It’s not something most people like to think about but it’s important to consider what happens to your debts after you die. While it would be nice to think our debts magically disappear upon death, this is not the case. If you haven’t planned in advance, financial debts can have a significant impact on those you leave behind which is why estate planning is so important.
The executor of an estate will be responsible for liaising with creditors to repay debts and will need to manage the assets within the estate to do so. Creditors have first right to the assets within the estate to reclaim their money. If there are insufficient assets then the estate may have to be declared bankrupt.
Creditors have the right to place an estate into bankruptcy if adequate measures have not been implemented to repay debts, and can liquidate any assets held as security over those debts.
Can family members be liable?
A common concern is that family members will be left to repay debt that is not theirs. A family member or related party of a deceased person can only be forced to repay debt in the following circumstances:
- They own an asset that was used as security on debt obtained by the deceased (eg. business debt secured against a family home);
- They were a joint borrower on debt with the deceased (eg. husband and wife borrow to buy a family home);
- They have provided a guarantee over a loan for the deceased (eg. Mum and Dad being guarantor for their child to purchase a home).
Estate planning debt issues worry many people and can come in very basic forms. Take a husband and wife with a family home and a mortgage for example. If the main income earner passes away the remaining spouse is responsible for the loan and may have no means of repaying it. This might then result in the home being sold unless there were adequate provisions put in place prior to death to prevent this.
Leaving specific assets that you still owe money on to a beneficiary through your estate requires you to make arrangements to have that debt paid out upon your death – unless the beneficiary is capable of repaying the debt owing on that asset. For example, leaving a house with a mortgage to elderly parents knowing they cannot afford the mortgage on the property. A provision to put in place in this instance would be sufficient life insurance so the creditor is repaid and your parents receive the house debt-free.
Business debts, including those that are obtained jointly by business partners, or debts that have personal assets held as security, can create very complicated estate issues. These need to be addressed in your will to ensure the continuity of the business or the remaining partners or family members are not financially affected.
Seek professional advice
These are just a few issues relating to managing debts after death. Estate planning is a complex area and requires strategic planning to ensure loved ones and others are not financially impacted in the event of your death. It is important to use professionals in these matters, such as your solicitor and financial adviser, to guide you on the right path so that all of your estate planning needs are covered and adequate measures put in place.
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