Ep. 18: The Inheritance Dilemma: Can Credit Card Debt Be Passed Down to Heirs
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Have you ever wondered what happens to your debts when you pass away? How can you protect your estate and your loved ones from being burdened by these debts?
In this eye-opening episode of the Repair the Roof Podcast, our host Attorney Ted Gudorf dives into the inheritance dilemma and discusses the different types of debt that can impact heirs when someone passes away. He breaks down the difference between secured and unsecured debt, and explains how Ohio law handles estate debts. You'll also learn how to protect your estate from creditor claims and discover the responsibilities of the executor, administrator, and heirs when it comes to paying off debts.
Ted explores the unique provisions of Ohio law regarding estate debt, such as the six-month rule for creditors to make a claim and how assets held in a trust can pass free of probate and unsecured debt. Discover the importance of understanding the order of priority for bills that need to be paid out of an estate, and how to handle paying unsecured debts, such as credit card debt. Ted also discusses the importance of estate planning and how to arrange your affairs to be free of potential claims from creditors. Don't miss this informative episode that will help you better understand inheritance debt and provide valuable information for your estate planning.
- Debt In An Estate (00:42)
- Debtor-Creditor Law in Ohio (06:13)
- Avoiding Payment of Unsecured Debt (09:43)
- The Order of Claims (13:38)
- Wrap-up (22:00)
- Gudorf Law Group
- The Ohio Estate Planning Guide - Free Book
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Transcript: Prefer to Read — Click to Open
Hello everyone, my name is Attorney Ted Gudorf. Welcome to The Repair The Roof podcast. This name comes from President Kennedy’s famous quote, “The time to repair the roof is when the sun is shining.” In this show, we help individuals and families learn more about all things estate planning and elder law. This is episode 18. The inheritance dilemma, can credit card debt be passed along to heirs? Well, I am still down in Siesta Key enjoying some rest and relaxation, but I thought I would take a break and have a conversation about debt in an estate. What happens when somebody passes away and they have a variety of debt? What can this debt look like? Well, perhaps they have a home, and they have a mortgage on it or possibly they purchased a car, and they have a car loan, or maybe they have a credit card bill. Let’s talk about debt and what the law says how it is treated when somebody passes away.
So the first thing we have to draw a distinction of is between what we call secured debt and unsecured debt. That is the first break that we got to make sure we understand. So under the law, to the extent that somebody has secured debt, that is, say the deceased owned a home and had a mortgage. That mortgage, that payment, that amount that is due is secured by the value of the home and to the extent that that mortgage is due when somebody passes away, that debt has to get paid, even if it means that the house has to be sold. Something similar with a car, an auto loan, that debt is secured by the car, and they are entitled to be able to take the car and either sell it at auction, or you can sell it and give the payment proceeds to the person who is secured by the debt. Typically, it will be a bank.
Now let’s talk about credit card debt. Credit card debt is not secured by anything other than the promise to pay. When we have debt that is secured simply by a promise and not by an asset, we call that unsecured debt. Other types of unsecured debt, let’s say we made a personal loan to somebody, but there was no mortgage tied to it, it was simply a promissory note. That is another type of unsecured debt. So secured debt will always be paid at least up to the extent of the security that is securing the debt. With respect to unsecured debt, Ohio law and most states law will give the responsibility to the executor or administrator named in the estate, named in the will, give a list of priority in terms of what the administrator is required to do under the law with respect to debt and how that debt is to be paid and to the extent that the administrator or executor fails to follow the priority set forth in the Ohio statute, the executor administrator can be found to be personally liable. So this is absolutely critical that we understand how this unsecured debt is to be handled. Now, in terms of debt itself, unsecured debt like credit card debt, just understand that there is no requirement for the heirs to pay for anybody else’s debt under the law. The estate may have some obligation to make a payment, but the individual heirs are not required, are not responsible for paying a parent’s debt or a friend’s debt or a sibling’s debt or a child’s debt unless the individual heir has personally guaranteed the obligation. To give you an example if somebody goes in to get a credit card, which is an unsecured debt, and in order to get that credit card, a spouse or a child has to sign on the obligation for the credit card, or simply does it as a matter of convenience so that they can use the credit card. If they’ve signed on the line, then they are obligated on that debt, but absent being signed on the line, there is no responsibility for a child or a spouse to pay the unsecured debt of a deceased out of their own money. So that’s important to understand that that is the basic fundamental rule. To give you an example, if on the other hand, you sign on the line for that credit card debt, then you are going to be responsible for making those payments or paying any deficiency if the estate fails to make a payment. Now, let’s also talk about the fact that probate matters, trust matters, debtor creditor law, for the most part is a function of state law and just remember, as I am fond of saying, this is the United States of America. That is we have 50 states and the law is a little bit different in terms of how debt is handled when somebody passes away. It is particularly different, it is particularly unique in Ohio.
How is Ohio unique? Well, let’s first talk about individuals who die with no probate estate. How do you die and own assets that don’t go through probate? Well, there is three main ways that you can own property that will pass free of probate. One, you could designate a beneficiary, whether it be on a bank account, or a life insurance policy, or a retirement account. If that beneficiary is alive and well, not incapacitated and not a minor, then those assets with the presentation of a death certificate will be transferred to the beneficiary. How else can we avoid probate? Well, how about if we own property jointly with rights of survivorship? Again, owning property jointly with the right of survivorship with the presentation of a death certificate will transfer the property to the surviving beneficiary. A third way to transfer property free from probate is to own assets in a trust, whether it be a revocable trust or an irrevocable trust, at death, those assets will pass free of probate. Ohio law says that assets that pass free of probate through either a designated beneficiary, joint ownership or through a trust are not subject to the claims of any unsecured creditors when a person passes away. So if you have 100% of your assets held in a trust, and you have a $40,000, unsecured credit card debt, when you pass away, that debt, technically, under Ohio law is not going to get paid, or there is no legal obligation for that debt to be paid out of the trust assets. Now, the trustee could get the consent of the beneficiaries and decide to go ahead and make a good faith payment on that credit card debt out of the goodness of their heart and some of our clients do that. They feel some obligation to make those payments, but please understand that under Ohio law, trust assets, transfer on death assets, beneficiary designated assets pass free of probate and therefore pass free of the unsecured creditor claims, not secured creditors, but unsecured creditors. So one way to avoid the payment of unsecured debt is to hold assets in one of those fashions. Our preference is to utilize trust because in all instances whether the beneficiary is incapacitated or the beneficiary is a minor, or the beneficiary dies, those assets will pass free of probate and free of the unsecured debt. By the way, that provision is very unique under various state laws. Most states make trust assets and beneficiary designated assets and sometimes survivorship assets, subject to the claims of unsecured creditors, and require the administrator to give notice to those unsecured creditors, but that is not the case in Ohio.
All right, let’s talk a little bit about another very unique provision under Ohio law and that is called the six-month rule. So under the Ohio Revised Code, we have a statute that says that a creditor has six months after somebody has passed away to make a claim against the estate, asking for the administrator or executor to pay that claim. Now, there are rules in terms of how the claim has to be presented, it has to be in writing, who it can be presented to, it can be presented to the executor or administrator or the attorney for the executor administrator if a probate estate is open, or if no probate estate is opened, then the creditor can go in and open up the estate themselves, as long as they do so, within a six-month period from the time the person has passed away. So what happens in that instance, if the administrator or the executor does not open the estate at probate court, for the first six months? Well, if the creditor does not go into probate court and open up the estate, then that creditor claim, which could have been filed within the first six months, does not get paid, because no executor, or administrator was ever appointed. To be clear, if we have an estate, and we do not open up that estate in probate court within six months, and the creditor does not open up the estate within the first six months, the unsecured creditor claims are not required to be paid by the administrator or the executor, who waits six months in one day to open up the estate. That law, again, is very unique under Ohio law but it is critically important that we understand that if you are serving as an administrator, you really need to pay close attention to whether you are or are not going to open up that estate, because there may be unsecured claims out there and if you open up the estate within six months, then Ohio law is going to tell you in what order those claims are going to be paid.
So, let’s talk a little bit about what the order of claims are that do get paid if we open up the estate within the first six months. Let’s say somebody dies, and they have $100,000 in a bank account and we don’t think that there is going to be any significant unsecured claims, so we just go ahead and open up the estate. Well, of course, we know that there are going to be some bills that have to be paid and let’s say during the course of administration, we ended up finding out that of course there is going to be lawyer fees, there is going to be probate court costs, maybe there is going to be accounting fees, there is certainly going to be a funeral bill. Maybe there is also going to be some taxes, maybe federal taxes or state and local taxes. Maybe there is going to be a claim by Medicaid because Medicaid was paying the nursing home bill and then let’s say we do not anticipate that there is going to be a credit card bill, but long behold, we find out that the decedent had a credit card and it was very substantial and we find out that the total value of the unsecured debts are going to exceed how much money we have. Let’s say if we have 100,000, we find out that the total debt is going to be, say 150,000. Well, the law is going to prioritize how those bills get paid? What may come as a real surprise to you, but the first payment goes to the attorney for payment of what we call administration expenses. It’s called cost and expenses of administration. So the lawyer gets paid, the probate court fees get paid, the accounting fees get paid right off the top and if we only have $100,000, we have to understand that if there are more than $100,000 of administrative expenses, obviously, that’s not going to happen on a small estate, but if there were, then not only the other expenses are ever going to get paid because number one, the costs of administration and expenses related to the administration get paid first. Number two, the first $4,000 of the funeral bill get paid next and that includes the funeral and burial, includes the monument. The statute says exactly what you can pay, but no more than $4,000. Now, in addition to that, the law says that the surviving spouse or a minor child is entitled to a family allowance, the total family allowance that gets swept between the surviving spouse and any minor children is all of $40,000. Sometimes, when we have small estate, the cost of administration and the funeral bill plus the family allowance will burn up the entire amount of the estate, and therefore, none of the other unsecured claims are going to get filed.
Well, let’s say we do have some more money. What happens next in terms of the order? Well, any debt that is entitled to a preference under the federal US law gets paid next, oftentimes, that’s federal income taxes. Also, the expenses of the last illness get paid next, let’s say somebody got a hospital bill, or a doctor bill, all attributed to their last illness, they get prioritized next. Then if we have, let’s say, we have more of a funeral bill, and burial that has to get paid above and beyond the initial 4000, the next 2000 get paid next as the 6th priority level. The 7th level for a priority is any nursing home stay under the statute, they are entitled to a preference as well. After the nursing home, last continuous stay gets paid, then the Medicaid state recovery gets prioritized, then the debts for manual labor and we finally get down to the 10th class and it’s basically all other debts for which claims have been presented properly within the six month period and that may or may not include credit card debt. So you see this unsecured credit card may never get paid. First of all, as we discussed here, we got to always understand that the individual heirs are not responsible for that unsecured debt unless they have guaranteed it. Number two, it is not going to get paid unless there are sufficient assets to pay for all of the other priority claims until we get to that 10th level, which is the other debts for which a claim has been provided, mainly an unsecured debt.
So it is really important that we understand the level of priority of this credit card debt, understand that unsecured debt falls to the end, understand that credit card debt oftentimes is not paid out of an estate. Now, if we are going to decide that we want to pay the unsecured debt and we have sufficient assets to pay all of the other priorities, then how do we deal with a credit card company? Well, the easiest way to deal with them is for the attorney to write a letter to the credit card company advising them that the individual owned a credit card that probably attach a copy of a credit card statement if we have it and close a death certificate, and then perhaps make an offer of payment, whether that be 25% of the debt that’s owed or 50% of the debt that’s owed. Oftentimes, a credit card company is just happy to get some amount of payment on the debt without writing the entire amount off. It is my client, as a general rule, want to resolve it one way or the other and so that is one way to kind of bring a resolution to it. Why would we want to bring a resolution to it? Well, we don’t want to continuously get calls from the credit card company harassing the administrator or the executor to pay the bill. I think that makes some sense. One of the things I want to mention to you that is unique to Ohio law even though I mentioned that Medicaid estate recovery did have a priority, the one thing to understand about Medicaid estate recovery is that the Ohio General Assembly has passed a specific law, which exempts Medicaid estate recovery from the six-month rule. They have expanded the time period for Medicaid recovery claims and it’s a rarity for Medicaid to ever miss making a claim, because Ohio law requires the executor or an administrator of an elderly person’s estate to notify Medicaid directly of their passing away if they are aware they were on Medicaid and that puts Medicaid on notice. Medicaid is pretty good at reaching back out asserting their claim and getting that filed and just understand that it is not subject to the six-month rule.
Handling debt when somebody passes away is extremely important to follow the rules because remember, absent following these rules, the executor administrator can be held personally liable for the debt if they don’t follow the rules. So we got to make sure we follow the rules. Better yet, when we are doing estate planning, we should arrange our affairs to be free of any potential claims filed by creditors at the time we pass away, certainly with respect to unsecured creditors.
Well, hopefully today’s podcast will give you some clarity, and will give you some confidence and will give you some needed information for you to go forward and put your estate plan together. Well have a great day, we will be talking to you soon during our next podcasts. Thanks so much.
Until our next session, just remember the time to repair the roof is when the sun is shining. To get started with your estate plan, you can go to gudorflaw.com/gettingstarted. For a free copy of our recently published book called The Ohio Estate Planning Guide, go to Gudorflaw.com/book.