What Happens When You Leave Debt in Your Will?
While it can be hard to think about the inevitable (death), it’s crucial that you properly plan your estate to save any hassle for your loved ones. After you die, the executor of your will has several responsibilities they’ll need to fulfil. One of which is paying down any debt in your will that’s left behind.
Once the executor receives probate, the assets and liabilities of the will become the estate and are passed to the named executor to handle. If there is no named executor, then the ‘Next of Kin’ would be responsible.
Before the executor can distribute any assets to your listed beneficiaries, they must pay down any debts left behind using whatever funds are available in the estate. They are entitled to use both real and personal property to satisfy these and any expenses, including funeral costs.
Secured Debt vs Unsecured Debt
There are two types of debt that you can leave behind in your will: Secured and Unsecured. These are dealt with differently, and it’s essential to understand the significant differences between the two.
Secured Debt refers to a debt that is fixed to one more asset. An example is a mortgage that’s secured against your property. These must be dealt with by the executor before the unsecured.
Unsecured Debt refers to debts held without collateral. The executor can typically pay these off from the money left in the estate. These can include credit cards, bank loans and bonds.
What if there are not enough funds to pay down the debt?
When your estate is solvent, this means that there are assets left over after the executor pays down the debt in your will. If the estate is insolvent, whatever debt is remaining exceeds the value of the assets.
If there’s not enough money to pay down the debt, the executor may need to sell property, and if there are not enough assets in the estate to pay it all down, then creditors will have to be contacted to request that they be ‘written off’.
From here, the creditor may apply for bankruptcy if they confirm that the estate is insolvent.
What assets can’t pay down debt in your will?
Unless your will states otherwise, there are a few things that the executor can’t use to pay down your debts. These include:
- Superannuation Death Benefits
- Life Insurance Benefits
It’s also important to note that if you’re a trustee or a joint tenant to a bank account or property, these will not become part of your estate. However, if you own any shares in a company/unit in a trust, these will become part of your estate.
Do My Family Members Inherit my Debt?
Generally speaking, your family members can’t be forced to pay down any debts you leave behind. But there are a few occasions where a family member could be liable, so It’s important to prepare for the following circumstances:
- You secured debt against property owned by a family member;
- You and the family member of the asset in question are co-borrowers;
- A family member acted as a guarantor to your debt.
However, if a beneficiary is given property with a mortgage, they can keep the asset and take on the mortgage repayments. Doing this would be by choice, and the liability would transfer to them.
How to Plan
To avoid any confusion and unwanted liability for your beneficiaries, it’s best to seek professional advice if you are unsure about any debts you have at the moment and to work towards getting them solved.
Disclaimer: The content of this blog is intended to provide a general guide to the subject matter. This blog should not be relied upon as legal, financial, accounting or tax advice
