Elderly couple estate planning with debt

How To Handle Your Estate Planning When A Large Amount of Debt Is Involved

When you have a large debt, estate planning requires careful consideration to ensure your assets are distributed according to your wishes while addressing any outstanding liabilities. The process involves evaluating the size and nature of your debt, understanding how debts are settled from an estate, and taking steps to protect your assets for your beneficiaries. It is essential to work with legal and financial professionals to create a comprehensive estate plan that accounts for your debts and their impact on your estate, minimizes the burden on your heirs, and complies with state and federal laws. This approach helps ensure that your estate is managed efficiently and your loved ones are cared for after your passing.

How To Approach Planning To Account For The Debt Involved

  • Understand Pennsylvania’s Laws: Estate planning laws vary by state, so it is essential to understand the specific laws in Pennsylvania, which include knowing about probate processes, state tax implications, and laws regarding wills, trusts, and estate administration. Consulting with a Pennsylvania estate planning attorney is crucial.
  • Inventory Your Assets and Debts: You should first make a list of all of your assets, including real estate, bank accounts, investments, insurance policies, and personal property. Then, list all your debts, such as mortgages, car loans, credit card debts, and personal loans. This comprehensive inventory will be the foundation of your estate plan.
  •  Consider How The Estate Will Handle Debts After Death: In Pennsylvania, as in most states, your estate pays off your debts before your heirs receive any assets. If your assets cannot cover your debts, your estate may be declared insolvent. Understanding this will help you plan accordingly.
  • Create a Will: A will is crucial as it dictates how to distribute your assets after settling debts. Without a will, your assets will be distributed according to Pennsylvania’s intestacy laws, which may not match your wishes. In your will, you can name an executor who will manage your estate, including debt repayment.
  • Consider Setting up a Trust: A trust can help manage your assets both during your lifetime and after your death. Certain types of trusts can offer advantages for debt management and asset protection. For example, a living trust can help avoid probate, which might expedite the distribution of assets to your beneficiaries. However, remember that revocable trusts do not protect assets from creditors.
  • Review Beneficiary Designations: Assets like life insurance policies and retirement accounts usually pass to named beneficiaries outside the will. Ensure these designations are up-to-date and reflect your current wishes. Remember that creditors typically can only access these assets if they are named as beneficiaries or required by state laws.
  •  Understand the Role of Life Insurance: Life insurance can be a strategic tool in estate planning, especially if you have significant debts. The death benefit can provide liquidity to your estate, helping pay off debts and expenses without liquidating other assets.
  •  Minimize Your Estate’s Tax Liability: While Pennsylvania does not have an estate tax, it does have an inheritance tax. An inheritance tax is levied on the deceased’s heirs, while the deceased’s estate pays estate taxes. Both have the purpose of assessing taxes on property transfer at death.  The distinction is that with Pennsylvania’s inheritance tax, the heirs are responsible for the taxes on the assets transferred to them upon the decedent’s passing. In addition, planning strategies, such as gifting within legal limits, can help minimize your estate’s tax liability, potentially leaving more assets available to settle debts and distribute to your heirs.
  • Keep Your Estate Plan Updated: Regularly review and update your estate plan, especially after significant life events or changes in your financial situation. This ensures that your plan remains aligned with your current circumstances and wishes.


Given the complexities involved, especially when the decedent has large debts that are part of the estate, it is advisable to consult an experienced estate planning attorney. Jones Gregg Creehan & Gerace can help you navigate Pennsylvania’s estate planning and tax laws. Since estate planning is a customized process, what works best for one person may not be suitable for another. Tailoring your estate planning strategies to your unique situation, especially when dealing with significant debts, is essential. Contact our firm for an initial consultation to see how we can assist you with your estate planning needs.