Your estate isn’t something that’s often at the front of your mind. However, it may cross your mind every once in a while about what happens to your debt when you pass away. A deceased estate comprises all of the assets and liabilities of someone who has passed away.
So, what happens to your debt when you die? Does your family have to pay for it for you? Does it magically disappear? Read on to find out.
What is a deceased estate?
An estate refers to the assets and liabilities of someone who has passed. Often, the deceased will include instructions for their estate within their will. The people who inherit this estate are called beneficiaries.
The assets that make up the estate can include:
- Bank accounts
- Superannuation and life insurance policies
- Real estate (including nursing home bonds or retirement village leases)
- Personal belongings such as furniture and jewellery
- Liabilities, including mortgages, credit cards and personal loans
Who is responsible for administering a deceased estate?
A deceased estate holds all of the assets of the deceased from the time of death until the transfer of the property and assets to their beneficiaries as nominated in the will. This estate is administered by the executor of the will (appointed by the deceased) or an administrator (appointed by the Supreme Court). When planning your estate, you must choose who will become the executor of your will. This doesn’t have to be a family member, but it can be a friend, lawyer, other working professional, or a trustee company. It’s important to keep in mind that you choose someone reliable to be your executor as there are quite a few tasks that need completing. If there is conflict in the family, it might be wise to choose a neutral party to undertake the role of the executor.
To learn more, read our blog on estate planning.
What happens to your debt when you die?
When you pass away, the executor of your estate is responsible for paying off any outstanding debts. The executor will use the assets left behind by the deceased to pay off any debt left behind. This includes selling property or other assets to cover the debts.
A lender cannot force your family members to pay your debts after you have passed unless:
- The debt is secured against a particular asset that is owned by someone else.
- The debt is in joint names with someone else.
- Someone has guaranteed the debt.
Dealing with deceased estate debts
When the executor deals with estate debts, they fall under one of two categories – secured or unsecured debts. Please note that before paying any debts owned by the deceased, it’s important to seek legal advice.
Much like loans, secured refers to when a debt is secured against an asset. This might be a home loan secured against a property or a car loan secured against a vehicle. For secured debts, it’s vital that payments are maintained, or you speak to the creditor about your options. If payments lapse, the creditor may take legal action and seize the asset to sell. If you are given an asset as a beneficiary, and you wish to keep the asset, you must also take on the debt secured by the asset. This debt must either be repaid or refinanced before the asset is transferred to the beneficiary.
Unsecured debts are debts that aren’t tied to an asset. This commonly includes credit card and personal loan debt. The amounts owed on secured debts are usually paid from money in the estate but come after secured debts have been paid.
What happens if the debts exceed the amount in the estate?
Sometimes, the estate won’t contain enough assets to cover the debts at the time of death. If this is the case, the estate executor will pay the debts according to either bankruptcy or insolvent estate provisions. The executor will never be required to pay the debts out of their own pocket (unless they have direct involvement with the debt). Insolvency refers to situations where debtors cannot pay their debts on time. In contrast, bankruptcy refers to a legal process where an insolvent debtor is legally declared unable to pay their debts.
These two provisions ensure that the funeral is the priority, as well as testamentary and administration expenses. The executor will then pay off current and past tax debts, followed by secured debts such as home or car loans. If a HECS debt is outstanding at the time of death, the debt balance will be extinguished. Unsecured debts are the final debts to be paid, meaning they are generally the debts that remain unpaid.
In the case of deceased estates, if an individual becomes insolvent on or around the time of their death, or the deceased estate becomes insolvent, the executor of the estate or a creditor who is owed a debt by the deceased can initiate bankruptcy proceedings. The beneficiaries of your will are not required to pay back any debts personally.
The first debt that must be repaid from the estate is any tax owed. Your estate can’t only cover half of your taxes so that something can be left for your beneficiaries – it must cover the total amount. Unfortunately, if paying tax debts consumes your entire estate, that’s it.
A deceased estate is a collection of the assets and liabilities left behind by someone who has passed away. The estate executor is responsible for paying off the debt by using the assets in the estate. For any debt that the estate cannot pay, the estate can become insolvent, or the executor can apply for bankruptcy provisions. If you need help managing your debts before planning your estate, talk to one of our expert financial advisor team members.