Elder Law Report
Elder Law Report
Protecting Your Estate: Navigating Debt Management and Planning for the Future
Hello and welcome to the Elder Law Report. My name is Brenton Begley, I'm an attorney and partner with McIntyre Elder Law, and I'm joined here today by Jane Dearwester, another attorney with our office. Hi, jane.
Jane Dearwester:Hi there.
Brenton Begley:All right, jane. As an attorney with what over 20 years of experience with handling different types of actions, including ones where debt is involved, we wanted to today talk about handling debt.
Jane Dearwester:Yes, yes, my experience, specifically before I was here with McIntyre Elder Law, was doing a lot of distressed debt litigation with regard to real estate. So in a former life I was a real estate attorney and did foreclosure defense. So in that, we're dealing with mostly the mortgage debt and there were a variety of different strategies that we use. But mortgage is not the only debt that's left over when somebody passes away or that we address as estate planning attorneys.
Brenton Begley:Right, and one big question I get now that you bring up mortgage is one of the things we hadn't planned about talking about, but I will mention it is. I get the question all the time. You know how do I handle the mortgage after someone dies? Because there's this kind of misconception. I think that you have to that either somehow you don't have to pay it or you have to pay it all at once.
Jane Dearwester:Right Yep.
Brenton Begley:Absolutely, but it's my understanding that and you can correct me if I'm wrong but the St Germain Garns Act of 1984 was federal regulation that was passed to tell banks hey, if someone dies and they owe you money and it's in regard to a mortgage where you already have the security interest to lean on their real property, you cannot force their heirs to pay it all off at once. You cannot force their heirs to assume the loan, have personal liability for the loan and guess what? You have to treat them as a successor in interest and treat them as if they are almost the primary person on the loan in regards to information and accepting payments, things like that. It's my understanding. That's the case.
Jane Dearwester:Yeah, and I saw a lot of situations, particularly after the housing crisis in the early 2000s, where people would pass away, the properties were upside down, so the properties were worth less than people owed on the mortgages. So that was a really interesting and tough time to be dealing with debt and it was very interesting the different paths that we would take to try to manage that.
Brenton Begley:Right, all right, so good. So there's that type of debt tied to a house. So point is it's like look, if you inherit a house subject to a mortgage, you can keep paying the mortgage. You don't have to get it refinanced unless you can get a better rate or it makes sense. You're trying to get the equity out of it, but you do still have to keep paying that monthly amount on the mortgage. So good to know, yes.
Brenton Begley:Debt comes up in other situations as well. With regard, to, you know, estate planning, one of the main things that we try to keep people to do, or get people to do, is to stay out of probate.
Jane Dearwester:Yes.
Brenton Begley:Now, why might we want to stay out of probate?
Jane Dearwester:Yes, I think staying out of probate the main reason is in North Carolina we're a limited recovery state, so creditors can only get to those assets that go through probate. So if you don't have any assets that go through probate, there's nothing for them to get their claws on. So that's what we're trying to get people in a position that their assets will pass outside of probate.
Brenton Begley:Right. So in avoiding probate, you avoid the opportunity for a creditor to dip into your estate, take what they're supposedly owed and then, you know, deplete your estate. That would otherwise go to your surviving spouse, which are your heirs, and this is really important because there's a legal avenue to help protect the estate and preserve it for their surviving spouse or the heir. And the main way to approach that you know legal avenue is to avoid probate. That's a that's a really big deal.
Brenton Begley:And now sometimes people have debt and they know they have debt and they know that that debt is not really going to necessarily be paid off by the time that they pass away. So you know, a lot of times what we're doing is we're planning for the inevitable the you know over 70% of people who need long-term care. We know they're going to incur medical debt somehow, but some people come to us already having debt. What strategies maybe could they use to utilize some type of maybe insurance policy, something like that, to help take care of something like that if they do have that debt and want to make sure it gets paid off?
Jane Dearwester:Yeah, I think some of the strategies we've talked about are life insurance, are also using a trust. That's part of the reason we encourage trust in certain circumstances, because that's going to be an extra layer of protection from creditors and it's important to point out. With regard to debts between spouses, in North Carolina, again, we've got this old fashioned it's called the doctrine of necessaries that says when you pass away, your spouse is going to be liable for that medical debt so huge and it cannot be contracted away, it can't be waived, so you can't get around it.
Jane Dearwester:In other words even by using a trust not by anything that I know of there's no way to get around it. So you've got to plan for that and also this kind of comes into the idea when you're going through a divorce or potentially a bankruptcy, navigating those types of debts as well, either with your spouse or, if it's just you, by yourself. But I think using some life insurance for that purpose is a good idea, and so having a trust in place.
Brenton Begley:Yeah, you bring up a really really good point. So medical debt, unlike any other type of debt North Carolina, is inherited by the surviving spouse, so you become personally liable for your spouse's medical debt. Okay, that's a doctrine and that's a series. So if I have a life insurance policy and that life insurance policy is otherwise not going to be subject to creditor claims, because life insurance is number one protected by the north carolina constitution as an exempt asset from creditors, um, if it's life insurance is set up correctly, okay, there's some, there's some parameters there, um, but the other thing is is that that that life insurance as well is going to avoid probate. So, again, practically speaking, outside the reach of, otherwise outside the reach of creditors. But there may be debt that you know, even though they can make a claim against my estate and get paid, well, you know they're going to go after my surviving spouse for that. So maybe, with that life insurance policy, or if I'm looking to buy life insurance, I'm setting that up not necessarily to just, you know, pay off any sort of debt, right, because I'm already done some estate planning to protect myself. But that debt that I know is not going to go away when I die. Okay, and I can utilize the life insurance for that. Or you know what? I can utilize that life insurance for a debt that's otherwise not going to be dischargeable and is tied to an asset that I'm leaving behind. So, you know, maybe a life insurance policy would be a good thing to use for a mortgage on property, something like that, if someone's going to inherit it. All good things to think about when planning for the future.
Brenton Begley:Or the inevitable needing long-term care. And that's another one where the debt comes in, where you incur medical debt or Medicaid pays for you and, by the way, medicaid they tally it up, it's a debt too, but it's Medicaid, a state recovery. They can't come after you for that debt during your life. Okay, they have to only go after your estate. And that's again where avoiding probate is so important, because, as Jane said, we're a limited recovery state where a creditor can only go after those assets through that probate process. So there you go. You know, I think that this has been a productive conversation. Really, what we're wanting to do is orient folks to say, okay, well, how do I plan to maybe figure out how to get my loved ones out from the mantle of debt if I incur any in the future, or if I've already incurred some now, and it's really, really, really important to remember that doctrine and necessities that you raised, that, hey, you know it may not be your debt, but it might be your debt in the future, right.
Jane Dearwester:Yeah, and then it's a whole another topic to talk about this in the context of a business if you're a small business owner or medium-large business owner to talk about estate planning with regard to business succession planning and business debts and how are those going to be handled when one of the business owners passes away. We could do another whole topic. Talk on that one.
Brenton Begley:Right, I'm glad you brought that up because business debts are important. Obviously, you have multiple types of debts debts that are tied to some type of contractual agreement ongoing contractual agreement where you know you're providing money for services, something like that, right? So you know, for example, we have payroll every month. You know every week that we have to satisfy as a business, we have certain obligations to pay vendors as a business, and then you have lines of credit and actual debt out there as a business, right? So those things are important to think about when you're doing that, structuring that succession planning.
Brenton Begley:Who's going to take over the business? Who can actually jump in and figure this out? And what do they know about my business? And is my business poised to be inherited, right? Do I have a key man life insurance policy if I die? Do I have any other types of insurance policies out there that are going to pay off the business? Right? Anything that it's owed, or pay off what the business owes itself? You know, is there going to be a stock purchase from one of the existing business owners upon my death? That sort of thing? There's many ways to structure this so that inheriting a business is not a burden.
Jane Dearwester:Yeah, we deal with a lot of closely held family businesses and in my experience the majority of those businesses have zero succession planning in place, because we're all brothers, you know, we're all related, and nobody ever prioritizes or plans it until something happens or somebody passes away unexpectedly. So getting ahead of that is in everyone's best interest for the best interest of the surviving owners, for the company itself, for all the employees. We've seen some very unfortunate situations in small, medium-sized businesses that did not have a plan in place. So very important in your personal life, but also very important if you're a business owner.
Brenton Begley:Right and worst case scenario. If you do have an estate that is going through probate, you're standing to inherit from that estate and there are debts. There's ways to figure that out. We try to keep people away from that worst case scenario. But obviously if you find yourself in the scenario where you are facing a situation where there is significant debt and you're trying to get out from that mantle, it's important to contact an attorney that knows what they're doing so that they can help guide you, help negotiate or otherwise figure out a way around having to deal with that burden. It can be heavy on your shoulders for sure.
Jane Dearwester:Yeah, and I guess, with my experience with debt, what I would like to put out there to everyone listening is that you know Paying off debt is always negotiable. So even if you don't have $100,000 for $100,000 debt, offer them $10,000 and see what happens. So it's always negotiable. They'd always rather have something than nothing and especially if you're on the brink of bankruptcy and other issues that are going on you very well, could you know?
Brenton Begley:how hard it is to collect on a debt If you're a creditor. If I'm a creditor and I'm thinking, okay, I have all of these people that owe me money and I'm gonna have to sue every one of these people, and what's gonna happen when I sue them? Am I gonna get a judgment against them? Do they have anything of value that I can put a judgment against? Or are they judgment proof by the very fact that they don't own any assets?
Jane Dearwester:There's power in being broke.
Brenton Begley:There's power in not having any money that's for sure, and so, if you know that, you can come at it in the way that not in a snarky way, but in just a truthful way like, hey, I don't have any assets, I don't have a way to pay you, all I have is this this is what I'm willing to give you, and someone who is reasonable and has ability to do a decent cost benefit analysis, they're probably going to negotiate with you and even if they sell off that debt because a creditor can do that, if you owe a creditor, they can sell it to somebody else who's going to come after you. That person, that entity, wherever they sell it to, is also going to be willing to negotiate. Okay, because they just they're in the hole, right, they just bought the debt. They're going to want to get at least break even, or a little bit more than even, and Lord knows, they probably bought that debt for pennies on the dollar.
Brenton Begley:All good things Well. Thank you, janeane. This has been a very productive conversation. If you all have questions about estate planning how to plan ahead to get away from your loved ones having to deal with something like this the headache of debt, and having to negotiate and go through the turmoil of figuring out what assets are subject to it, what process, process we're in that sort of thing or if you find yourself in that situation, give us a call. We offer a free consultation to anybody who wants to know how to plan ahead or how to solve their problems. Okay, so that's what we do.
Brenton Begley:So give us a call 704-259-7040 or visit our website mcldlawcom for a free consultation. Thanks again, jane.
Jane Dearwester:Cheers, bye.