As a possible recession looms over the American economy, financial planners often tout the same advice: reduce debts and cut spending.  That advice resonates with estate planning attorneys too.  The simple reason is that reducing debts can impact a decedent’s estate administration and ultimately what heirs may inherit. 

With estate planning attorneys, clients often inquire whether a Trust or a Will, which would pass assets through probate, is more beneficial.  The legal discussion centers on the person’s assets, their goals for their estate and heirs, and also personal debt.  With a Will or Trust, both require creditors to be paid before beneficiaries receive anything. Both instruments can be drafted with specific instructions for certain assets.

One advantage of probating a Will is that a Personal Representative is required to notify creditors to bring claims against the estate for outstanding debt within a certain period of time; creditors who do not file claims within that time frame are out of luck.  Personal Representatives have significant responsibility to follow the law in handling estate assets and paying valid claims properly and in the correct order.  Ultimately a solvent estate can pay debts and expenses, often leaving assets for heirs to inherit. However, an insolvent estate may not have sufficient assets to pay off all of the debts, leaving nothing for the heirs to inherit.  

How to Minimize Debts to Simplify an Estate:

• Pay off and reduce debt during life: Financial experts tout the pay-offs of reducing debt. That fiscal responsibility allows heirs to inherit more and eases the burden of administration on a Personal Representative.
• Purchase a life insurance policy to cover expected debt:  Plan with an adviser to purchase a policy that will adequately satisfy debts and any other goals. Naming the proper beneficiary of the policy is key to whether that policy will pay off personal debts or pass directly to others. 
• Review Beneficiary Designations: Assets like retirement accounts and life insurance policies allow beneficiaries to be named so that those assets could pass outside of an estate or directly to others. Consider naming contingent beneficiaries or whether an estate should receive those funds to pay off personal debt.
• Structuring Business Debt: Structuring a business as an LLC or a corporation, in lieu of a sole proprietorship, may limit whether a decedent’s estate assets are required to satisfy business debt.
• Create an Estate Plan: Work with an attorney on developing an estate plan. In a Will or Trust, instructions can be written so that some specific gifts may pass to the heirs, allowing other assets to satisfy debts. Allocating gifts based on percentages versus a specific dollar amount is helpful in ensuring heirs may receive even a small portion of an estate.
• Consider joint ownership of assets: Sometimes, joint ownership of an asset like real estate is one way to avoid passing an asset through an estate, passing any related debt to the surviving owner.