Whether at a young or old age, just as we acquire assets during our lives, we accumulate some debt. Though we definitely don't want to pass debts to our heirs after death, it’s important to understand what really happens to our debts after our passing.
Will your children or other next-of-kin become responsible for paying those debts? The debts of a deceased relative do not pass on to family unless a family member is also a signatory to the debt. Where the debts are solely those of the deceased, the only source for payment is the estate, or property left after the death. If you choose to handle an estate as the executor or administrator always remember that you will take on zero debt of the decedent.
If there are sufficient assets in the estate to pay all the unsecured debt, in most instances it must be paid from the estate. Real estate or other items can be sold to raise funds to pay the debt.
If there are not sufficient funds to pay all debt, the debt can only be paid in a specific order specified by Ohio law. Note that secured debt like mortgages and car loans are not included in this list because they are not subject to any setoffs. They are paid or the property surrendered regardless of priority.
1st Priority: Administrative Costs
The first thing allowable to be paid is the cost of administration of the probate case.
This includes things like attorney fees, fiduciary fees to the executor or administrator (anywhere from 4% to 2% of the total assets,) appraisal fees, costs of the sale of property, the cost of upkeep on the decedent’s property, court costs and the cost of the probate bond.
2nd Priority: Funeral Costs
After administrative costs are paid, Ohio law allows up to $4,000 for funeral expenses and $3,000 for burial expenses.
3rd Priority: Family Allowance
Ohio law then allows up to $40,000 to be paid to the family of the decedent. Note that this family allowance can be paid to the exclusion of most other debt not listed above. So, if the deceased had large credit card debt, the family allowance is paid first.
4th Priority: Obligations to US Government
These would include income taxes, social security overpayments, federal agency loans, and veteran and federal retirement program debts.
5th Priority: Expenses of the Last Illness
If the last sickness was a very long drawn out disease, it may not qualify for this priority, however generally the last hospitalization is covered here.
6th Priority: Additional Funeral Expenses
Up to an additional $2000.
7th Priority: Expenses of Last Continuous Nursing Home Stay
This also covers a long term hospital care unit.
8th Priority: State Government Debt
Personal property taxes, Medicaid recovery debt and other state debt is included in this category.
9th Priority: Manual Labor
Up to $300 of manual labor provided for the decedent within the prior 12 months.
10th Priority: Everything Else
After the above nine categories are paid, the estate then may pay all remaining debts including credit card bills, medical debt, remaining funeral and burial expenses, personal loans and vendor invoices.
If there is not sufficient assets to satisfy all debts, they are paid in order of priority. Only after debts are paid will the beneficiaries share in the proceeds of the estate.
To avoid this priority list and the hassle of dealing with the probate court and its oversight, consider a living trust. More information on living trusts can be found here.
If you would like more information on debt after passing, and what you can do to protect your assets, we offer a free, no risk, no obligation consultation as well as estate planning services.
Contact us at Port Legal to learn more.