Creating an Estate Plan When Your Family Has Debt Contributed by: Emily D. Banning, Estate Planning Coordinator
It’s closing day. Imagine you’re just leaving the settlement office with the keys to your dream home. As you enjoy the tunes on the drive home you hear an ad about the importance of creating an estate plan. The voice in your head chimes in to say, I don’t need to worry about that because these shiny new house keys came along with a thirty-year mortgage. If I have debt, surely I don’t have an estate to plan for.
For Delaware residents, the best end of life estate planning tool is almost always the Revocable Living Trust. Like a Will, this estate planning document directs what happens to a person’s assets and belongings at their death but adds the benefit of avoiding probate. A benefit to using this type of trust and avoiding probate is the swiftness of closing an estate. When a person creates a Revocable Living Trust, one of the instructions they can include is for debt to be paid at their passing. This debt could be related to a mortgage, credit card bills, medical expenses, car loans, etc. Expenses that we anticipate are oftentimes thought of as debt. The trust can include direction for these as well, such as paying for the funeral services that are needed. The trust would allow these matters to be quickly settled rather than adding the complexity of a prolonged estate closing process including an eight-month allowance for creditor claims.
Another important estate planning document to consider is the Irrevocable Asset Protection Trust. This trust protects assets from the costs of long-term care, after the asset has been titled in the name of the trust for five years. Even if an asset, like a home, carries debt, this trust can protect the current and growing equity from the cost of receiving long-term care in your home or in a facility. This trust also directs what happens to a person’s assets and belongings at their death, and avoids probate, like the Revocable Living Trust. It’s common for a family to have both trusts within their estate plan.
Frequently, people forget about the importance of the estate planning documents that support us while we are living – the Power of Attorney and Advance Health Care Directive. No matter our finances or amount of debt, these documents remain imperative to allow the trusted people in our lives to make legal, financial, and medical decisions for us, if we are not able to do that for ourselves.
Don’t let debt be a reason not to create a thorough estate plan. People create estate plans to take care of the people and organizations they love. Estate plans clearly document our wishes; estate plans direct our assets and belongings; estate plans can satisfy debt; estate plans eliminate burdens from our loved ones; estate plans support us during illness or incapacity. Instead of considering debt a deterrent, consider it one more reason to have a good plan.