Here is the introduction of the article:
Debts Paid Upon Death
When someone dies and leaves an (IRA) or (401K), the funds may be used to pay their final bills under certain circumstances. This depends on whether the account has a designated beneficiary other than the deceased’s heirs at the time of death. An (IRA) or (401K) has a designated beneficiary if the deceased filled out a beneficiary designation form for the account prior to their death.
Debts Paid During the Probate Process
When a person who has accumulated debts passes away, the primary responsibility for payment typically shifts to their estate in the probate process. The deceased’s estate representative uses any cash left by the deceased, along with assets available for sale, to settle with those creditors.
The Surviving Designated Beneficiary
The retirement account will pass directly to the designated beneficiary outside of the probate process if the beneficiary survives. The account will not be subject to the deceased’s creditors because the probate process utilizes estate assets to settle the deceased’s final debts. An (IRA) or (401K) cannot be used to pay final death bills if it does not become part of the estate.
No Surviving Designated Beneficiary
One of two things can occur if the deceased completed the beneficiary designation form before death, but the named beneficiary dies first. The (IRA) or (401K) account may pass to the deceased’s heirs within the probate process to pay the deceased’s final bills, or the (IRA) or (401K) may pass directly to the deceased’s heirs according to the payout policies of the retirement account holder or designated beneficiary. In this case, the (IRA) or (401K) will not be used to pay final death bills.
No Beneficiary Designated
The same scenario can occur if the deceased did not complete a beneficiary designation form before death. Either the (IRA) or (401K) will pass to the probate process of the deceased and be available to pay the deceased’s final bills, or the (IRA) or (401K) will pass directly to the heirs of the deceased, thereby protecting it from creditors, according to the policies of the retirement account custodian or designated beneficiary.
When the Estate is the Beneficiary
If the estate is named as a beneficiary, retirement accounts will go to the deceased’s estate for final transfer to estate beneficiaries, those named in the will to receive the deceased’s property. However, these beneficiaries can only inherit what remains after paying final bills, taxes, and estate operating expenses.
Note
Complex estate tax provisions apply to inherited assets under (ERISA), so the estate representative or personal representative of the estate is likely to sell other properties if obligations to creditors must be settled through the estate’s liquidation.
Note: Laws can change frequently, and this information may not reflect recent changes. Please consult an attorney for current legal advice. The information in this article is not legal advice and does not substitute for legal counsel.
Source: https://www.thebalancemoney.com/does-an-ira-or-401-k-be-used-to-pay-a-decedent-s-bills-3505413
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