When Your Parents Die Broke

By Liz Pulliam Weston

Trillions of dollars will be inherited by baby boomers and their progeny over the next 50 years.

But rising debt, spiraling medical costs and inadequate retirement savings mean that not everyone will share in the bounty. Some, like Your Money message board poster FrazzledMom, will see their parents die broke. Instead of inheriting wealth, they may inherit bills.

“When my mother died, she had about $100 in the bank, $5,000 in debt, hospital bills and a small whole-life insurance policy that had been borrowed against and was practically worthless,” FrazzledMom wrote. “I paid for most of her funeral.”

Survivors typically aren’t responsible for their parents’ debts. But they may still have to deal with aggressive collection agencies and the expense of settling the estate. They may have to scramble to take care of a surviving parent or even dependent children. The family home and other assets may have to be sold.

And somebody’s got to pay for the burial. Your Money poster rcrow has helped pay for two so far:

“My stepdad died and left my mother with bills and no life insurance. … Then my mother died three years later and left one minor child and bills … and no life insurance,” rcrow wrote. “My sister and I paid monthly payments until my mother’s funeral bill was paid off — over $5,000!!”

Dying broke isn’t that uncommon. Though the median net worth of households headed by people over 65 was close to $200,000 in 2004, the latest year for which the Federal Reserve has statistics, nearly one in seven households headed by people aged 65 to 74 was worth $10,000 or less. In the over-75 age bracket, it was slightly more than one in 10.

If your parents are among the poorer crowd, you need to know:

Your responsibilities when your parents die broke.

How insolvent estates are settled and how to deal with creditors.

What you can do now to ease the burden later.

Read on for some practical advice.

What you owe when your parents go

Children aren’t on the hook for their parents’ unsecured debts — credit cards, personal loans, medical bills — unless they had agreed to take on the responsibility, said attorney Denis Clifford, a co-author of the Nolo Press book “Plan Your Estate.” You’ll typically share liability for a debt if:

You were a co-signer on a loan. Co-signers are just as responsible for paying off a loan as the primary borrower.

You’re a joint (not an authorized) account holder. If your income and credit history were used to get the loan or credit card, you’re generally responsible for paying it off. If you were only an authorized user of a credit card, you’re not.

You abused a power of attorney or conservatorship. If you had responsibility for your parents’ finances and spent their money on yourself, you’re responsible for paying it back.

Michele in South Dakota said that’s what her mother did. The older woman drained the savings accounts of Michele’s grandparents, borrowed against her grandfather’s life insurance and racked up $20,000 on the couple’s credit cards with “frivolous spending.” Then she died.

By law, the mother’s estate was responsible for repaying the money, except Michele’s mother died in debt. Now collectors are going after her grandfather (her grandmother is also dead), but he is essentially broke and living in a nursing home.

Michele isn’t responsible for her mother’s or her grandfather’s debts, but dealing with the collectors is taking its toll.

“I am not bitter about my mom anymore. … I am sure the stress from the debt caused her heart attack. However, I am the steward of my grandfather’s money and care, so I need to manage this debt mess and continue paying his long-term health facility,” Michele wrote. “I am a little overwhelmed.”

Michele’s troubles may not be over when her grandfather dies. A growing and lucrative market for old debt — see ” ‘Zombie’ debt is hard to kill” — has led some collection agencies to pursue credit card bills even after an insolvent person dies.

One of my readers told me a collection agency insisted he had a “moral obligation” to repay his father’s debts. If this happens to you, take a moment to savor the irony of being lectured about morals by a clearly unethical collector. Then hang up.

Secured debts — loans that are attached to an asset such as a house or a car — are a different story. Those payments must be made, or the lender can take the asset. If your folks had any equity in a home or car, finding the money to make the payments may need to be a priority.

(By the way, if a surviving spouse is still living in a home, some or all of the equity might be exempt from creditors’ claims, depending on state law. Otherwise, the house may need to be sold to pay debts.)

Also, if you’re the executor, the person in charge of settling the estate, you have a responsibility to find and inventory all debts and assets. Tax forms, bank statements, credit card statements and checkbook entries can give you clues where to look.

Then you must notify creditors, banks, brokerage firms and others of the death. For a list of your initial tasks, read “Steps you must take when someone dies.” For a more complete list of an executor’s duties, check out a primer like “The Executor’s Guide,” another Nolo Press book, by Mary Randolph.

What you shouldn’t do, Randolph said, is rush to pay off bills until you have a solid idea of your parent’s entire financial picture.

“A mistake people make is they pay off things too quickly,” Randolph said. “A credit card bill comes in and they pay it, not realizing there won’t be enough money in the estate to pay for (higher-priority bills) like funeral expenses or medical expenses.”

Another mistake: counting on life insurance or retirement accounts to cover the debts. These assets typically have designated beneficiaries; if that’s the case, the money goes directly to those people without passing through probate or other estate-settling processes.

The beneficiaries of these accounts “walk off into the sunset,” said Pasadena, Calif., lawyer Ruth A. Phelps, a certified elder-law attorney and board member of the National Association of Elder Law Attorneys. “That money is not subject to creditors’ claims.”

How estates are settled

If there are no assets, settling a parent’s estate should be fairly simple. You’ll send letters to creditors explaining the situation and including a copy of the death certificate, and that, probably, will be that, although you may still have to deal with a random debt collector who refuses to get the message.

If your parent had some assets, just not enough to pay all the debts, your state’s probate court has a distinct list of what bills get priority. The details vary somewhat by state, but California’s list is fairly typical:

Expenses for administering the estate, which can include court costs, attorney’s fees and executor’s fees.

Mortgages, tax liens and other secured debt, to the extent that the sale of the assets can pay off the loans. Leftover debt generally drops to the bottom of the priority list.

Funeral expenses.

Expenses from the last illness, including hospital, doctor, caregiver and pharmacy bills.

A family allowance, which is typically a stipend that allows a surviving spouse and any minor children to pay essential living costs.

Wage claims by any employees.

All other debt.

Tax debt is typically considered to be among the highest-priority debts, equivalent to a lien on any property the dead person owned. Phelps handled one case in which a woman with dementia had failed to file tax returns for several years, and her entire $50,000 estate was eaten up by taxes, penalties and interest.

Also, hospitals and other caregivers may be fairly aggressive about trying to collect their share, knowing that they’re high on the priority list, Phelps said. She recommended trying to negotiate settlements with them once you’ve inventoried all the debts and available assets, particularly if your parent wasn’t fully insured.Unfortunately, the uninsured are often charged far more than insurance companies or Medicare pay for the same services.

“A doctor might charge $100 but accept $25 as full payment from an insurer,” Phelps said. “You may be able to negotiate the bills down substantially … especially if you say something like, ‘If you accept this (offer), I can send you a check today,’ and then do it.”

If there’s anything left for the credit card companies and other creditors, you’ll generally divide the remainder by the number of creditors, Phelps said.

What you can do before they die

If your folks are profligate spenders, you might want to read “Should you bail out spendthrift parents?” for advice on your options.

If you or your parents find it hard to discuss finances, Phelps recommends setting up (and probably paying for) a session with an elder-law or estate-planning attorney who can review their financial situation and offer advice. Changing beneficiaries or the title to assets, for example, could help survivors better pay bills and protect property from creditors. If your folks are insolvent and struggling to pay their bills, a bankruptcy filing could be a better option than waiting to fend off creditors after their deaths.

If nothing else, try to scope out your parents’ wishes about funeral services, keeping costs in mind. If they’d be happy with lower-cost options, like cremation, ask them to put those preferences in writing to avoid family battles later. If your parents can’t prepay their burial expenses and there likely won’t be any assets to tap, talk to your siblings about sharing the costs before the inevitable happens. Otherwise, you might find yourself entirely on the hook, since burial costs aren’t one of the bills that can be put off.

“The funeral home,” Phelps said, “is going to want to be paid.”