New York Estate Planning & Elder Law Blog
Estate planning is a complex process that involves a great deal of attention to detail. However, truly comprehensive estate planning goes beyond creating a Last Will and Testament or even a trust and includes things like understanding how debt will affect your estate once you die. The best way to avoid the negative effects of debt on your estate is, of course, to avoid debt. However, that is often impossible to do today. In fact, according to sources cited by a recent Yahoo! Finance article around 73 percent of Americans have outstanding debt when they die with an average debt of $62,000 per person. As such, it is important to understand your debt as well as how to manage it appropriately to minimize any potential financial burden such debt could cost your loved ones.
Different Types of Debt
There are several different types of debt, and understanding the differences between them as well as how each type will affect you can help you understand how to manage them. The first type of debt is secured debt. Secured debt is debt that has been guaranteed by some type of collateral. This allows lenders to provide better interest rates on secured debt because a default on such debt typically awards the collateral to the lender. The most common examples of secured debt include residences and vehicles.
The next common type of debt is unsecured debt. Most often, unsecured debt is associated with credit cards. While lenders with secured debt can take steps such as repossession to take control of collateral, lenders with unsecured debt cannot take any property from you unless they have gone through a court and received a judgment against you.
Many Americans often have student loan debt, too. Typically, student loan debt is handled in two different ways. If you have federal student loan debt, death usually cancels that debt regardless of the assets within your estate. However, private student loan companies often have the option of pursuing repayment through your estate.
Help Planning for Debt
Generally, your debt belongs to you and your estate. That means that your estate could be responsible for settling any debt you have when you die, which will decrease the amount of assets you can provide loved ones you leave behind. In fact, depending on how much debt you are carrying at the time of death and the size of your estate, debt could have a significant impact on the value of your estate. Using estate planning tools like placing certain assets in a trust can help protect those assets because they can often be removed from the overall value of your estate.
While many of the tools used in estate planning are similar for many people, the process is unique to each individual. Working with an experienced estate planning attorney will help you address the individual needs your estate plan may have, including planning for debt. An experienced estate planning attorney can also help you understand how taxes and other financial concerns could impact the distribution of your assets. By keeping an eye on your credit report and monitoring your debt, you can take proactive steps to minimize the impact it will have on your estate. Through sound financial planning and awareness, you can minimize the negative effects of debt on your estate. Remember, an ounce of prevention is worth a pound of cure.