Our New Mexico Attorneys frequently address the legal issues associated with passing one’s assets to beneficiaries when they die. There is a related issue that is not widely discussed but often asked about that focuses on the opposite side of the spectrum. Many people ask about whether they can be liable for the debts of a loved one. While creditors cannot generally enforce a debt owed by a decedent against his or her surviving family, this statement is a bit of an oversimplification, so we have provided a more nuanced answer to this question.
When a party passes away without a trust in place, the distribution of assets under a will require that financial obligations are satisfied before the remaining assets are distributed to beneficiaries under a will. If an individual dies while owing financial obligations, the debts must be paid by the executor (referred to as the “personal representative” in NM) according to a particular order of preference as set forth below:
- Any unpaid income taxes or estate taxes have first priority
- Secured obligations like mortgage payments and car loans have second priority position.
- Unsecured debts like credit cards, hospital bills, and similar expenses have next priority.
After these financial obligations have been satisfied, the net estate is then distributed to the beneficiaries of the decedent. If debts remain unpaid after all of the assets in the estate have been exhausted, these debts generally will remain unpaid because they cannot be enforced against the beneficiaries or other surviving family members.
There is an exception to the general rule that creditors of a decedent may not pursue family members or other beneficiaries if the net estate has a negative value. There may be debts that were joint obligations, such as when a child is a joint credit cardholder. In this situation, the passing of the decedent will not protect the surviving family member from creditors.
While there are strategies that can further protect an individual’s legacy from being taken by creditors with effective estate planning, including use of a trust or giving away assets while alive. However, these creditor protection strategies must be structured properly to avoid claims that the transfers should be reversed because the gifts were solely intended to frustrate legitimate creditor claims. A New Mexico Attorney who handles estate planning and probate issues can also advise you regarding ways to obtain creditor protection by using a living trust.
The above information is designed solely to illustrate general principles of law, and does not constitute a specific legal opinion on individual cases. We suggest that you contact experienced legal counsel for a specific opinion tailored to your individual circumstances.
If you have questions about creditor claims or other estate planning issues, our New Mexico Estate Planning Attorneys at Life Leaf Legal Group, PC offer a free consultation in our centrally located offices in Santa Fe and Albuquerque so that we can discuss your specific situation. Call us today to schedule your free consultation at (505) 856-3591 to learn about your rights and options.