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How to Avoid Taking On the Medical Debts of Parents or other Relatives in 2021

This month ABC 15 shared a story about a Valley man who lost 10 family members to COVID 19. Soon after, the medical bills started rolling from losing his dad and his mom’s subsequent hospitalization. The debt is crushing. And he is not alone. ABC says that “hundreds of people have shared their story about dealing with medical bills after receiving COVID-related treatment at hospitals in a public Facebook group with over 150,000 people.

 

Though he is not obligated under the law, the man has assumed his parent’s debt to assist his mother, whose battle with COVID has left her “not the same.” Reading the article got me thinking about how many folks may not realize how their estate plans, by design, could  obligate them to family debts. Here is some quick information, but as always, every circumstance is unique and should be evaluated by a qualified estate planning attorney.

 

Administer the Estate Properly Before Distribution to Beneficiaries

The best way to avoid taking on the debts of a parent or other relative is to administer the estate properly BEFORE distributing the estate to beneficiaries. Put plainly, that means that any money owed to creditors should be dealt with FIRST before giving out any money/property to anyone inheriting. This usually does not include spouses because that is a more complicated matter closely tied to community property and other laws. Here are some basic tips:

 

Take time to ascertain the true obligations of the estate:

  • Make a list of all “known” creditors (description with dates and amount claimed). Hint: If you can find the creditor on a credit report as an open account, or if you saw a recent statement in the mail or email, or if it is a recorded lien on an asset (whether you actually knew about it or not), they are “known” creditors, even if you think those claims are illegitimate.
  • Publish a notice to “unknown” creditors – if done properly, any potential claimant that tries to collect after four months of publication will be out of luck when it comes to seeking payment. Any claim that comes in during that period (before it expires) is now a “known” creditor and should be added to the list of known creditors. (This is why I recommend leaving updated lists of accounts/assets/property. See this article here.)

 

Pay Legitimate Creditors and Formally Deny Illegitimate Creditors

This step is important, because if you pay the wrong creditors in the wrong order and the estate becomes insolvent (runs out of money), the personal representative can be liable for the unpaid debts that were supposed to be paid first. On the other hand, if this step is done properly, many creditors may negotiate. Also, formally denying an illegitimate creditor in the proper manner will bar that claim if the creditor doesn’t take the proper legal steps within 60 days of the denial. The personal representative should obtain confirmation from any paid creditor (especially ones that were paid a lower, negotiated amount).

 

 

The above steps can take some time because many estates will also have tax obligations which might not be fully ascertainable until tax statements (1099’s etc.) are sent out at the beginning of the year following death. As you may have guessed, tax or other liabilities owed to the government cannot be denied and are not subject to the same four-month notice statute.

 

 

If the above steps aren’t done correctly, then creditors can go after any of the following persons for payment: personal representative, successor trustee, and any beneficiary who received assets from the estate (even if that asset was received by way of beneficiary designation). Please reach out if I can be of service in any way.

 

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