BARRISTER BITS: How to Protect Heirs from Inheriting Debt

DEAR READERS: Do you have a legal question that is burning on your mind?   If so, please email me.  Names will remain confidential.  Every inquiry may not be published, although we will publish as many as possible.   This Q & A Legal Column is intended as a community service to discuss general legal principles and does not create an attorney-client relationship. 

Q:  I am “underwater” on my house loan by about $60,000 but do have about $120,000 in my IRA (and no other possessions worth much value).  At 55 years old, should I have a will so my grown kids are protected and do not inherit any debt?

                                                            Signed:  Lance Landowner

A:  Dear Lance: 

First, let me congratulate you for at least thinking about the inevitable—Death.  The next inevitable is “Taxes”…are you ready? 

It is not an easy task to think, let alone act, to assure that our affairs are “in order”.  As John Galsworthy quipped, “The beginnings and endings of all human undertakings are untidy”.  Good for you for rolling up your sleeves to deal with the untidy aspects of living and dying. 

Here’s how it works in California.  Generally, if a person dies without a Will and Living Trust and they own real estate (i.e. a home or land), and the value of the real estate is over $20,000, then a probate proceeding must be opened in the county where the deceased lived.   Now, as with any law, there are exceptions.  If the home/land is owned in joint tenancy with right of survivorship or the owners are married, probate may be avoided.  You did not mention if you were married.  If you are, you may be able to avoid probate depending on how the title to the home is held.   

Probate can get messy.  Real messy.  It is a long and costly legal process.  Read between the lines—your heirs will spend money on lawyers and court costs, and your estate may take years to settle.  One sure way to avoid probate is to have a Will and a Living Trust.

One quick and easy option is to make sure your heirs are named as beneficiaries on your IRA, and then when you pass, your heirs may be able to “walk away” from the home.  I am not an estate-planning attorney or a collection attorney, but my basic understanding is that generally your heirs cannot inherit debt unless they have some stake in it (like they co-signed on a credit card or on the mortgage).  BTW, speaking of debts haunting your heirs from the grave, check out the Federal Trade Commission’s new 33-page “Statement of Policy”, issued on July 20, 2011, which addresses what debt collectors can and cannot do when a person dies.  www.ftc.gov/opa/2011/07/fdcpa.shtm.

A better option, though, is to create a Will and a Living Trust to avoid probate.  Your home may be “underwater” now, but when the market recovers (and it will, hopefully), your home likely will be your biggest asset.  Why wouldn’t you want to make sure it passes to your loved ones, as described in your Will and Living Trust?  

The best option is to consult with an estate-planning attorney, who can advise you in more detail about the process.  Ask your friends and co-workers if they know a reliable estate-planning attorney.  Interview at least two attorneys to decide who is the best fit for you.  My top two “favs” in Sonoma County are Bridget Mackay in Petaluma (769-9975) and Brian Rondon in Santa Rosa (541-7250). 

The real trick is for the living to take every action NOW to avoid probate by having a Will and Living Trust.  Two tips for the living on how to avoid probate:

Tip #1:  Find, catalog, and review all your “contract-based accounts” (bank accounts, life insurance policies, retirement accounts, etc.) and make sure you have an updated beneficiary named on those accounts; and 

Tip #2:  Any remaining assets that do not have a beneficiary should be put in a Living Trust.  You’ll need a reliable estate-planning attorney to help with this one.

Debra A. Newby is a resident of Monte Rio and has practiced law for 30 years.  She is a member of the California, Texas and Sonoma County Bar Associations.  She maintains an active law office in Santa Rosa and emphasizes personal injury law (bicycle/motorcycle/motor vehicle accidents, dog bites, trip and falls, etc.) and expungements (clearing criminal records).  Debra can be reached via email (debra@newbylawoffice.com), phone (707-526-7200), fax (526-7202) or pony express (930 Mendocino Avenue, Suite 101; Santa Rosa, 95401).