Who Will be Responsible for the Debts of My Parents When They are Gone?

Over the years, I have received many questions from clients and others regarding estates.  A very common question is, “Who will be responsible for the debts of my parents when they are gone?”  This question is most concerning when you become aware that your parent(s) do not have sufficient assets of their own to pay their debts.

Children are not personally responsible for their parents’ debts.  Your parent’s estate will be held responsible for his or her debts and, if there are any assets left over after all debts and expenses have been paid, the heirs of his or her estate will receive the remaining amount according to the terms of his or her will, or according to the laws of intestate distribution of the state in which he or she resided at the time of his or her death.  If there are insufficient liquid assets within the estate to pay all debts and expenses, then real estate (along with any other non-liquid assets) will need to be liquidated in order to pay such debts and expenses.

Also, note that the beneficiary of a life insurance policy is typically not responsible for paying the debts of the decedent or the expenses of his or her estate from the proceeds of the life insurance policy because the proceeds are not part of the probate estate.

Highway Investment, Job Creation, and Economic Growth Act of 2012

The Highway Investment, Job Creation, and Economic Growth Act of 2012 is the latest transportation funding bill. The purpose of the proposed legislation is to finance transit, highway and bridge improvements. The bill would make critical infrastructure investments across the country and create good-paying jobs by fully funding the Highway Trust Fund and the projects it supports. So what, might you ask, does this have to do with estate planning?

In order to help raise revenue to fund the projects contained within the bill, Senate Finance Chairman Max Baucus has recommended a provision that would limit the use of stretch IRAs. Funds that are placed into a traditional IRA are exempt from income taxes. When funds are distributed from the IRA to the original account owner, or to a beneficiary, the distributed amount must then be claimed as income and taxed in the year of distribution. Under current tax law, beneficiaries who inherit a traditional IRA usually have the option of stretching out distributions over their own expected lifetimes, thereby allowing income tax-deferred growth. There are some exceptions to this rule, but overall the option of stretching out an IRA provides an opportunity for many years of tax-deferred growth.

Under the proposed changes, with certain limited exceptions, a beneficiary of an IRA would be required to withdraw the entire amount, and therefore pay the deferred income taxes from these distributions, from the inherited IRA within five years.

Opponents to this proposal claim that too many investors have placed funds in IRAs, relying heavily on the tax-saving provisions currently in place. In addition, opponents argue that tax policies should encourage saving and transferring investments between generations.

Those who support the proposal claim that the changes would raise $4.6 billion for the Treasury over the next decade by requiring younger beneficiaries to pay taxes over five years instead of spreading them over their lifetimes.　 Further, the original intended purpose of IRAs is as a retirement planning tool, rather than a way for wealthy individuals to pass even more wealth to their beneficiaries (who did not earn the inherited money) essentially tax free.

Many anticipate that the proposed legislation will not ultimately clear the full Senate and the Republican-controlled House of Representatives. However, it’s certainly something for investors and advisors to keep an eye on.

How can I cash a check that’s made out to the estate of my deceased family member?

In Wisconsin, the answer to this question depends on the total value of all assets that were titled solely in the name of your family member that did not pass to beneficiaries by virtue of beneficiary designations or transfer on death designations. If the total value of these assets is greater than $50,000, then you will need to initiate a probate proceeding. If the total value of these assets is less than $50,000, then Wisconsin law provides that the assets can be transferred by virtue of a “Transfer by Affidavit”. Either way, you should speak with a Wisconsin probate attorney to ensure that all assets of your family member are transferred pursuant to Wisconsin law.