When most of us think about writing a will, it’s our assets we have in mind, and which of our survivors will get what.
 
But sometimes an estate must address the balance sheet’s negative side, too. That’s why I urge all my clients to think about their debts when drafting a will.
 
Sometimes this isn’t a big deal. That’s true of most of our clients. If you owe only a small amount of money, these minor debts can easily be paid off from your estate’s liquid assets. Likewise, if you are leaving all or most of your estate to your spouse or dividing it evenly among just a few people, the will’s executor can decide how to retire those debts.
 
Even so, it’s always a good idea to avoid any misunderstandings or hurt feelings among your beneficiaries by spelling out your intentions. That includes not just how each debt will be addressed, but who will be responsible for it and what assets should be used.
 
One important fact is that, except for secured loans, debt can’t be inherited. (I’ll get to those secured debts in a moment.) So even in the worst cases, your heirs won’t end up in the hole. But they might end up getting little or nothing if the estate’s assets must be used to repay the obligations you leave behind.
 
I recently heard about an interesting historical example of this. An associate who has been researching his family’s history discovered a will a wealthy ancestor wrote almost 200 years ago.
Although he made elaborate provisions for how his vast estates and other property would be divided among his widow and children, one paragraph stood out painfully: “As to my debts, the magnitude of which fills me with apprehension,” he directed his executors to sell specified lands to retire those obligations, and “at least to assist and advise my wife in the arduous undertaking of rescuing my family from ruin.” (I miss the days when wills had such flowery language!)
 
As it turned out, the debts proved so overwhelming that the executors could not save the family “from ruin.” They had to sell off nearly all the man’s estate to satisfy his creditors. Thus, the children got nothing from their father’s fortune, and had to start from scratch to get their education and earn their own livings.
 
Some things just don’t change very much!
 
About those secured debts - these are the ones backed by a lien on property, anything from a mortgage to a car loan. In those instances, the collateral can be distributed to heirs without having to pay off the loan. But the new owner then owes the balance on the mortgage or other note. So, if the owner leaves a house worth $500,000 to a child, and the mortgage still has a $250,000 balance, that child would have a choice to either continue to pay on the existing mortgage or use other assets (maybe the cash portion of an inheritance) to pay it off, or sell the house and retire the debt.
 
If you think an heir might have trouble managing the debt on this sort of inherited property, your will could also leave specific assets to be used to pay off that debt. This is a prime example of how thinking ahead can help you accomplish what you wish. In other words, leave your heirs with a benefit, not a burden.
 
All other debts—meaning those not backed by collateral—must be paid first from the estate’s assets. Examples would include credit card balances, personal lines of credit, margin accounts with brokers, and certain types of business loans. Outstanding medical bills fall into this category, too.
 
Instead of leaving it to the executor to figure out what’s owed, and which assets to use in paying off the debts, I’m constantly preaching the importance of spelling out the details. For instance, you might have something special - say a collection of valuable gold coins - that you want a particular heir to get, as well as a money market account. By instructing the executor to use that boring but valuable source of cash to retire your outstanding loans, you help ensure the collectibles don’t get sold before the heir ever sees them.
 
By law, an estate’s assets have to be used in a specific order. In general terms, it’s like this: first, the costs of probate, the funeral and burial; next, any estate tax and other back taxes; then all the unsecured debts; and finally, all bequests to heirs and other beneficiaries. It’s a good idea to give those beneficiaries a realistic idea of what they stand to get. In other words, subtract what’s owed before writing specific promises into the will.
 
For example, if your estate is worth $4 million and you have four heirs, you might write the will to say each gets a quarter. But instead of collecting $1 million each, those beneficiaries might actually inherit significantly less. If outstanding debts and tax obligations take $1 million from the estate, then those four heirs will divide up just $3 million, or $750,000 each. Now, that’s still a very nice inheritance, but it’s best not to raise unrealistic expectations, only to force the poor executor to dash them.
 
Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely. 

Susan Willett is the director of trust services and oversees all aspects of trust administration for Old North State Trust, LLC. Old North State Trust, a North Carolina chartered trust company, provides: asset management services; income, estate and trust tax consulting; retirement planning and administration; and trustee and estate services to both individuals and businesses. Old North State Trust professionals have many years of experience and for over a decade have assisted clients in identifying and reaching their financial goals. For more information, visit www.oldnorthstatetrust.com or call 910-399-5470.