How to Handle Taxes and Debt in Your Will

When you pass away, you will have to deal with not only your assets but also your debts through the execution of a will. A will is not the only way to resolve your estate upon death; a trust can also serve as the means of executing your final wishes. However, in the absence of a trust, your will becomes the final statement in how you wish for your assets and liabilities to be finalized and passed on. Therefore, properly providing for these steps through a legal document will protect your beneficiaries from emotional and financial stress.

Create a Legal Document

The first step to assuring your taxes and debts are resolved upon your death is creating a will that stands up to the test of the court system. You can choose to write a will on a plain piece of paper in your own home. However, with this "holographic" will, there is little assurance your document encompasses all items you need to cover, and there is no assurance it will stand up in court. Instead of going through the steps alone, use legal advice to create a document that you know follows the laws in your state.

List all Assets and Liabilities

When you work with a lawyer to create your will, you are asked to list all your assets and liabilities. This is an exhaustive process. However, if you fail to do this, the list will have to be made during the probate process after your death. Probate is expensive, and it will cause undue stress for your beneficiaries and the executor of your will. Instead, ensure you list your assets and debts in their entirety. File proper loan contracts, liens and necessary papers with your will so your executor can easily verify these items in court.

Provide Instructions for Resolving Debts

First, it is best to pass away with as little debt as possible to help your beneficiaries. In particular, pay off any outstanding taxes or legal settlements against you were possible. If you have debts, it is best to secure them with an asset at the end of your life. This way, the sale of that asset can cover the remaining balance of the debt, leaving your beneficiaries with no further obligation. If you fail to cover the outstanding balance on your debts, your estate may have to pay taxes on debts forgiven in your death. This leaves your beneficiaries with a smaller inheritance and a legal hassle.

Chose your Executor Wisely

Ultimately, your executor will be responsible to paying your debts and assuring taxes on your estate are filed and paid appropriately. This can be extremely stressful and challenging for an individual without a legal or accounting background. Choose an executor that is qualified, such as your lawyer or accountant, in order to make the process easier. Provide instructions for this individual to be paid out of the estate or prepaid while you are alive. This reduces any possibility your beneficiaries will be stuck paying your debts, your taxes or your executor after your death.