Some bequests that ‘look’ equal really aren’t

debt 300x194When you’re writing a will and deciding how to divide your assets among multiple heirs, it’s very important to consider who will pay your estate’s debts out of their share. Two bequests that look equal in theory might be very different in practice once debts are taken into account.

Generally, when a person dies, his or her outstanding debts must be paid out of “probate assets.” This means the assets that pass to someone according to the person’s will. But many assets don’t pass via a will. For instance, jointly held bank accounts, jointly owned real estate, IRA and 401(k) accounts, life insurance proceeds, and “transfer on death” brokerage accounts might all pass to someone outside of a will, and thus not count as probate assets.

So if you have three children, and one gets your retirement accounts, one gets your life insurance proceeds, and the third gets everything else, the third child will be saddled with paying 100% of your debts. These could include taxes, a mortgage, outstanding credit card bills, personal loans, condo fees, and many other items.

Of course, your children or other heirs might be very cooperative and agree to share the burden of your debts. But it’s usually much easier for everyone if you take debts into account in your estate planning, and divide your assets accordingly.