5 Types of Debt Your Kids Can Inherit (And How To Prevent It)

While many grown children look forward to one day inheriting the family home or sizable savings, others are afraid of inheriting a stack of debts from their parents.

Many older Americans have minimal savings. If these folks end up in debt, their grown children may fear being left to sort through the mess.

Even worse, there are some situations where these kids could actually be liable for their deceased parents’ debts. Avoiding the following situations can help ensure your children won’t have to get out of debt simply because you left some financial obligations behind.

If your child is the co-signer on a loan belonging to ‌you, in most cases the child will be responsible for that debt after you die. A co-signer assumes liability for the bill if the other person can’t pay.

There is an important distinction, however, between co-signers and authorized users. Authorized users on credit cards are not liable for the unpaid debts of those who die. However, they should report the primary cardholder’s death to close the account.

Inheriting the home of a loved one can be a good thing. However, if the property had an outstanding mortgage or home equity loan, the person who inherits the home could be left with the debt.

If an heir lacks the ability to make these payments, they may need to sell the home so that debts can be settled.

More than half of all U.S. states have filial responsibility laws on the books. These antiquated laws require adult children to pay the bills of their parents.

While these laws remain in place in many states, experts say they are rarely enforced. Still, it is technically possible that adult children could be on the hook for parental debt in these states.

Many grown children discover their late mom or dad owes money in back taxes. If you are expecting to inherit the family cabin, it can come as a blow to find out it has a $35,000 tax lien on it.

You are not personally liable for your late parents’ back taxes. However, the money your parents owed might come out of their estate. That lake cabin you have got big plans for may need to be sold if you can’t pay Uncle Sam’s claims on it.

If someone dies with more debts than assets, their estate is insolvent.

Insolvency requires debts to be resolved even if they can’t be paid in full. This typically means using the estate to pay off as much of the debt as possible.

Laws vary by state, but typically debts are paid off in the following order:

• Fees for estate administration
• Funeral and burial costs
• Family allowances for dependents
• Federal taxes
• Medical bills
• Property taxes
• Secured debts, including mortgages and car loans
• Unsecured debts such as credit cards

Technically, kids are not responsible for paying such debts. But they do reduce the size of the estate, which is close to the same thing. After settling debts, it’s not uncommon for the estate to have no funds left to bequeath to heirs.

It’s not pleasant to think about your parents’ mortality, but having some frank conversations in the here and now can eliminate some money stress later on.

With planning, parents can avoid sticking their living children with unexpected bills. Talking to your parents about their final wishes and consulting with an estate attorney and a financial advisor might be helpful.