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How Will Your Debt Impact Your Estate?

Filed under: Estate Planning

Do you want to leave a sizable legacy or inheritance for your children, grandchildren or other loved ones? Maybe you want to leave an inheritance to fund your grandchild’s education. Or perhaps you want to help your grown children get a head start on their retirement savings. Whatever your specific objectives, it’s natural to want to help those who are closest to you.

One of the best ways to achieve your goals and protect your legacy is to develop a written estate plan. Outline your objectives and create the necessary tools, such as wills, trusts and more. You’ll also want to identify potential risks that could threaten your legacy. One such risk is debt that you’ve accumulated throughout your lifetime and in retirement.

Could debt negatively impact your legacy? It’s possible. Debt usually isn’t directly passed on to heirs unless a specific heir is named on the debt account. For example, if you share a credit card with a child, that child would still be responsible for the balance after you pass away.

Barring one of those unique scenarios, your heirs likely won’t be personally responsible for paying your debts. However, that doesn’t mean your debt won’t impact your legacy. Below are a few types of debt commonly held by retirees, along with a description of how they may impact your estate. If you hold any of these types of debts, you may want to develop a strategy to limit their impact on your estate.



After you pass away, your estate will go through probate, which is the legal process for settling a deceased person’s estate. During this time, the court and the executor of your estate perform certain functions to finalize and close out your estate. They may notify heirs, liquidate assets and deal with outstanding debts.

One of the primary tasks in probate is to file a final tax return. Your estate will have to pay income taxes for the final year of your life. If you owe money for unpaid taxes, fines, penalties or more, your estate may have to pay those bills before assets can be distributed to your heirs. In fact, your heirs may have to liquidate certain assets to pay the bills.

If you have tax debt, you may want to develop a strategy to minimize the balance before you pass away. If that’s not possible, consider using life insurance or other tools to provide your heirs with liquidity to pay the tax bill.


Credit Card Debt

Credit card balances can be corrosive to your financial stability, especially in retirement. The fees and interest rates associated with credit cards can be a drag on your cash flow. However, you may find yourself in challenging financial situations in which credit cards are your only option.

Unsecured credit card debt usually isn’t passed on to children or other family members unless they are named on the account. However, your creditors will pursue payment from your estate. They could even go to court to place liens on your assets. Like tax debt, credit card debt may have to be paid before your heirs can receive assets from the estate.


Medical Debt

It’s not uncommon for retirees to accrue debt related to medical expenses and long-term care. This is especially true in the later years of retirement, when you may experience medical issues with increasing frequency. If you pass away with outstanding balances on medical debt, those bills will fall to your estate. The creditors for medical debt can file liens against your estate assets to make sure the debt is paid.

The best strategy to minimize medical debt may be to plan ahead and create funding sources for health care costs. For example, you may want to use vehicles such as health savings accounts and supplemental Medicare insurance to limit your out-of-pocket costs. Long-term care insurance could also be a helpful tool.

Ready to plan your legacy? Let’s talk about it. Contact us today at Ambrose Financial & Insurance Services. We can help you analyze your needs and create a strategy. Let’s connect soon and start the conversation.


Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

16607 – 2017/4/25