'She left behind a 30-year-old son and 32-year-old daughter'

"Life insurance is not part of the estate." (Photo subjects are models.)

Dear Quentin,

A friend passed away. She left behind a 30-year-old son and a 32-year-old daughter. She had no "estate" per se; she and her daughter bought a house together, with the right of survivorship, so her daughter automatically gets full ownership of the house.

Her bank accounts were stripped bare by Medicaid during her illness. She has a life-insurance policy with the children as equal beneficiaries. She had about $20,000 in credit-card debt. Are her children required to pay her credit-card debt out of the life insurance?

I'm thinking they are not, since the life insurance is not part of the estate.

Friend of the Family in Missouri

Related: I am 71. Would it be foolish to sell $10,000 in shares to visit my grandchildren in Thailand?

You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.

Credit-card debt is normally paid, if at all, from the deceased's probate estate - not from assets that pass outside probate.

Dear Friend,

I have good news and good news.

Based on the facts, the children are not required to use the life insurance proceeds to pay their mother's credit-card debt. Credit-card debt is normally paid, if at all, from the deceased's probate estate - not from assets that pass outside probate.

What's more, unless a child was a joint account holder or cosigner, they are not personally liable for it. Credit-card companies cannot touch your friend's life insurance because the children were named beneficiaries.

Let's go through your friend's estate piece by piece: her $20,000 credit-card debt, her life insurance, her Medicaid benefits and her home. If she qualified for Medicaid, there likely won't be much probate estate available to creditors or heirs.

A six-month window for creditors

The $20,000 debt would come from the probate estate only. Probate typically has a minimum amount of time before closing, so creditors have an opportunity to come forward and file claims for outstanding debts before the assets can be distributed to heirs.

Creditors in Missouri usually have up to six months to make a claim on an estate. The executor or administrator of the estate reviews each claim, choosing to approve, deny, settle or dispute claims. If contested, those claims may ultimately be decided in court.

Debts are paid in a legally required priority order, typically beginning with administration expenses, funeral costs and taxes before unsecured debts like credit cards. Heirs receive assets after valid claims are resolved, assuming that probate assets actually exist.

Named beneficiaries on life insurance

If her kids are named as beneficiaries on your friend's life insurance, the proceeds pass directly to them and are not available to satisfy the deceased's creditors. Only if the estate is named as beneficiary, or no valid beneficiary exists, would the credit-card company have a claim.

Complicating matters, Missouri Medicaid estate recovery may apply in some cases for recipients 55 or older, but it is limited to certain probate assets. It does not affect property that passes outside probate, such as joint tenancy with right of survivorship (JTWROS).

There is a five-year Medicaid lookback period to review whether you divested yourself of assets to qualify for benefits, but the ineligibility period or the penalty is not automatically five years; it depends on how much and when the transfers were made.

Medicaid estate recovery

For readers earlier in the planning process, it's worth knowing the options. A Medicaid Asset Protection Trust $(MAPT)$ is considered one of the most secure ways to protect a home from Medicaid estate recovery, giving up direct ownership while potentially retaining certain benefits.

If the house was subject to a life estate at least five years before your friend's Medicaid application, the property would pass automatically to the remainder beneficiaries - in this case, joint ownership with right of survivorship happily did that job for her.

Ultimately, if your friend's children are indeed named beneficiaries of the life-insurance policy, the proceeds pass directly to them outside of probate. Unless they cosigned those debts, her children are not personally liable for those debts.

I hope this puts your mind at ease.

Related: I am a CFP and see nothing wrong with networking on the golf course. Am I wrong?

More columns from Quentin Fottrell:

'He threatened to cut the roots': A tree fell onto my neighbor's property during a storm. Then all hell broke loose.

'I have no preexisting conditions': I'm 56, earn $198,000 and want to retire early. Can I afford private healthcare?

'There is zero transparency': My friend's sister controls their mother's estate. How can we stop her from stealing?

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-Quentin Fottrell