Does debt stress you out? You are far from alone. According to data cited by CNBC, nearly three-quarters of Americans cite financial issues as a primary source of stress—and debt is the most common financial problem that people and families are worried about. Debt can raise estate planning questions. You may be wondering: Will a change inherit their parent’s debts when they pass away? In North Carolina, the answer is “no”—at least not directly. Though, a child will be responsible for debt if they co-signed. Here, our Monroe estate planning attorney provides a guide to the most important things to know about North Carolina law regarding parental debt.
A Child Does Not Directly Inherit a Parent’s Debt in North Carolina
To start, you should put your mind at ease. The worst fears that many parents have about debt are not the case: In the state of North Carolina, a child does not directly inherit their parent’s debts when the parent passes away. Instead, the deceased person’s estate is responsible for settling any outstanding debts. The executor of the estate is responsible for paying off the debts using the assets in the estate. It happens through a process called probate. If a parent is insolvent, the creditor takes the loss. The debt has to be discharged. A child never directly inherits a debt from their mother or father. Creditors cannot lawfully recover debts from a person who is not responsible.
Understanding the Exception: A Co-Signed Loan
What happens when a child co-signs a loan along with a parent? That is an entirely different situation. Each co-signer to a debt is individually responsible. When a person passes away, their co-signer is still liable for the debt—even if that co-signer is their child. The co-signer is essentially guaranteeing the loan, so if the primary borrower (the deceased parent) is unable to repay the debt, the co-signer (the child) becomes responsible for the outstanding balance. Other co-signers beyond the child remain responsible for the debt as well.
Secured Debt Continues to Run With the Property (Home, Vehicle, etc)
Another important aspect of estate planning is understanding the implications of secured debts. A child does not inherit debt from a parent in North Carolina. However, an outstanding liability that is secured by real property does not automatically disappear when a person—parent or otherwise—passes away. Here is what you need to know:
Secured Debts and Estate Planning: Secured debts—with the two main examples being mortgages or car loans— are backed by collateral. In almost all cases, they are attached (backed) to the property being purchased. If the deceased person had outstanding secured debts, the financial obligation continues to follow the collateral asset unless some sort of alternative arrangement is in place.
How does it work? When a child inherits a property with an outstanding secured debt, they may choose to continue making payments on the loan to keep the property. For example, imagine a child in North Carolina inherited a $500,000 home from a parent through probate. Imagine that house still had an outstanding mortgage balance of $100,000. The child would become responsible for that mortgage. Though, they would inherit their parent’s full $400,000 of home equity.
A Well-Crafted Estate Plan Can Help to Protect Preserve Wealth and Protect Assets
An estate plan in North Carolina should always be custom crafted to meet your goals and your needs. Estate planning plays a vital role in protecting the financial well-being of your family and ensuring the smooth transfer of assets to your heirs. Debts—whether secured or unsecured—are something that must be carefully considered. Estate planning strategies—from setting up a trust to getting the right life insurance policies—can put your family in the best position. An experienced estate planning lawyer in Union County can review your situation and help you develop and execute a comprehensive plan that is narrowly tailored to meet your needs and your objectives.
Call Our Monroe Estate Planning Lawyers for Immediate Help
At Plyler, Long & Corigliano, LLP, our North Carolina estate planning attorney are results-focused advocates for our clients. If you have any specific questions or concerns about dealing with debt as part of an estate plan, we are here as a legal resource. Reach out to us by phone or contact us today for a fully confidential, no obligation case evaluation. Our estate planning attorneys serve communities throughout Union County, including Monroe, Indian Trail, Waxhaw, and Weddington.