Anthony S. Park

You probably don’t want to burden your kids or family with your debt when you die. Here, we’ll cover the ins and outs of debt and death, including an overview of what happens to your debt when you die and how to handle an estate with debt.

We’ll also cover when heirs do not inherit debt (with some exceptions), and why debt collectors keep calling heirs. Lastly, I’ll explain how your heirs can turn the table and actually increase their inheritance.

When Heirs do NOT Inherit Debt

Generally, debt dies with borrower, and the estate will pay, if it can. When someone dies, their assets and debts all get thrown into an entity called the “Estate.”

If the Estate is positive, then the heirs will inherit the assets. For example: Your aunt died with a $100,000 house having a $30,000 mortgage, no cash, and another $30,000 in credit card debt. The executor will need to sell the house and pay off the bills, but now the heirs will inherit the $40,000 remainder.

If the Estate is negative, then the heirs get nothing. However, the heirs DO NOT owe the difference. The creditors have to eat the loss, and usually cannot come after the heirs. For example, your Grandpa rented his home and pretty much spent what he had. He then died with $5,000 in his checking account, but also with $25,000 in credit card debt and medical bills. Now, Grandpa’s estate is $20,000 negative. Do his heirs have to reach into their pockets and settle the $20,000 difference? No. Credit card companies and hospital must eat that $20,000 loss.

There are some exceptions, however:

1. Co-signers and co-borrowers on mortgage will be held responsible because they were equally responsible when they took out the loan.
2. Another example is when parents guaranteeing private student loans (you can avoid this with federal loans which don’t require co-signers).
3. Some hospitals will nudge a spouse or family to co-sign medical bills (check with your attorney before signing). This happens when your loved one is in the hospital and you want to make sure he gets the best possible care. You’re not thinking about the dollar amounts in that emotional state when the hospital administrator puts a pile of papers in front of you to sign in order to continue his care. Your first thought probably isn’t to call your lawyer, but you may be co-signing something that you don’t really have to sign.
4. Joint credit cards (between husband and wife or business partners) are another exception. Some people make themselves joint signers for convenience (allowance cards for adult kids, or retired parents). Both parties might be liable for that line of credit, which might not be your intention. FYI: This doesn’t apply to authorized users, such as employees. So, you may want to make your child an authorized user rather than a co-signer.
5. Some states (California and Texas) have community property, meaning that spouses share everything even if the asset not co-signed or joint.

Given these pretty clear rules, you may be wondering why debt collectors keep calling heirs? Debt collectors can be pretty aggressive and cold in calling the surviving family. They do it because often, it works! They can guilt or trick heirs into paying debts that the heirs never had a legal obligation to pay. It’s horrible that debt collectors take advantage of grieving, disoriented families. It’s gotten so bad that the Federal Trade Commission has made rules that debt collectors can’t mislead family members into thinking they have to pay. As with all rules, there will always be loopholes.

So, how do you turn the tables on these debt collector bad guys?

Don’t just avoid getting scammed. If you negotiate HARD enough with estate creditors, you can significantly reduce the amount you pay on the bills. As a professional executor, I’ve settled debts for as low as 33 cents on the dollar. By negotiating hard, there were tens of thousands more left for the heirs. I increased their inheritance by knowing the law and flipping the script and getting aggressive with the creditors.

Knowledge is key! Most people don’t have the information they need for successful estate administration. If you want to learn more about probate, check out my book "How Probate Works"  on Amazon

When someone passes away and you are in charge, one of the top priorities is securing the house. In order to do this, you need to start with the following five steps.

1. Take care of the lights, mail, etc. to keep criminals from thinking the house is vacant.

Use automatic lights and don’t let mail or newspapers pile up on the porch. Just think about things you might do when going on a long vacation.

2. Change the locks...maybe.

In most cases, you want to change the locks in case someone else out there has an extra key. However, if there are tenants, you cannot change the lock without a court order in New York. If you do, you could be charged with a crime. If there is a possible tenant (even your sister or cousin), don’t change the locks.

3. Winterize the home.

This can mean different things in different parts of the country. Take into consideration things like pipes freezing or bursting or snow piling up on a roof. Make sure you don’t incur any additional damage based on the weather. Probate can take a long time, so start thinking about winterizing in the beginning.

4. Set a routine to check in on the home or ask a neighbor to check in.

If you live close, you could drive by often. If not, you can ask someone to routinely check on it for you. You want to make sure that the home is in good shape and there is no criminal activity.

5. If you live in New York – tell the doorman.

There could have been a dog sitter or cleaning person who has ongoing access to the apartment. The best person to stop that (a gatekeeper) is the doorman. Let him know that your loved one has passed away and there is to be no more plant watering, dog walking, or house cleaning until someone is appointed to do that.

To learn more, read my book "How Probate Works."

America’s favorite billionaire Warren Buffet has said “All things considered, the third best investment I ever made was the purchase of my home…” We’ll compare homeownership to investing, and we need baseline assumptions to understand the comparisons.

Over a lifetime, your mortgage payments, taxes/maintenance (including amortized capital costs) will equal roughly similar housing for free-market rent. If I buy a house right now, the mortgage, taxes, and fees added up might be about the same or less than I’d pay for rent in the same area. Homes in the same area may be rented out for more than the average mortgage payment, but sometimes it’s cheaper to rent.

Housing cost nets out. Some believe that when you buy a home, you’re not only investing, but you are also getting “free housing.” This is not the case. What we’re really comparing is the down payment plus any large mortgage reduction payments vs. same amounts invested in the stock market.

Here are the four reasons that homeownership is better than investing:

1. Homeownership is More Familiar

You can touch and feel your investment. You live, eat, sleep, play, and possibly even work on this tangible investment! Compare this to stock investments, where you see a squiggly line on the screen with a green or red arrow. Even if the market crashes and the value of your house plummets, you still feel safe knowing you have somewhere to live.

2. Leverage

There is nothing else in the world like the benefits and infrastructure of mortgages. Average folks can get huge loans with standardized application processes and brokers/bankers to help you. In Korea there are no mortgages! There, you have to buy your home in cash. Oftentimes, Korean parents have to help their adult children buy homes. If you have other examples of how easy or hard it is to buy a home in other countries, please let us know.

Warren Buffet said that the 30-year fixed mortgage is “the best instrument in the world.” Not only is it easy to borrow a home loan, but there are also huge tax benefits such as deducting the interest that you paid. Not many loans let you do that. There also used to be more deductions available for SALT (state and local property tax), which we discuss in other episodes. To put this in perspective: if you have $50,000, you have possibly $600,000 to $1,000,000 in purchasing power. You can’t get this kind of multiplier in buying power with stocks.

3. Tax benefits

Owning a home means a deduction for mortgage interest and no capital gains on the first $250,000 (or $500,000 if you are married). For many people, the mortgage interest deduction makes the difference between paying a large amount of taxes vs. a reasonable amount. As mentioned above, the downside is that SALT deduction benefits have been limited.

4. Forced savings

Mortgage payments are a form of forced savings. If you are not disciplined to save, a mortgage is the way to go. Every month that you make a payment, you are also paying down debt on a huge amount of equity. With investing, you have to have discipline to save (not spend) and not to tinker, buy/sell (let the index compound and do its work!). The more a task requires willpower, the less likely you are to succeed. Having a forced system like mortgage payments can be beneficial. The temptation is not there to do something else with your mortgage payment money; you are required to pay your mortgage! The looming threat of homelessness is quite a motivator!

Learn more in my book "How to Buy Your Perfect First Home."

It is helpful to know what happens to your probate vs. non-probate assets when thinking about your estate plan or your future inheritance. Do you really know how assets transfer upon your death? You may think there is a shortcut to use in your estate planning but read below to see what really happens.

First, there are in-court and out-of-court assets. In-court means that there is a type of asset that has to go through the probate court. Probate court is an extremely specific court that every county in the country has. Their job is to make sure that assets transfer properly. They make sure that the Will is correct and real, and that the proper heirs are notified. If someone dies with a Will, it’s called the probate process. If there is no Will, it is called the intestate process. By default, anything in your name or your name alone will go through probate.

What are the advantages of probate assets?

In general, the pros are related to a legal finality.

1. By going through the probate process there are safeguards in place. The court has procedures in place to protect people who may not be able to protect themselves. For example, if you are survived by minors (children) who don’t have the maturity to look out for their own interests, the court can appoint a temporary guardian. If you are survived by an heir with special needs, there is a procedure in place to make sure their best interests are protected.
2. Probate has processes to make sure final creditors and taxes are paid. If you close the estate properly, there won’t be lingering taxes. If you follow the probate procedure, you won’t be sued later by someone who comes after the estate. There is a 7-month statute of limitations against creditors once probate has taken place. If an executor is appointed on January 1st, any creditor (including the IRS) has 7 months from January 1st to submit their bill or claim. If they don’t do it during that time, they are out of luck.
3. Probate is all in a centralized place. If someone lived and died in Manhattan, and the next living heir lives far away, he might not know where the decedent stored his/her Will. However, if he knows that the person died in Manhattan, he can contact that courthouse to see if someone set up an estate.

What are the drawbacks of probate?

The cons are generally related to dealing with a government entity.

1. Probate process is slow. It can take from 9 months to a few years, and in some cases, even longer. It is long because there is a 7-month waiting period for creditors. There is a lot of paperwork to circulate among the heirs, executor, and court. Oftentimes these forms still need to be mailed, and sometimes these documents even have to be notarized. If multiple heirs have to get papers notarized, it can cause a lot of delay and friction. The process of using paper and wet signatures is unfortunately antiquated.
2. Another drawback are costs. You’ll need to pay court fees, attorney fees, accounting fees, Executor commissions, etc. All these things added up can be tens of thousands of dollars.
3. Probate is public. If you are a celebrity or a very private person, maybe having your private affairs accessible by the public is not desirable. For example, if you are in New Jersey, you can pull up James Gandolfini’s Will because his estate went through probate. This is also true for Prince and Frank Sinatra. If public access bothers you, then you may want to consider a non-probate method when planning your estate.

Examples of Non-Probate Assets

Probate means you have to go through court. The other option is having non-probate assets. These assets are anything with a named beneficiary or a named/joint owner. One example is life insurance. A life insurance company, for example, might require the beneficiary to turn in a claim form and death certificate in order to receive the money. This is a good thing to set up so there is some cash available while doing the rest of the probate.

Other examples of non-probate accounts are IRAs, retirement accounts, 401(k)s. There are tax benefits for naming your spouse or children as beneficiaries on IRAs and 401(k)s (talk to your tax advisor!).

If you are joint owners of real estate, the survivor automatically owns the whole thing. For example, a husband and wife own a condo in Manhattan. Husband dies, and the wife immediately owns 100% of the condo.

Even bank accounts can be set up as non-probatable assets. You can add a joint owner or use another method such as ITF (in trust for, TOD (transfer on death), POD (paid on death), Totten trust, and many other options.

Trusts are also non-probate assets. These can be revocable, living trusts, or grantor trusts. They act as a wrapper that you put around your assets so that they are no longer owned by you. Rather, they are owned by a trust with its own instructions with what happens when you pass away. These are used to avoid probate court.

You Can Change Your Assets from Probate to Non-Probate Anytime

Let's’ say that I bought a house before I got married, and it is my name alone. Then I can update the deed to add my wife after we married. I can add my wife easily to a bank account, etc.

Beware: Non-Probate Assets Override Wills

This is extremely important to understand. Let’s say my wife and I have our first child and I go through all of our accounts and name the baby as the secondary beneficiary. Then we have more kids and I forget about the beneficiary designations. Now that I have a big family, I decide to have a Will drafted to leave everything to my wife. If she dies, then I leave everything to my kids. However, the Will only controls anything that comes through probate. So, those beneficiary designations naming my first child will not go through my estate. Then my other kids get nothing from those accounts, even though I named them in the Will. This happens all the time – people forget!

Making Everything Non-Probate is NOT Estate Planning

You might think that making everything non-probate will save time and money. Don’t do that. Here’s why: people forget! Your monthly bank statements do not list your beneficiaries; there are no reminders for updating! Unless you are one of the few conscientious people who remember to update all account beneficiaries, there will be something that doesn’t match your intentions when you die.

For example, Kurt was in love with Jasmine. They weren’t married, but Kurt added Jasmine as beneficiary to his savings account. Unfortunately, Kurt and Jasmine separated. Decades later, Kurt got married and had a daughter. He had a very long, fulfilling life and all the while he maintained that bank account. When he passed, his daughter was going through the estate assets and had to find out why someone named Jasmine was getting all that money!

Hopefully, my examples have been helpful to you in your estate planning or in administering a loved one’s estate. Please check out my book, “How Probate Works,” which covers this and a lot of other topics.

We’ve previously talked about the “F.I.R.E.” movement (Financial Independence and Retire Early). Most people assume that early retirement is a universally good thing. But what are some of the unexpected drawbacks of leaving the workforce early?

1. Not as Happy as You Expected

Generally, retirement makes you happy, but the increase in happiness was already priced in. It’s not like an instant happiness from winning the lottery. Retiring early is a process that you’ve been building up. Perhaps it’s better to say that the process toward early retirement may cause a gradual increase in happiness. People have said that the initial happiness of retiring early tends to fade in three to six months. As humans, we adapt to our circumstances quickly. Your way of living eventually becomes your normal.

2. Identity Crisis

Many people don’t realize how much of their identity is connected to their job and only after you leave your job do you truly realize how wound up you were in your profession. This identity crisis may last as little as three months or even up to a few years.

When people ask what you do for a living and you tell them you don't do anything, it could pull at your sense of self-worth. It’s hard to tell people that you are not working when you used to do something. You may feel like you now have a void that needs to be filled.

3. Loss of Power/Influence

This affects more of corporate America. When you work for a company, regardless of your actual salary, you may have a fancy executive title. You make decisions that have potentially million-dollar impacts. You have people reporting to you, depending on you, and seeking your permission. It is extremely hard to shift from having all of that power and influence to having none of it. Going from a job like that to fishing every day may sound heavenly, but people report that it is hard to deal with the loss of that sense of importance. When people prepare for retirement, they often think of the financial aspect, but It is important to plan for how it will impact you mentally and emotionally, too.

4. Need for New Motivation

Most of us have been working for money since we started working. Once you achieve financial independence, what now? You don’t want to be idle, but you’re not striving for the highest paying position. Losing your main source of motivation can be disorienting, but it is something you have to learn to deal with.

When someone retires, their motivation isn’t for money anymore. They need to find happiness and fulfillment in other ways. The most public example of this is Bill Gates. He made his money in Microsoft, but he’s not working on Windows anymore. He’s trying to cure malaria and solve nuclear power. Not everyone will retire and become a philanthropist, but retirement opens the opportunity to do something you love. Maybe you had a demanding work schedule that kept you from volunteering. In retirement, you now have the time to pursue those desires.

5. Living within a budget

This does not apply to everyone, but many retirees have to watch what they spend. Maybe you start declining dinner invites, forgoing expensive travel, downsizing belongings, or sell your home. For many, living on a budget is an easy decision when deciding if they would rather be back in the rat race, or forgo some things and truly be retired.

I’ve read essays from folks who have been through this. I think the F.I.R.E movement is not just about retiring early but making sure you’re set up to have resources. Retirement means changing your budget for the stage you’re in. For some, it will be a tougher adjustment than for others.

 

You can learn more in my book, “How to Invest for Retirement”

What happens if the executor dies during probate? It depends on how far along you are in the probate process.

Probate Court Process Just Started If no one has been officially appointed yet, you either restart the court process or amend your original papers. For example, Matt’s dad died and his mom hired a lawyer to start probate to appoint her as executor. But before it was finalized, she passed away. The court allowed Matt to amend his mom’s papers to name him as executor instead. This saved Matt a couple of weeks in the process, rather than starting over from scratch. What Does Administrator DBN Mean? If the executor has already been appointed, then you must ask the court to appoint a new executor. Unfortunately, getting the administrator de bonis non (dbn) swapped in is about as time consuming and complex as getting original letters. The Latin term de bonis non administratis means, “goods not yet administered.” Once appointed, the administrator dbn is substantially the same as any other executor. When Estate Is Almost Complete If the executor has already gathered the assets, completed tax returns, and only accounting is left, the court may allow the executor’s executor to close the estate. Let’s say that Matt’s mom did almost all of the work and right before her husband’s estate was done, she passed away. Matt is his mom’s executor. As his mom’s executor, he can come in and finish up the accounting as the executor of the executor. This is a niche situation that the court allows when there is almost nothing left to do for the estate. But most of the time, the court will demand that an administrator be appointed. Request your free consultation

Bitcoin is getting more mainstream every day. But new bitcoiners need to be aware of the unclaimed funds problem. Hopefully we can contribute to a solution.

How do Unclaimed Funds Work, Generally? The first level of prevention of loss is password recovery. This is not part of unclaimed funds, but for banks and other custodians. If your bank account is dormant (meaning no activity for a long time), then the bank must make attempts to contact you. If there’s no contact after several attempts, then the bank sends your money to the State to hold in the unclaimed funds department. You and your heirs can recover from the State any time. This is how banks protect their members from catastrophic loss of assets. Why Bitcoin Is Different When you own your bitcoin, you own your own keys (self-custody). If you keep your bitcoin on an exchange, there are some similarities to a regular bank account. Meaning, you have a way to recover your password and there is a similar unclaimed funds procedure as discussed above. If you are a real bitcoin enthusiast, you probably own your bitcoin. In this case, there is no one you can call to recover your password. You are responsible for it, and there are some measures you need to take to make it work. If your bitcoin wallet is dormant for years, no one will attempt to contact you. It just stays in zombie mode. Bitcoin is a public ledger, meaning we can all see how much is in a given wallet, we just don't know whose wallet it is. There are wallets sitting with huge amounts and there is no one to check on them. If you lose your keys (or fail to deliver them to your heirs), they are gone “forever”. In other words, your wallet becomes stuck with no way to get into it. How to Prevent Lost Bitcoins Since bitcoin is not governed by the unclaimed loss protocols, there is not a safety net. If you think someone knows how to manage your crypto after your death, it won't happen without leaving instructions. How do you recover your password?

Don’t share your keys. You can split up your seed phrase or add a passphrase. You can give a copy of the hardware wallet to one person and the PIN to another person.

Another option is a decentralized dead man’s switch. A dead man’s switch is a button that needs to be pressed in order to prevent something from happening. The act of pressing the button is proof that you are alive. If you fail to press the button as scheduled, then the process starts for your funds to transfer to your beneficiary. For example, the PINs, phrases, or locations of those keys will be sent to people who will combine the information to access your account. It's important to remember that it is not safe to store seed phrases anywhere online (even split up). A centralized dead man's switch with a company could go away at any given time. A decentralized dead man's switch would be some sort of open-source project that does not rely on one server or one company. A solution that preserves the ability to control your assets is decentralized and secure. For now, split hardware/pin or seed/passphrase are the best solutions we have. What are some better solutions? I would love to hear from you. What will bitcoin look like in the future? Will we have bitcoin “banks” to protect your money and provide quick easy access? How will they remain decentralized and let you keep your sovereignty over your money?

If you want to learn more about probate in general, please check out my book, “How Probate Works.” I don’t have a Bitcoin chapter yet, but you will get a sense of how the probate process applies to your Bitcoin situation.

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