Does it pay to reduce card debt before death?
Dear Maturing Loans,
I have a terminal illness. I have significant credit card debt. I have no significant assets, except my paid-off house. My husband preceded me in death. As you might imagine, I have a lot of things on my mind. One of them is maximizing what I pass along to my children. Should I just ignore my credit card debt? It's supposed to be unsecured, so they can't come after my house, right? Seems to me I'd have more to pass along to my children. -- Charlie
I am so sorry to hear of your illness. I hope you have plenty of time to get your affairs in order. There really are two questions that you pose. The first is what to do about your credit card debt. The second is that you want to pass as much to your heirs as possible. The two are connected.
Let's start with your credit card debt. Since your husband died, is it safe to assume that you are the only person listed on the credit cards? This is important. If there are joint owners for your credit cards, then the other owners not only share in the credit offering for these cards, but they also share in the responsibility to pay off the debt as it is incurred, and after you are gone. If there are no other owners for these cards, then the debt is your responsibility. It is true that the debt is unsecured as you stated. This means that you did not put up any assets for the loans/credit offered to you by your credit card holding companies.
But this does not wipe the debt from the books upon death.
Upon passing, any debt in your name is now in the name of your estate. The personal representative of your estate (the executor or executrix) is responsible for settling any debts of your estate before distributing assets. I have encountered situations where people had been distributed assets from an estate and then asked to return them to the executrix of the estate to pay off a debt. This is not always easy to do, so it is best to get those debts paid first.
So the answer to your first question is to continue to pay on the credit card debt as best you can. If you can afford to accelerate payments, then less interest will be due on the credit card debt. The lower your debt, the greater the estate that will pass to your heirs. Your estate will be distributed by this simple formula: Estate passed = Assets in estate minus Liabilities of the estate. To reiterate, credit card debt in your name is a liability of your estate and needs to be paid prior to your estate being distributed.
Which brings us to part two of your question: What is the best way to get these assets to your beneficiaries? In order to expedite the process of getting assets to your beneficiaries, there are some steps you can take today. You state that you have no significant assets other than your house. Step one is to clearly document who gets what upon your passing. Take out a pen and paper and write this down. Make sure you have listed out all of your assets. Take a hard look at any assets that have a beneficiary designation (life insurance, annuities, IRAs, etc.). Make sure these assets will pass to your designated beneficiaries. This may mean updating any beneficiary designations on account paperwork with your bank, brokerage firm and insurance companies. This is important as there are some account types that can pass without certain taxes to a beneficiary, but with no beneficiary stated they pass to the estate and certain taxes may be due. Coinciding with this step is to get yourself to an estate attorney to make sure your will is in order and you are maximizing what you can pass. I stress that you put down your thoughts on paper first, so that you save time and money on your trip to the attorney. Don't put this off.
Once this is done, make sure you monitor your credit card balances and revisit your final instructions periodically if something in your situation changes.
- Continue to pay your credit card bills to lower the debt burden to your beneficiaries and increase the size of their inheritance.
- Write down who you want to receive your assets upon your passing.
- Shore up all beneficiary designations.
- Keep your will current.
- Monitor your credit cards.
- Revisit final instructions on an annual basis (or sooner if needed).
Thanks for the question, see you here next week.
See related: What happens to credit card debt when you die?
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