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.
Debt owed on mortgages, car loans, credit card debts and other liabilities all have an effect on your estate. Leaving debt when you die can tie up assets you intend to pass on- turning the expected benefits of an inheritance into a worrisome burden for your family.
The general rule is that when an account holder dies with debt- including mortgages, private loans and credit card debt- this has to be paid back. 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. With this in mind, unpaid debt payments don'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 debt 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. This rule is relevant to other debt on a particular asset within the deceased's estate, such as a car.
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 secured and unsecured debt in the deceased's estate.
As outlined above, the Executor of your estate is responsible for handling of money and assets left in your estate. Paying off your outstanding debts using the money you leave behind is an integral part of these duties.
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. You want your remaining assets to help other family members, not create stress with debt and pushback from creditors looking for repayment.
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. In getting strategic about your financial situation, you can ensure there's enough money and plans in place to ensure your wishes are carried through.
Safewill provides an easy, flexible and affordable way to write your Will. We provide legal aid to ensure money left and remaining debts don't create issues for your loved ones.