates are not large enough to owe federal or state estate tax, or because their state does not have an estate or inheritance tax. To learn about these taxes, and to find out whether your estate could be liable for either federal estate tax, state estate tax, or state inheritance tax when you die, go to the Estate, Gift, and Inheritance Taxes section on Nolo.com.
Unless you specify otherwise in your will, in most states, these taxes will normally be paid proportionately out of the estate’s liquid assets. This means that a beneficiary’s property will be reduced by the percentage that the property bears to the total liquid assets. Liquid assets include bank accounts, money market accounts and marketable securities. Real estate and tangible personal property, such as cars, furniture and antiques are not included. This could cause a problem if, for example, you left your bank account with $50,000 in it to a favorite nephew and your tax liability—most of which resulted from valuable real property left to another beneficiary—gobbled up all or most of it.
Choosing Whether to Leave Instructions
Typically, you do not need to leave instructions about debts if any of the following are true:
- Your debts and expenses are likely to be negligible—or to represent only a tiny fraction of a relatively large estate.
- You are leaving all your property to your spouse or partner or specifying that it should be shared among a very few beneficiaries, without dividing it into specific bequests.
- You understand and approve of how your state law deals with debts and expenses.
On the other hand, you may need to be concerned about covering your debts and taxes when your will-making plan involves dividing up your property among a number of beneficiaries. And you need to plan more carefully if debts payable by your estate are likely to be large enough to cut significantly into bequests left to individuals and charitable institutions. The danger, of course, is that unless you plan carefully, the people whose bequests are used to pay debts and expenses may be the very people whom you would have preferred to take your property free and clear.
If you do not leave instructions about how to pay your obligations, your executor will pay them as required by the laws of your state. Some states leave it up to your executor to make good decisions about how to pay your debts and expenses. Other states require that debts and expenses be paid first out of property in your estate that does not pass under your will. In other states, your debts and expenses must first be paid out of liquid assets, such as bank accounts and securities, then from tangible personal property and, as a last resort, from real estate.
Choosing How to Pay Your Obligations
If you decide to leave instructions in your will, you must choose which assets you executor should use to pay your obligations. It’s best to designate liquid assets over tangible assets that would have to be sold, and using insurance is also an option.
- Liquid assets. Liquid assets -- such as bank and deposit accounts, money market accounts, stocks and bonds—are a good choice because they are easily converted into cash at full value.
- Tangible assets. Tangible assets -- such as motor vehicles, planes, jewelry, stamp and coin collections, electronic items and musical instruments -- must be sold to raise the necessary cash. Hurried sales seldom bring in anywhere near the full value, which means the net worth of your estate will also be reduced.
- Insurance. You can purchase a life insurance policy in an amount large enough to pay your anticipated debts and expenses and have the proceeds made payable to your estate. But be careful: this subjects the insurance proceeds to probate which could create a significant expense.
Of course, if the source you specify is insufficient to pay all the bills, your executor will still face the problem of which property to use to make up the difference. For this reason, it is often wise to list several resources and specify the order in which they should be used. Also, make sure that they are worth more than what is likely to be required.