Caring and sharing. It's what families are all about. But one thing your family would thank you for not sharing with them are your financial debts.
Unpaid mortgages, car loans, credit card debts and other liabilities all have an effect on your estate and can tie up assets you intend to pass on when you die – turning the expected benefits of an inheritance into a worrisome burden for your family.
The general rule is that your debt, including mortgages, private loans and credit card debt, has to be paid back after you die. There are priorities and exceptions, however, and it’s important to note that in most cases the Executor of a Will is responsible for using the Will maker’s assets to pay back the debts – the debt doesn’t technically attach to the deceased’s next of kin or Beneficiaries.
By understanding how your debts “live on” and how to handle them, you can be confident that you won’t leave your Beneficiaries with excessive financial obligations and administrative burdens after your death.
There are two major types of debt: secured and unsecured. Generally secured debts will take priority over unsecured ones when an Executor pays off the total debt obligations from a deceased estate.
Secured debts are when the lender has a legal interest in the property which is the subject of the loan and can repossess or sell that asset if the borrower stops making repayments. Examples of secured debts are home and car loans.
Unsecured debts are when the lender has no rights over any property or collateral for the debt and can’t claim your assets as a result of non-payment. If you fall behind on repayments, or if debts remain unpaid after your death, the main course of action is to use a debt collection service or to take legal action against your estate. Examples of unsecured debts are credit card debts, utility bills and medical bills.
Note that estate administration costs and funeral costs have a high priority in the list along with secured debts, and that Australian states and territories may have different rules for dealing with estate debt priority.
When you die before paying off the mortgage on your house or other properties, the lender naturally retains the right to repayments on its secured loans.
It’s likely that you own your home as a joint-tenant with your spouse or partner and in this case the property bypasses your estate and all obligations (including loan repayments) revert to the surviving joint-tenant.
In all other scenarios, while a mortgage debt doesn’t technically pass to Beneficiaries, the estate must find a way to pay the debt off to avoid the house having to be sold. Either the estate pays off the mortgage using any available funds, or a Beneficiary inherits the house and takes over future mortgage payments.
Even though your debts survive when you die, it doesn’t mean that your spouse, family and Beneficiaries are always liable to pay them. Liability for debts is usually limited to what can be paid out of the assets of the Will.
There are some circumstances, however, where a family member may be required to pay a debt. Examples are if they were joint holders of a credit card with the Will maker, or if they guaranteed a loan made to the Will maker.
Unless one of these circumstances applies, a lender cannot force your family members to pay off your debts after you have died.
As outlined above, the Executor of your estate is responsible for paying off your outstanding debts using the money you leave behind in your Will. If there’s not enough cash in your estate to cover the debts, your Executor must sell property or other assets to discharge them. If there’s still not adequate funds to cover debts after property and assets are sold, the debts are usually written off or “forgiven”.
Your Will is your last chance to leave a legacy and ideally you want it to be positive – not one that’s “in the red” and burdened by liabilities your estate needs to make good on.
As unavoidable as some debts are, writing your Will is the best foundation for a solid estate plan that deals with any contingencies and complications that may crop up after you die.