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What happens if someone leaves you an inheritance and you owe them money?

by Curtis Lee | Contributor
March 22, 2023

If you owe money to someone who has left you an inheritance, you may still be legally obligated to pay off your debt to the decedent’s estate.

This could mean reducing the inheritance you receive.

In other words, your inheritance can be reduced by the amount of money you owe. But the answer in reality is often more complicated. This could be because a decedent’s right to collect money from you may not be certain. Then there’s the question of how the decedent can collect the debt.

To provide a more complete answer to this question, we need to first address the question of whether someone who has just died can legally collect a debt from you.

If you owe money to someone who just died, do you still have to pay them back?

Probably, although the precise answer to this question depends on practical considerations. In other words, “there’s the law, and there’s what people do.” Whether you pay back the debt owed to the decedent depends on at least three factors.

First, do we have a legally enforceable debt? In the context of paying back someone who just died, this issue usually takes the form of whether we have enough evidence to support the claim that you owe the decedent money.

Often, this proof will come from a handwritten document, like a formal contract and promissory note. Alternatively, it might be something informal, like a text message conversation by mobile phone or a direct message exchange on social media. Depending on the applicable state law on contracts, these informal writings may be sufficient to create a legally enforceable debt.

If your promise to pay back the decedent isn’t in writing, you could still have to pay back the money if there’s other evidence to demonstrate the existence of the debt and your agreement to pay it back.

For example, there might be witnesses who can testify to the creation of the debt. Maybe there’s a family member who heard you and the decedent discussing the terms of the debt. Alternatively, there could be circumstantial evidence of your promise to pay back the debt. Evidence might include canceled checks from you to the decedent or copies of the decedent’s bank statements showing you making regular payments for the same amount each month.

These examples won’t serve as conclusive evidence that you agreed to pay back the decedent, but taken with other forms of circumstantial evidence, they could be enough for a court to agree with the decedent’s estate that you must pay back the claimed debt.

Second, assuming we have a legally enforceable debt, does the decedent’s estate wish to enforce it? This might seem like a silly question, but sometimes taking advantage of a legal right is not worth the trouble.

For instance, the decedent handling the executor’s estate might be swamped with work relating to the probating of the estate that’s worth tens of millions of dollars. If your debt to the decedent is for $500 and memorialized on a napkin that only you and the executor know about, they might be inclined to just let the right to collect the $500 from you disappear.

Or maybe the debt is more substantial, say $50,000. But you contest the validity of this debt and have several strong legal arguments to support your position. In this situation, the executor may not feel it’s not worth the time and money to litigate this legal disagreement. So they might be willing to reach some sort of settlement with you.

Another reason why the decedent’s estate may not want to collect a debt from you is because of family dynamics. You might even be willing and able to pay back the debt. But due to the nature of family relationships, you won’t have to. This type of situation could arise if the executor views money and you differently than the decedent.

Perhaps the decedent cared a lot about money and was a strong believer in doing things “by the book.” As a result, they felt debts must always be repaid, no matter what. But the decedent’s spouse couldn’t care less about money and always felt the decedent treated you unfairly because you didn’t pursue the career the decedent felt you should.

Assuming the decedent’s spouse was the executor and there were no other heirs or creditors to question an uncollected debt, it wouldn’t be surprising for the debt to mysteriously go away and you never have to pay it back.

Third, how does the decedent’s estate want to enforce your legal obligation to pay back the decedent? If the debt is contested, the executor might be willing to either cancel the debt or accept a smaller amount and consider the debt “paid.” Using the most recent example, you and the executor might reach an agreement where instead of paying back $50,000, you pay back just $5,000.

The estate gets $5,000 and avoids the risk of wasting time and money on a losing case. From your perspective, you avoid the risk of having to pay back the full $50,000 (or a smaller, but still sizeable amount). In return, you have to pay back a portion of what the estate claims you owe.

If the debt gets canceled or reduced in this way, you were able to avoid having to pay back some or all of the debt you might have owed the decedent. If this happens, there’s a good chance that the amount of the debt reduction will be considered taxable income by the IRS.

When reaching this type of agreement, you need to make sure it’s done properly. This should include creating a written agreement where the estate agrees to indemnify you for the amount of the debt that’s being written off or reduced.

It’s important to get this indemnification for situations where heirs or creditors aren’t getting what they feel they’re entitled to receive and the decedent’s estate owes more money than there are assets. The other heirs or creditors might feel that you should have fully paid off your debt to the estate to make it more likely they can get their money from the estate from a debt collection action or inheritance.

You could also negotiate with the estate to make good on your debt in some other way. Imagine you were to inherit a classic car worth $50,000, but you also owed the decedent $50,000 when they died. The estate might be willing to forgo collecting that debt if you agree to disclaim the classic car as your inheritance.

How would the decedent collect a debt after they pass away?

The person you owe money to is no longer alive, so how do they collect a debt from you? Most likely, it’ll be a representative from their estate (like an executor, personal representative or administrator) who collects the debt.

The estate executor will likely first make the request nicely, maybe by sending a letter and calling you. If you refuse to pay the debt and the executor decides to enforce the decedent’s legal right for repayment, then the executor would probably file a lawsuit against you and on behalf of the decedent’s estate. The lawsuit will proceed just as if the decedent were alive and decided to sue you to collect the money you owe.

What happens if you owe money to someone who left you an inheritance?

As mentioned, the answer to this question is simple: Your inheritance gets reduced by the money you owe. How this takes place in reality is more complex because of questions as to the debt’s validity and the logistical considerations of offsetting an inheritance with a debt.

Pretend your inheritance was $10,000 in cash and you owed the decedent $5,000 when they died. Assuming there’s no question that you owe this debt and the estate is inclined to collect it, then you can expect an inheritance of $5,000 in cash.

OK, but what happens if your inheritance was the family home worth $100,000, but your debt was $50,000? You can’t physically split a house in half, so maybe you can take the house, then write a check to the decedent’s estate for $50,000. For most people, this isn’t a solution as they don’t have $50,000 in cash just sitting in a bank account nor do they have easy access to $50,000 in credit.

So what happens? There’s no definite answer here, as there are multiple legal and financial arrangements that might be possible. These include your financial situation, other properties to be distributed to other heirs and the existence of any debts the decedent’s estate owes. Then there’s accounting for the validity of the debt you owe the decedent and the estate’s ability and willingness to collect it.

One possible solution might be to inherit the family home with another heir, with each of you getting a 50% interest in the house. Then the other heir pays off your $50,000 debt for you. Another possibility is to swap inheritances with another heir who’s supposed to receive $100,000 in cash. They now get the house while you get the cash, making it easier for you to pay off your $50,000 debt to the decedent’s estate. These may be overly simplified solutions, but they show that a resolution may be negotiable.

It’s also possible for your debt to exceed your inheritance. If this happens, the amount of your debt can be reduced by your inheritance. If you still owe money after this offset, the estate will still have the right to collect the rest of the debt from you.

If you owed money to the person who died, could your debt be forgiven?

Absolutely. A decedent may include in their will that the debt you owed them should be forgiven when they die. If your debt gets forgiven in the decedent’s will, the forgiven debt will not be viewed as taxable income by the IRS.

If the debt gets forgiven or reduced in some other way, such as the executor agreeing to reduce the debt owed or cancel the debt entirely, then the IRS will likely view the amount the debt gets forgiven as taxable income.

What if the debt is part of a trust?

A decedent’s legal right to collect money from you could potentially be property assigned to a trust. Just like how a bank can transfer a mortgage to another bank, an individual can transfer the right to collect a debt to a trust.

If the decedent assigns that right to a trust, you’d then owe money to the trust, not the decedent. In practice, this means you’d pay back your debt to the trustee of the trust, not the decedent’s estate.

Now let’s look at a slightly different situation involving a trust and paying back the decedent. The decedent can create a trust where you’re the beneficiary, but before receiving benefits from the trust, you have to pay back a debt.

For example, imagine that before dying, a decedent created a trust where a trustee would distribute money from that trust to you. However, you’d only receive money from the trust after you paid back the money the decedent loaned to you when you bought your first car.

Unfortunately, you were never able to pay back the money you owed while the decedent was still alive. Unless there are facts or circumstances surrounding this condition that make it illegal or go against public policy, you’ll most likely be unable to receive the money from the trust until you pay back your debt to the decedent’s estate.

Could my inheritance be reduced by debts owed by the decedent?

It’s possible, but it depends on the amount of the estate’s debts, the nature of your inheritance and how the estate’s debts are to be paid. In states where inheritance and estate taxes must be paid, the money usually comes from the estate’s cash assets. Then if that’s not enough, non-liquid assets may be sold, with proceeds used to pay any remaining debts.

This makes sense, as it’s faster, more convenient and cheaper to withdraw funds from a bank account or sell securities in a brokerage account than it is to sell a car, personal property or real estate. The problem is that it could result in someone’s cash inheritance getting dramatically reduced, while a real estate inheritance gets left untouched.

In some states, the executor may have the freedom to decide how the decedent’s debts get paid. In other states, the executor may be required to pay applicable taxes and any of the decedent’s debts first using assets not passed by the decedent’s will.

One way to avoid this uncertainty is to have the decedent leave instructions in the will on how certain debts and other financial obligations get paid. Even if state law restricts what the decedent can put in their will concerning paying debts and taxes, the decedent will have the opportunity to plan the bequests accordingly.

In other words, if they know ahead of time that their bank account will be depleted paying for probate court costs, funeral expenses and taxes, they might find something else to let you inherit instead of the bank account.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at

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