Two Things You Should Know About Forgiving Debts In Your Will
Posted on: 14 July 2016Share
When you pass away, a debt someone owes you isn't automatically cancelled. In fact, the executor of your estate will be tasked with collecting the money from the debtor until the loan is paid off. If you decide you want the person's liability for the debt to end when you leave this mortal coil, you'll have to essentially cancel the debt in your will. However, there are two important things you must know to ensure your wishes are respected when you die.
Your Estate Must Be Solvent
No matter how emphatic you may be in your will, your executor cannot follow your directive to forgive debts if your estate is insolvent. If you don't have enough assets to cover your debts, the executor is legally obligated to collect the cash owed so he or she can pay your creditors. In fact, your creditors are typically paid before any of your assets are doled out to any of the beneficiaries of your estate.
If you expect to pass away owing more money than you have assets to cover, the only way to release a person from a debt owed to you is to do it before you die. Otherwise, you need to take measures to ensure you estate will at least break even if you want to ensure your wish to forgive debts is honored.
You Can't Forgive Your Spouse's Half of the Debt
The other thing you need to be aware of is you cannot forgive your spouse's half of the debt if it is an asset that's owned by you and your spouse. Generally, assets acquired during the marriage or purchased using co-mingled funds are classified as community property. If you loaned someone money using cash in a joint checking account, for instance, then your spouse has an interest in the loan.
As noted previously, you can only forgive your half of the loan. The person would still be responsible for paying your spouse his or her portion unless your spouse gives permission to you to forgive the entire amount. If your spouse agrees to cancel his or her interest in the debt, you'll need to draw up an agreement to that effect and include it with your estate planning paperwork.
Forgiving debts in your will is a noble act that can provide relief to someone who may be struggling financially. Work with an attorney to ensure things go according to plan after you pass away. Click here to learn more.