Generally, beneficiaries are not held legally responsible for unpaid debts held by the deceased. However, the deceased is liable for their unpaid debts, so when they die the value of their estate is used to pay their creditors. As you go through the probate process as a beneficiary, you will need to take care of a few things before the estate is settled.
When someone dies, their estate may or may not go through probate. Depending on how they have planned out their estate, some or all of the assets included in their estate may be available to pay unsettled debts. In this case, creditors must file a claim with the probate court to request payment of those debts.
There are a number of differences between probate and non-probate accounts.
A non-probate account holds funds designated for a certain purpose. For example, 401(k) and IRA accounts are non-probate accounts, meaning they are not subject to the probate process. When you open these types of accounts, you are typically asked to fill out a form that names a beneficiary and sometimes even a successor beneficiary. The funds are then transferred to the beneficiary upon death without having to go through the probate process.
Additionally, because these accounts bypass probate, they are protected from any creditor claims. In other words, if your mother dies with unpaid debts and has designated you as the beneficiary on her IRA, then those funds go directly to you. Her creditors have no legal right to claim those funds.
In contrast, any assets included in the estate which are subject to probate will also be subject to claims by the deceased’s creditors. So, to continue with our example, when your mother passes away the funds in her checking account will most likely be used to pay her unpaid debts.
In the case that there are insufficient funds in the estate to cover all of your mother’s unpaid debts, the probate court will decide which funds go to pay which debts.
The best way to protecting your inheritance from creditors’ claims is to convert as many assets as possible to non-probate accounts. Besides 401(k) and IRA accounts, other accounts which are not subject to probate include retirement accounts, life insurance policies, payable-on-death (POD) accounts and investment accounts.