If we unwillingly inherit a business that is in debt, are we responsible to pay off that debt?

[teithi71]

My father in law wants to leave us his company when he passes on as a legacy for which he wants continued. However his business is is close to bankruptcy and has a high debt on the company credit card along with many personal loans. Is there a way to decline an inheritance? And are we responsble for all that debt even if we don't want to inherit the business?

[celeste]

A lot is going to depend on the business organization of the business, which you don't mention.

Is it a C corporation, an S corporation, an LLC, is it unincorporated, a sole proprietorship, etc?

In general, his estate is responsible for paying any personal debts before the estate is divided. It may be that the executor of his estate will have to liquidate the business before you even inherit it.

If it is a corporation that is insulated from his personal debts, when you inherit it you can do with it whatever you see fit. For example, you can sell it or close it and liquidate its assets (or put the business in Ch 7 if necessary, which would liquidate the business and use the proceeds to pay creditors insofar as is possible).

You will not have any personal liability for the debts of the business at the time you inherit it, although you could easily come to have personal liability for the debts of a failing business if you make bad business decisions once it is yours (for example, if you personally guarantee debts incurred by the business).

You are under no obligation to attempt to keep the business running after your father in law passes on, regardless of whether that is his desire while he is still alive or when he names you the beneficiary.

[wynn]

A lot is going to depend on the business organization of the business, which you don't mention.

Is it a C corporation, an S corporation, an LLC, is it unincorporated, a sole proprietorship, etc?

In general, his estate is responsible for paying any personal debts before the estate is divided. It may be that the executor of his estate will have to liquidate the business before you even inherit it.

If it is a corporation that is insulated from his personal debts, when you inherit it you can do with it whatever you see fit. For example, you can sell it or close it and liquidate its assets (or put the business in Ch 7 if necessary, which would liquidate the business and use the proceeds to pay creditors insofar as is possible).

You will not have any personal liability for the debts of the business at the time you inherit it, although you could easily come to have personal liability for the debts of a failing business if you make bad business decisions once it is yours (for example, if you personally guarantee debts incurred by the business).

You are under no obligation to attempt to keep the business running after your father in law passes on, regardless of whether that is his desire while he is still alive or when he names you the beneficiary.

You can disclaim (refuse) an inheritance, or part of an inheritance, if you don't want it. There is no obligation to accept a gift if you don't want it and an inheritance is a form of a gift.
As far as the debt goes, you would need a Tax Professional and a Business Accounting Professional to go over the books and tell you just what the financials show. Generally the business itself should be responsible for any debt that it owes but your Father In Law may have taken some of the debt in his own name (not the business) and his estate would owe those debts, not the business. If you don't accept the business, you would also not accept or be responsible for any of the businesses' debt.

[delron]

If the business is a limited company then it is the company that has the debt, not the shareholders. The "limited" in "limited company" essentially means that, once shareholders have paid the company for their shares, they have no further debt to the company or to its creditors.

At least, that's what I gather from a perusal of the literature. I hope that's right, since I do have shares in a limited company that has a high debt to equity ratio.

[aviya]

If the business is a limited company then it is the company that has the debt, not the shareholders. The "limited" in "limited company" essentially means that, once shareholders have paid the company for their shares, they have no further debt to the company or to its creditors.

At least, that's what I gather from a perusal of the literature. I hope that's right, since I do have shares in a limited company that has a high debt to equity ratio.

My advice to you would be to get legal advice from a professional

Personally, If you don't legally sign for that business, I dont think you could be held 100% responsible for the debts.... however, if NO ONE takes over the business when your father in law passes away then it would probably depend on which banks he has taken out the personal loans / credit cards and what insurance he has on these loans...

Any money / assest he happens to have will be frozen so the creditors get paid first ie: house, boat, car etc... if no one takes over the business, these banks will want their money and they will be entitled to any assets first before anything can be inherited.