There are many misconceptions about debt and inheritance. It’s not correct that when a person dies, their debts die with them or that their family members are responsible for paying their debts.
When someone dies their debts are normally paid out of their estate before it is distributed to the beneficiaries. The estate consists of everything they own including their home, any other properties, investments, business interests, vehicles and belongings.
Who has to pay off the debts?
It is the executor’s responsibility (or administrator’s if there is no Will) to find out if there are any debts outstanding and work out if there is enough money in the estate to settle those debts.
The executor must collect in the estate’s assets (depending on the type of assets and the values, they may need to obtain a Grant of Probate to do this) and then arrange for any costs for the funeral and administration of the estate to be paid. Once they have done this, the deceased’s outstanding debts must be settled before proceeding to distribute the estate to the beneficiaries. Assets such as properties, vehicles or valuables may be sold to pay off any debts.
If there aren’t sufficient funds to cover all the debts, the executor must ensure that the debts are paid off in a prescribed order as follows:
- Secured debts, such as mortgages
- Priority debts, such as taxes
- Unsecured debts, such as credit cards and personal loans
A debt does not pass to a spouse or a civil partner (or anyone else) unless they have provided a guarantee on a loan or the debt is held in joint names. A mortgage on a jointly owned property will usually mean the surviving borrower will be liable for the outstanding amount.
To make it easier for the person who will be dealing with your estate when you have died, think about keeping a record of any debts which are held in your name and be aware that if debts exceed asset values this means your intended beneficiaries might not inherit anything from your estate.
Dealing with debts if there is no money in the estate
If there isn’t enough money in the estate, the debts are paid off in priority order which starts with secured creditors, eg banks, mortgage lenders, finance providers etc and then unsecured creditors, eg credit card companies, customers, suppliers, HMRC and anyone else who is owed money that does not have the same security as a secured creditor.
The debts are paid as above until the money or assets run out and any remaining debts are likely to be written off. It there is nothing in the estate when someone dies then the debts will usually die with them.
Debt is not inherited by the beneficiaries so they will not be responsible for settling any debts if there is no money in the estate. An executor can be held personally liable for the debts but only up to the value of the estate.
What happens to mortgage debt?
If the deceased had a mortgage in their sole name, it will be treated as a secured debt and need to be repaid by their estate as a priority. Once paid off the property can pass to the entitled beneficiary.
If there isn’t enough cash in the estate to pay off the mortgage, the property will usually be sold and the proceeds used to repay the mortgage.
If a mortgage is held in joint names, the survivor will be responsible for making the mortgage repayments.
If a property is held jointly the mortgage may be treated differently. If they own it as ‘joint tenants’, that is the property passes automatically to the surviving co-owner on the first death, then the co-owner will need to pay the mortgage. Whereas, if you own it jointly as ‘tenants in common’ (and there is no right of survivorship), you can leave your share in the property to whoever you like and not necessarily the co-owner. In this case, if there isn’t enough money in the estate to repay the mortgage, the beneficiary can choose to take on the responsibility of paying the mortgage to avoid the need to sell the property.
If there is a Will, you should always check the wording as sometimes it may say that the person inheriting the property is responsible for paying the mortgage (and any other debts secured on the property) in which case they must repay the mortgage and not the estate.
Can Life Insurance be put towards your debts after you die?
Absolutely! Some people take out life insurance specifically to cover debts when they die. This may be sufficient enough to cover the mortgage and other debts. Arranging life insurance can be significant part of your estate planning to ensure that your family aren’t left with the burden of paying your debts out of the estate.
It is easy to be confused about what happens to your debts if you die because of all of the misconceptions. Get in touch with our Private Client team today for some real answers on 01284 767766.
Where to find us
We have offices in Bury St. Edmunds, Sudbury and London.
© Atkins Dellow LLP 2022
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