Do your debts live on after you?

BY ANDREW STEWART

Ok, you might have worried about, asked a friend or family member, maybe even asked a lawyer this million dollar question. “Why should I worry about my bills if I’m dead?”

That to me is a very logical question to ask. The quick simple answer is; you don’t have to worry but your estate sure does. So, let’s start from the beginning. What is your estate? An estate is a property that you own or have a legal interest in like your home and vehicle. The term is often used to describe the assets and liabilities left by a person after death. Others may be on the hook for your debts if they co-signed with you, or in other cases.

No Way! If someone dies, can they leave their debts to you. Debts do not transfer by virtue of marriage or death – not without your signature. What does get transferred though is the emotional stress and headache of your family having to deal with them on your behalf. Any debts you leave behind when you die can eat up assets that you might have planned to leave to heirs. Things like jewelry, paintings, valuable collectibles might have to be sold to pay those bills. The process of paying your bills and distributing what money is left is called probate. You might have heard some of the horror stories of celebrity’s estates being in probate for years.

Myth #1 Richard had heard that when parents die, their kids inherit their debts and are responsible for paying them.

What does happen to the debts when someone dies?

Well, that depends on if there is any money in the estate to pay the creditors and it also may depend on the creditor that the debt is owed to. The executor of your estate’s job is to distribute according to the directions in your will. When a person dies without a valid will (intestate), Ontario’s law on intestate succession requires specific distribution rules of the estate. This could mean your executor has to write checks from a bank account or selling of the property to get the money. Some creditors may try to go after the spouse or family members of the deceased person. However, most creditors will try to collect from the estate first. If the debt is “joint” the survivor will be required to pay the balance of the account. Let’s look at some of the most common types of debts people have.

Mortgage

For most married couples, the process is straightforward. If both spouses own the home and applied for the loan together, the surviving spouse generally takes over everything. Under federal law, lenders must allow family members to take over a mortgage when they inherit residential property.  If anybody co-signed for the home loan, that person would be liable for paying off the debt—whether or not they live in the home or have an ownership interest. Non-owner co-signers are probably most at-risk if you die with outstanding mortgage debt.

Credit Cards

Credit card debt is the borrower’s responsibility, not anybody else’s. If your estate does not have enough assets to cover credit card debts, then the creditors are out of luck. This debt is not secured by assets the way mortgages and car loans are. But any joint account holder would be responsible for the unpaid bills.

Car Loan

Auto loans are secured loans where the vehicle is used as collateral. If payments stop, the lender can repossess the car. However, most lenders simply want to get paid, and they won’t repossess if somebody takes over the payments.

Do You Need Life Insurance?

Creditors typically can’t go after your retirement accounts or life insurance benefits, because life insurance payouts are protected from creditors by having named beneficiaries. You can use a policy to protect family members who would be responsible for your debts or simply to make sure you have money to pass on. In addition, life insurance payouts are usually not taxable. A common error is when people leave their estate as the beneficiary on the life insurance policy. Then it becomes available to creditors.