Can Debt Be Inherited?

Written by hunkar ozyasar
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Can Debt Be Inherited?
You usually will not be liable for your relatives' debts. (financial growth image by Christopher Meder from Fotolia.com)

Broadly speaking, the debt of your parents, spouse or anyone else who might have designated you as the beneficiary of an estate is not directly inheritable. The debt usually will diminish the net proceeds you may receive from the estate, but your existing assets typically are beyond the reach of estate-related debts.

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Inheritance Basics

When an individual dies, the assets he leaves behind are passed to immediate family members, even if there is no written will. These beneficiaries always have the right to refuse the assets, in which case other beneficiaries who are further removed in the lineage will be contacted. If no suitable party can be found to receive the assets, they will be transferred to the government. Most people, however, have debts as well as assets, which can complicate the situation.

Estate Liquidation

When the deceased person has debt as well as assets, the usual procedure is to sell the assets, pay off all creditors and distribute the remaining cash or property to the beneficiaries. Sometimes, the beneficiaries prefer to pay the creditors themselves to prevent the liquidation of inherited property. If you inherit the family home, for instance, and your dad owes £6,500 in credit card balances, it might make more sense to pay the £6,500 out of pocket and keep the home instead of selling the home to pay £6,500 in credit card bills.

Should the debt of the deceased exceed the value of inherited assets, the beneficiaries usually have to do nothing at all. Typically, the assets are sold, creditors paid with the proceeds and the shortfall simply is written off. In this case, beneficiaries would receive nothing.

Marriage

If the deceased is not a parent or a more distant relative but is instead a spouse, slightly different rules may apply. If you live in a joint-property state and the debt was accumulated during the marriage, it is the responsibility of both the wife and husband. Certain exceptions do apply, however. Business debt may not be a joint responsibility depending on the type of business entity it is attached to, and the "innocent spouse" rule may exempt the surviving wife or husband from certain types of financial responsibilities.

Other Exceptions

If you are a co-signer on the debt of the deceased, the entire amount due will be your financial responsibility. An even more complex and potentially devastating situation may arise if you were the co-signer on the debt and the person's will excludes you from the estate. In this case, you may have to pay the debt without receiving access to the inheritable properties or cash.

You also may be impacted by the deceased person's debt without directly inheriting it in some other cases. Such situations can arise if you are an active user of the person's property. For example, if you are living on the family farm, which is taken by the bank following the death of a parent, you may be evicted.

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