Dear Dr. Don,
My wife and I are 83. We own our small home, with no mortgage. This is our only asset. When we die, will our children be responsible for our credit card debt?
— Troubled Tom
Before I tackle your good question directly, I’d like to raise a couple of questions for you and our readers. Are the balances fairly high on your credit cards? If there’s a lot of debt involved, you would be leaving behind an unfortunate legacy and burden on your estate.
Of course, credit card companies track balances and spending, and you’ll see your interest rates jump to levels such as nearly 24% and even higher, making the balances and minimum payments snowball to the point where you can’t handle paying your credit cards while you’re both alive.
It doesn’t get better after 1 of you dies and you go from 2 Social Security checks to just 1.
Plastic, death and debt
Credit cards represent unsecured debt that is the responsibility of the cards’ account owner or owners. For example, if your wife was an authorized user on a credit card and not a joint account owner, should you die before her, she doesn’t have to pay the credit card balance. She also can’t use the card after you die.
At issue is whether you live in a community property state. In general, debts acquired during marriage in a community property state are considered joint, even if only 1 spouse is on the account. The community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Couples can elect community property status in Alaska.
A check of assets
You say your only asset is your home. Then, if you own the home as joint tenants with rights of survivorship, it passes to the surviving spouse outside of the probate process. If the decedent (person who died) was the sole debtor, he or she has no interest in the property after death, putting it beyond the reach of the credit card companies. Married couples have an alternative to joint tenancy. They can own the home in tenancy “by the entirety.” By doing that, the house goes to the surviving spouse and should also be protected from the decedent’s creditors. If you’re not sure how you own the home, find out.
If the credit cards are jointly held, you both owe the balances, and the death of 1 of you doesn’t eliminate the obligation of the surviving spouse to repay these balances. At the death of the surviving spouse, the credit card company can make a claim on the estate for legal debts.
Call in a professional?
It might make sense to consider estate-planning moves involving your children’s ownership of the property. Along with that, there are implications for Medicaid eligibility. These are things to take up with an elder-law or estate-planning attorney.
How to handle debt collectors if you’re the surviving spouse and don’t owe the money yourself is another issue for another day.
Ask the adviser
To ask a question of Dr. Don, go to the “Ask the Experts” page and select one of these topics: “Financing a home,” “Saving & Investing” or “Money.” Read more Dr. Don columns for additional personal finance advice.