Who Deals with Your Debts & Expenses After Your Death?
by Jacqueline Coombe
Source: Pexels (Opens in a new window)
What happens to your debts and expenses after you die? And which of these can be paid out from your deceased estate? If you’re dying (pun intended) to know the answers, you’ve come to the right place.
There are many things for the executor/administrator of your estate to consider when managing your liabilities, such as what happens if you have sufficient or insufficient funds to repay your debts, what happens to different types of debt you have, and what assets can and can’t be used to pay off your debts and expenses. To find out the answers to these and more, read on.
What is a deceased estate?
After you die, you leave behind (Opens in a new window) assets and liabilities that must be managed and finalized. This is referred to as your deceased estate. Assets and liabilities in your name only (Opens in a new window) are considered part of your estate. And those assets in your name only can be used to pay off your debts and expenses.
Your assets include your:
Home, car, furniture, and other contents in your property
Money in bank accounts, shares, and other investments
Insurance policies
Superannuation and employment entitlements.
Your liabilities include the following debts and expenses:
Mortgage, credit card, car loan, and other debts
Funeral and testamentary expenses
Administration expenses of the estate (costs of obtaining probate and costs of proceedings)
Business-related expenses
Outstanding tax
Subscriptions or memberships
Unpaid utility bills (water, gas, electricity, phone, and internet)
Rates and body corporate fees.
The role of the executor/administrator of the estate
If you have a will, the person you appointed (Opens in a new window) as the executor (a relative, friend, trusted advisor, or solicitor) will apply for a grant of probate with the court in order to validate your will and manage your estate. Once probate is granted, the executor will seize or possess your assets and deal with your liabilities.
If you don’t have a will, the person appointed by the court (Opens in a new window) to administer your estate will handle your assets and liabilities (i.e. the person who was granted a letter of administration).
Grants of probate and letters of administration (aka grants of representation) are legal documents that authorize the executor/administrator to clear your liabilities and distribute your assets in accordance with your will.
It can take months (Opens in a new window) for your estate to be administered before funds are available to pay for your debts and expenses.
Sufficient vs insufficient funds to repay debts
If your estate has enough assets (Opens in a new window) to pay off any debt you may have, the executor/administrator will first use the funds or sell your property to pay them off, as well as immediate expenses. Then they’ll distribute the remainder of your assets to the beneficiaries named in your will according to your wishes. If you don’t have a will, your assets will be distributed in accordance with (Opens in a new window) the laws of intestacy.
If your estate doesn’t have enough assets to repay your debts, and there’s no one else liable to meet them, the debts will be discharged. The creditors will be notified of your passing and inability to pay off your debts and they could declare your estate bankrupt. The executor/administrator and your family can’t be held responsible for your debts.
In what order are liabilities paid and assets distributed?
The executor/administrator has to pay your liabilities in the following order (Opens in a new window):
Secured debts from the assets securing them
Funeral expenses
Testamentary and administration expenses of the estate
Unsecured debts
Future and contingent liabilities.
If your estate is solvent after paying liabilities, your assets will be distributed as follows:
Undisposed of by your will, like lapsed or void gifts
Not exactly disposed of by your will but included in residuary gifts
Appropriated by your will for paying off debts
Charged with or disposed of by your will subject to a charge for paying off debts
Any fund kept to meet monetary gifts
Disposed of by your will, according to value.
Types of debt and what happens to them
Depending on the type of debt or expense you have, it may or may not need to be paid after you die. For example, the executor/administrator may cancel services (Opens in a new window), mobile phone contracts, and other utilities under your name only, if you’re living alone, or no family member takes over your property. Also, if the debt can’t be paid out from your estate, like a joint debt, your family or co-owner has to pay for it using their own money.
Here are the most common types of debts (Opens in a new window) and how they’re handled after your death:
1. Mortgage debt
If there’s a co-signer on your home loan, they must pay the remaining debt. But if you’ve got life insurance, the payout could help cover the cost. If there’s no co-signer on the mortgage, the debt doesn’t have to be repaid. However, if your family wants to keep the house, they’ll have to pay off the loan. If they want to sell it, they’ll need to continue paying off the mortgage until the house is sold. If nobody takes over the mortgage, the bank will sell the property to recover the amount owed.
If you gift a property (Opens in a new window) with a mortgage to a beneficiary in your will, they’ll have to repay it outright or transfer the mortgage into their own name. If they can’t, the property will be sold to repay the loan, and then the balance of the sale proceeds will be distributed to the beneficiary according to your will.
2. Credit card debt
If you’ve got a credit card with a joint owner, they must pay any remaining balance. But if you have a credit card in your name only, the credit card company can request to get paid via your estate.
3. Student loan debt
If you have a federal student loan, they’ll be discharged after you die. This means no one has to pay for it. However, if you’ve got a private student loan and the lender doesn’t discharge it, assets from your estate can be used to pay it off. If there’s a co-signer for the loan, they must pay what’s owed. If the lender requires that they pay the balance immediately, they can either use your life insurance payout or negotiate with the lender to change the contract through a debt relief attorney.
4. Car loan debt
If you’ve got a car loan, your family can allow the lender to repossess the car if they don’t need it or sell it to pay off the debt. Your family can also choose to keep the car and continue to pay what’s owed, but they’ll have to qualify as a borrower. If there’s a co-borrower on the loan, they must pay the remaining debt.
5. Medical debt
If you have a medical debt and you only owe a small amount, the care provider or collection agency may declare it uncollectible and close your account. However, if you owe plenty, they could try to collect what you owe from your estate. Medical debt usually doesn’t have a co-owner, so you’ve got nothing to worry about there. But for a deceased child, the parent would have to foot the bill.
What assets can and can’t be used to pay off debts and expenses?
Your life insurance and funeral insurance policies can provide an immediate cash payout (Opens in a new window) when a claim is made in order to pay off your debts and expenses. This way, there may not be any need to sell your property or drain your other assets, leaving your loved ones with more. All they have to do is request the insurer to release the funds.
However, there are some assets that can’t be used (Opens in a new window) to pay off your debts or expenses, including:
Superannuation benefit paid to your estate unless stated otherwise (Opens in a new window) in your will
Assets of a unit or discretionary trust where you were a trustee because they belong to the trust
Jointly owned assets, i.e. a property you shared with someone will be passed on to them and not form part of your estate.
What about your bank account?
If you have a bank account in which you were the sole account holder, your bank or financial institution will freeze it (Opens in a new window) to avoid further transactions and protect your estate. A joint bank account will continue to work as normal, and if the method of operation was ‘both to sign’, just one signature will now be needed.
Regarding the bank account where you were the sole account holder, the executor/administrator will need to ask the bank to release the funds soon after your death. Once they’ve filled in and provided the relevant documents and are able to access your transaction and savings accounts, they can then use the funds to cover your debt and expenses, as well as distribute the remaining funds to your beneficiaries according to your will. If you don’t have a will, ownership of your account and estate will be transferred to the next of kin or the executor/administrator and the account will be closed.
Leaving a positive legacy
As you can see, exactly how and when debts and expenses are paid after your death will depend on your individual asset and liability structure. What’s important is to leave a positive legacy – one that’s not burdened by liabilities your estate has to make good on. Writing a will to create an estate plan that deals with contingencies and complications that could come up after you die and taking out insurance policies can help you leave a positive legacy.
