A Grave Error

Could mom give away personal valuables to stiff her credit-card lender?

Dealing with a parent's passing isn't easy even when there are no creditors lined up at the cemetery's gates. The good news is that children aren't on the hook for their dead parents' unpaid bills, says Bernard Krooks, president of the National Academy of Elder Law Attorneys. The bad news is that our debts outlive us, hanging around until the estate pays them off. Only then can the remaining assets, if any, be distributed to the heirs.

If there isn't enough cash in the estate to cover debts, the remaining assets, such as a house or a stock portfolio, are sold to pay off the creditors. In some cases, even family heirlooms could be unloaded at an estate sale.

That's why many people decide to start gifting baubles and silver candlesticks to their children before they die. But don't fall in love with that mink just yet. An act of parental devotion can be painted as one of "fraudulent conveyance" in the law's unforgiving glare. That term applies when an individual knowingly gives away assets to shirk payment on an outstanding debt. Such gifts can be claimed by aggrieved creditors. "If the creditor wants to be aggressive, it can ask (the gift recipient) to give it back," Krooks says.

In the real world this doesn't happen too often, especially if the estate owes just a few thousand dollars, acknowledges Krooks. Many credit-card companies, for example, simply won't go to the trouble. Other creditors might be less likely to go after a ring that was given away five years ago than one transferred a month before a deadbeat's death. Still, the risk is there.

Elder-law attorneys recommend publishing a death notice in a newspaper advising creditors to file claims against the estate within a certain time frame. The required waiting period usually lasts four to seven months, depending on the state.

If there's a known creditor, an executor of the estate should contact that company. If the estate doesn't have enough money to pay the debt, the executor should try to work out a settlement protecting family heirlooms.

In many cases, creditors are willing to settle for less if the estate is relatively small and there are other creditors competing for those same assets. For example, an executor might offer the credit-card company the proceeds of a $3,000 IRA to settle the debt. Something is better than nothing, right? Another bit of advice: Negotiate with all of the creditors at once. They'll often compromise to jump to the head of the line, says Krooks.

Finally, fight the urge to dole out the inheritance — even to a son who says he really needs the money — until creditors have used up their time to make a claim. Here's why. Just because an executor knows mom has $6,000 in credit-card debt doesn't mean that she couldn't owe even more to another company. And if the money or other assets are given away before creditors are satisfied, the executor becomes personally responsible for making good on those obligations.