No House, No 401k, No Will: Estate Planning When You’re in Debt
There were only 3 pieces, why was this so difficult?
HEY MILLENNIALS! Quit doomscrolling for a minute and let me explain why you need estate planning even if you think all you have is debt. I promise I’ll piece it together like the Shrine of the Silver Monkey.
Does Debt Die With You?
“I have nothing, nothing, nothing…” - Whitney Houston
Let’s start with the biggest misconception about estate planning: it’s not just for people with stuff to leave behind. You don’t need to have a palatial estate and a house in the Hamptons to plan ahead for the future. In fact, one of the biggest things people leave behind isn’t something you even want in the first place - debt. Debt doesn’t disappear when you die, but who deals with it, and how, absolutely depends upon whether or not you planned for it.
To further clarify, lots of people simply think “my debt dies with me”. That’s not entirely true. Debt doesn’t usually transfer to your heirs (with two major exceptions: spouses and co-signers - if your parents co-signed your student loan debts, they’ll be responsible for continuing payments). However, it’s important to note that debts DO get paid out of your estate before anyone inherits anything, assuming there’s even an estate to speak of. Let’s break down the debts by type and examine whether or not your heirs will have to deal with them.
Federal student loans - these are discharged at death once the proof of death is submitted.
Private student loans - these depend upon the lender and whether or not there is a co-signer. THIS is the big one that you’ll need to plan for, most likely.
Credit cards - these are typically paid from estate assets, and are generally not inherited directly (again, unless there’s a spouse or co-signer).
Medical debt - this is handled at the estate level, and is state dependent. In New Jersey, the filial responsibility law could force adult children to pay for a parent’s medical care or nursing home costs if the parent is unable to pay. This doesn’t apply in every circumstance, but millennials could be required to pay their parent’s long-term care bills. (If you’re one of the 27% of Americans who are no-contact with their parents, you’ll likely be off the hook.) If you receive a letter from a care facility about this, contact an estate planning attorney for further assistance.
Mortgages or co-signed loans - someone will have to keep paying or the asset will get sold. If you & your spouse co-own a home and you die, they’re stuck with the monthly mortgage payment on their own, and now that starter home becomes a prison sentence with amortized interest.
What Counts as an Asset (Even When You’re Broke)
Biggie could have passed on his game collection to his heirs. Do you think he was more of a Street Fighter guy or Mortal Kombat?
“Super Nintendo, Sega Genesis, when I was dead broke, man, I couldn’t picture this…” - Notorious B.I.G.
Let’s also reframe what “no assets” really means, even if you feel broke. The following things are assets that contribute to your overall estate:
Life insurance - many jobs provide a limited life insurance policy with a payout that needs a named beneficiary.
Vehicle - even if your 2019 Corolla with 140k miles isn’t paid off, it still counts.
Retirement accounts - if you have a pension or a 401(k), regardless of the size, it’s still an asset.
Digital assets - crypto, any monetized content, or domain names for a website. Even your Steam library counts, and you don’t want all those hours you spent in the Sims to go to waste, do you?
Gig work income - your DoorDash money isn’t everything, but it’s not nothing.
Future assets - inheritance from your parents, any legal settlements or potential settlements in progress.
The point is, even a “broke” 30 year old usually has something that needs a designated person attached to it. That’s the difference between your stuff going where you decide and your stuff going wherever the probate court decides to send it.
The Documents That Actually Matter
“So tell me whatcha want, whatcha really really want…” - Spice Girls
Get a healthcare proxy set up before all you can say is zig-a-zig-ah.
In addition, estate planning is more than just covering financial assets. These documents could potentially matter more than a will if you have debt, not wealth:
Beneficiary designations - the named beneficiary of a life insurance policy or retirement account is often more impactful than a will itself, especially when those benefits pass directly to the named person outside of the probate process.
Healthcare proxy/power of attorney - the simple fact is we will all die one day, and naming a person to make healthcare decisions for you in the event you’re unable to is important regardless of your net worth.
A basic will for guardianship over kids or pets - even something basic will help name an executor and avoid guessing games over what you want.
Letter of intent/digital asset list - naming a digital executor is an often overlooked aspect of estate planning, but in an age where our digital footprint is orders of magnitude greater than our physical one, it’s vital to name someone to handle all of it.
So What’s Next?
“Closing time…” - Semisonic
To reiterate, if you have a co-signer, whether that’s a parent on private student loans or a partner on a joint account, your plan isn’t really about your assets, it’s about not leaving that person exposed or confused. If you’ve ever asked yourself “why bother?”, think about your loved ones who will be left to deal with the heartbreak of your death AND navigating all of these financial obstacles without a clear roadmap. The plan isn’t about what you leave behind - it’s about not leaving a mess behind. An estate planning attorney can help you set up something straightforward to provide you and your loved ones peace of mind, and it doesn’t require a mahogany desk and a six-figure invoice. Contact Anthony today to get started.