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.

1. Co-signed loans

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.

2. Mortgage or home equity loan

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.

3. Debt accrued in a ‘filial responsibility’ state

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.

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4. Debt related to unpaid taxes

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.

5. Other debts related to settling the estate

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.

Bottom line

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.

Money tips that can work for everyone

No matter what your bank account balance is, there's always an opportunity to optimize and improve your finances. Here's a quick checklist of things you can look at today.

Focus on paying off your debt. Debt can hold you back from making progress with your overall financial well-being. Aside from cutting expenses, there are tools that can help you pay off debt faster like balance transfer credit cards and debt counseling.

Earning extra income can give you breathing room. If finances are tight, earning some extra money to supplement your income can make a huge difference. A new job is one option to consider, but if you're not ready to make a big change or already retired, a part-time side job could be a better choice.

Cut your expenses. It sounds painful and so not fun, but it doesn't have to be. Take a look at your biggest expenses because that's where you'll probably find the biggest savings. For example, auto insurance rates have been soaring so shopping around for a new insurance company can be the fastest way to cut your bill. Also, look for ways to cut your grocery bill (despite rising inflation).