Protect your Estate from your Debts
By Gary Parsons
It has been said that when Alexander Hamilton, the father of the modern banking, passed away he left his family $55,000 in debts. That amount, while seemingly manageable, would be the equivalent of over one-million dollars today. Despite all his financial acumen and experience, his family was left to raise the monies in an attempt to extinguish his debts or risk losing their home. An important lesson can be learned from his misfortune.
Dying deep in debt may sound like a good idea. After all, if you leave this world having spent more money than you earned, you won that aspect of the game of life. And, if the stars align that can be one way to look at it.
Unfortunately, more often the payment of the debts upon death can harm those you leave behind. The financial, emotional and legal ramifications of extinguishing debts upon death can be complex.
When someone dies with outstanding debts, the balance is paid out of their estate. Your estate consists of the money and property you are leaving behind. If you have a will assigning portions of your estate to various beneficiaries, the sum of those portions will be net of any debts payable.
This can become particularly complicated in the event that a home is jointly owned and may hinge on the way that ownership was structured. Regardless, it can take a great deal of time and money to sort out the mess.
Fortunately, there are some pretty simple ways to manage this process. First and foremost, there is the novel idea of not incurring any debts. While I am not discouraging the responsible use of credit, accumulating frivolous and substantial debts is neither healthy for your financial situation in life nor in death.
Secondly, you can manage the risk through life insurance. We have often discussed the benefits of term life insurance in that the premiums are cheap relative to permanent insurance and the term can cease at a time when you no longer have financial dependents and your life insurance needs have waned.
The downside is that it is, by definition, a term. When that term expires, there is no more coverage. If you hope to pay your final debts out of life insurance rather than your estate, it is important to ensure that you have a permanent life insurance policy or that your term policy isn’t set to expire too soon.
Alexander Hamilton went out in a duel, which should have provided him with the foresight to plan for at least the potential for death. His failure to plan left his scrambling for other solutions. If you’re not going to leave your surviving spouse and/or family money, at least don’t leave them a hassle.
This article is meant to be general in nature and is not intended, nor should it be construed as personal financial advice. Waddell & Reed does not offer tax or legal advice. The services of an appropriate professional should be sought regarding your individual situation. Insurance products are offered through insurance companies with which Waddell & Reed has sales arrangements.
Gary Parsons is a Financial Advisor with Waddell & Reed, Inc. Member SIPC. He can be reached at 850.894.9950. (01/17)