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Handling Debt in Wills: What Happens to Your Liabilities?

Preparing for what comes after isn’t just about deciding who gets your money or your important possessions; it’s also about dealing with all the other stuff that makes up a life, like any debts you might leave behind. Knowing how your financial responsibilities will be sorted out is key to making sure your loved ones are looked after and saved from any undue stress or legal complications after you’re gone, so they can focus on cherishing your legacy.

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Nothing is certain in life except death and taxes.

The Legalities of Estate Debts in Australia

In Australia, the handling of a persons’ debts after death is governed by a combination of statutory law, common law principles, and the specific terms outlined in their Will. The process is broadly similar across jurisdictions but can vary in detail, so it's important to be aware of any requirements specific to your state or territory.

Estate and Non-Estate Assets

Estate assets are those included within the estate for the purpose of probate - the legal process by which a Will is validated and an executor is granted authority to distribute the estate.

Non-estate assets, such as jointly held property or superannuation with a nominated beneficiary, bypass the Will and are not used to settle debts unless specifically ordered by the Court.

An Executor’s Responsibilities

The executor of an estate has the duty to pay out any debts or liabilities before distributing the remaining assets to the beneficiaries of the estate. This includes everything from mortgages and personal loans, to credit card debts and utility bills.

The executor must first identify all outstanding debts, value the estate's assets, and then use those assets to pay off debts in a prioritised order set by law - put simply, certain debts are considered more important than others in Australia, like mortgage repayments or owed taxes. Only after all debts have been satisfied can the executor distribute the remaining assets to the beneficiaries as outlined in the Will.

Given the complexities involved in this area of estate planning, you may choose to seek legal advice before appointing an executor, or your executor may need to themselves in order navigate the probate process effectively. This is particularly advisable in situations where the estate's debts exceed its assets, raising questions about which debts to pay and in what order.



Types of Debts in Estate Planning

What are Secured Debts?

A secured debt in Australia is a loan where an asset is used as security or collateral against the loan, meaning that the asset can be seized if you default on the loan. Examples of secured debt include a mortgage or car loan, where the item being financed becomes the security for the financing.


What are Unsecured Debts?

An unsecured debt in Australia is a loan that is not tied to an asset and so has no security or collateral against it. These include things like credit cards, personal or payday loans, unpaid rent, or utility bills.


Tax Liabilities After Death in Australia

In Australia, there are no taxes on inheritances or deceased estates. There is, however, still an obligation to pay tax for earnings and investments if a person passes away.

When an individual dies, the Executor must perform a number of tasks related to their tax affairs. These include notifying the ATO of the death, lodging any outstanding tax returns of the deceased, arranging for a final tax return, and attending to the payment of any tax liabilities. The ATO also separately considers an individuals’ tax affairs from the liabilities of the estate; for taxation purposes, the estate is treated as a trust.

Consulting with experienced legal professionals is advisable if you have more complicated financial arrangements, or think you may require the services of a professional executor.


The Process of Debt Settlement in Estates in Australia

Identifying Your Debts

Firstly, the executor of your Will needs to figure out exactly what debts you’ve left behind. This might potentially involve a bit of detective work, from checking your personal documents for loan agreements and outstanding bills to contacting any banks or credit companies.

If the estate is complex or the financial situation is unclear, it might be wise to consult with financial advisors, accountants, or lawyers who can help uncover hidden debts or advise on potential liabilities.

Valuation of Your Assets and Debts

Once all the debts are catalogued and laid out, the next step is valuing the estate's assets. This means everything you owned that has value – from your home to your bank accounts – is appraised and assigned a worth.

At the same time, the debts are tallied up. It's a bit like balancing a scale, where you want to see how the value of the assets weighs against the total debts.


Prioritisation and Payment of Your Debts

Not all debts are equal, and in Australia there’s a legal order that needs to be followed when paying them off. Generally, any funeral or testamentary debts are dealt with first, then the payment of secured debts, and costs of administration. Once these high-level debts are settled, the executor can move on to other debts until either all are paid off or the estate's assets run out.

If there's not enough in the estate to cover everything, the executor has to follow specific rules about which debts to pay off first. It can get pretty complicated, and sometimes tough decisions have to be made. That's why many executors find it helpful to work with a legal professional to navigate this part of the process.


Impact on Heirs and Beneficiaries

Inheritance and Debt in Australia

When a person passes away, their estate is responsible for settling any outstanding debts. The assets within the estate are used to pay off these liabilities before anything is distributed to the heirs. This process can significantly reduce the value of the inheritance if the estate is heavily indebted.

If the deceased had secured debts, like a mortgage or car under finance, the associated assets can be sold to cover the debts. Beneficiaries may choose to take over the payments to keep the assets, but they are not obligated to do so unless they are co-signers on the debt. Unsecured debts, like credit cards and personal loans, are paid out of the estate's remaining assets.

Only after these debts are settled will the beneficiaries receive their inheritance.

If there aren’t enough assets in the estate to cover all debts, then it’s considered insolvent. In this case, specific laws determine the order in which debts are paid, and some creditors might not be fully repaid. Beneficiaries generally won’t be responsible for the debts of the deceased unless they are co-signed or guaranteed by them.


Protecting Beneficiaries from Debt

Estate planning aims to distribute your assets effectively while ensuring your beneficiaries aren't burdened by debts you've collected throughout your lifetime. Life insurance is a straightforward solution, providing funds to settle debts and preserve your estate's value. Trusts can also protect assets from being used for debt repayment, with their effectiveness varying by jurisdiction.

Documenting your financial affairs and discussing your estate plan with beneficiaries and your executor can help in managing your estate's debts efficiently. In Australia, beneficiaries aren't automatically liable for debts unless they've co-signed or guaranteed loans. However, debts can reduce the estate's total value and, therefore, the inheritance. Proper planning and legal guidance are essential to protect your loved ones from inheriting costly financial burdens.

Planning Ahead: Strategies to Address Debt in Your Estate Plan

Utilising Insurance Policies

Life insurance plays a key role in debt management within your estate plan. It provides a financial cushion that can be specifically earmarked to settle any outstanding debts, preserving the estate’s value for heirs.

Life insurance in Australia is largely governed by Commonwealth legislation, the principal acts being the Life Insurance Act 1995, administered by the Australian Prudential Regulation Authority (APRA), and the Insurance Contracts Act (ICA)1984 and the Financial Services Reform Act, administered by the Australian Securities and Investment Commission (ASIC). For more information about including life insurance in your estate plan, read here.

Other types of insurance, like funeral insurance, can also play a part in reducing the administration work and potential strain on your estate and loved ones.


Asset Distribution and Beneficiary Designations

Careful asset distribution and clear beneficiary designations are key considerations when thinking about how your estate will settle your outstanding debts. By specifically assigning assets, and ensuring superannuation and insurance policies have nominated beneficiaries, you can protect these assets from being consumed by debt settlements. The objective behind this approach to asset distribution and beneficiary designations is to ensure your assets are protected from being used to settle estate debts, maximising what your beneficiaries inherit.

Navigating the Complexities of Debt After Dying in Australia

Jurisdictional Variations

Australia’s legal system is made up of different jurisdictions, each with its own unique set of laws, regulations, and requirements governing the area of deceased estates, probate, and trusts. This means that the rules on your current home state or territory may differ from another, affecting how you put together your estate plan. It’s important to understand the specific requirements of your state or territory in order to ensure your wishes are met.


International Considerations

For those with assets or beneficiaries overseas, international considerations add another layer of complexity to estate planning. Different countries have diverse laws regarding inheritance, taxation of assets upon death, and the recognition of foreign estate planning documents.

If you hold assets in multiple countries or if your beneficiaries reside abroad, you’ll need to consider how these international laws intersect with Australian rules and regulations. You may need to create separate estate planning documents for each jurisdiction where you hold assets to ensure they are managed according to your wishes and compliant with local laws.

Seeking the advice of an experienced wills and estates lawyer to help navigate the nuances present in this area of the law is advisable, particularly if your estate or personal circumstances are complex or unique.

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Keeping an updated accounting of your debts and liabilities makes it easier on your Executor and loved ones once you're gone.


Estate planning, especially when it comes to tackling debt after death, requires careful planning and forethought. Utilising insurance policies, distributing your assets wisely, considering trusts, and dealing with the legal complexities that come with are all important steps in protecting your legacy and looking after your beneficiaries as you intend.

It's more than just preparing for what lies ahead; it's a gesture of respect for the well-being of your loved ones, ensuring their future care with deliberate and thoughtful actions.


Frequently Asked Questions

What is considered a liability?

In estate planning terms, a liability refers to any outstanding financial obligation or debt of the deceased at the time of their passing. This includes things like mortgages, car loans, credit card debts, personal loans, and even unpaid bills.

Essentially it’s anything that requires payment to a third party, which the estate is responsible for settling before assets are distributed to beneficiaries. Once an asset has been specifically gifted to a beneficiary (e.g. you receive a house from your parent), any debt associated with the gift travels with it, and the estate is no longer liable.

Can my family inherit my debt?

In Australia, family members are not automatically responsible for the deceased's debts unless they have co-signed or guaranteed those debts. Debts are typically paid from the estate's assets.

However, an Executor can be held personally liable for debt if they incorrectly carry out the probate and distribution process, and don’t lodge any of the required statutory notices. Considering a professional executor service can help avoid this issue, especially if you are unsure of who in your life could act correctly as your executor.

What happens if the estate doesn’t have enough to cover all debts?

If an estate doesn't have enough assets to cover all outstanding debts, it is considered insolvent. An insolvency process similar to bankruptcy may be initiated, where debts are paid in a specific order determined by law. If funds run out, remaining creditors may not be fully repaid, and beneficiaries may not receive an inheritance.

Can I specify how my debts are to be paid in my Will?

Yes, within your Will, you can provide instructions on how you wish your debts to be settled, including designating specific assets to cover certain liabilities. However, legal and practical limitations might apply, especially if the estate lacks sufficient assets to fulfil these wishes.

Consider seeking legal advice to ensure your instructions are clear, feasible, and meet legal requirements.

Does all property go through probate?

Not all property has to go through the probate process. Any assets that are held jointly, typically with a right of survivorship, pass directly to the surviving owner without probate. Similarly, assets with designated beneficiaries, like life insurance policies and superannuation funds, bypass the estate and are not subject to probate.

Only assets solely in the deceased's name or as tenants in common require probate to transfer ownership to beneficiaries.

Last updated 12th June 2024
Laura Barling
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