What Happens to My Debt When I Die?
Benjamin Franklin was famously quoted as saying that nothing in life was certain, aside from death and taxes. Recite this to bankers at a cocktail party and they’ll be very quick to suggest adding a third certainty – debt.
With no thanks to our martini-loving banker friends, debt will almost always survive despite your departure. When drafting your will, it is always important to consider the effect that debt may have on how your estate is distributed.
Who Becomes Responsible For My Debt?
Although you have passed away, your assets will still be considered your ‘possessions’ and they will be held as part of your estate. Your estate will in essence become an artificial legal person – one that is capable of being sued and in some cases, even suing others!
The person you have appointed to execute your will has the responsibility of ‘squaring away’ your finances when you pass away, and this will often require them to pay off any outstanding debts they may still have. As an example, if your house is still under mortgage at the time of your death, your executor may have to pay off this mortgage before distributing your estate to your beneficiaries.
In fact, debt can often be so powerful that it takes first place in the queue for distribution. In Queensland, the Succession Act 1981 creates a legal obligation on the executor to first repay any outstanding debts before distributing any other assets to beneficiaries. You will often hear this first-in-line privilege described by lawyers as being the “first bite of the cherry”, and ought to be a serious consideration when planning the distribution of your estate.
Does This Mean I Can’t Will A Mortgaged House To Someone?
Banks are generally happy to allow for a transfer of title in property, so long as there is an undertaking that the person taking on the mortgaged property will also continue to pay the mortgage. Where a person who has been willed the house does not want to take over the mortgage payments, they may also opt to simply sell the property and retain its value minus any outstanding debt.
While debt will always be satisfied by any existing value in the deceased’s estate, there is a fairly considerable exception to the rule – superannuation.
Will My Superannuation Be Used To Pay Off My Estate’s Debts?
Your super fund may or may not be used to satisfy your estate’s debts, depending on how you’ve set it up.
Where you opted to nominate a beneficiary for your superannuation (aside from yourself, of course), that money will not be considered a part of your estate and will therefore not be used to satisfy any debt.
In this case, the trustee of your super fund will be required to act exactly as you specified and will transfer your super fund to whomever you had nominated. Given that this money cannot be ‘touched’ by creditors, superannuation nominations present themselves as a relatively risk-free way of ensuring that your intended beneficiaries receive exactly the amount you intend to give them.
It is worth noting, however, that where there is no nominated beneficiary on your super fund, the trustee of that fund will generally pay it directly into your estate. Your super fund will then become a part of the greater value of your estate and may be used to satisfy debt.
As always, a meeting with your Estate Planning Professional will allow you to get a good idea of any risks to look out for when considering the effect of debt on your estate, and he or she will be able to provide strategies to limit or overcome any detrimental effect that this may have.