What happens to your debts when you die?
Death does not extinguish a deceased person’s debts. Creditors to whom the deceased is in debt can still pursue repayment from the Estate. The order in which the deceased’s assets can be used to pay debts is governed by rules. And other limitations exclude the use of certain asset types to repay debt.
Executor’s obligation to pay deceased’s debts
One responsibility of an Executor of a deceased Estate is to pay the deceased’s debts from the Estate assets before distributing the Estate assets to the beneficiaries named in the deceased’s Will, if there are sufficient assets do so. The Probate and Administration Act (NSW) (the Act) authorises an Executor to collect the deceased’s assets and use them to satisfy the Estate’s debts. Failure to fulfil that responsibility can expose the Executor to a personal liability to any unpaid creditors.
If there are insufficient assets in the Estate to meet all the Estate’s debts, the Estate is classed as insolvent. The Executor may have to advise creditors that the debts cannot be repaid and ask for the debts to be written off. However, creditors are not obliged to write off debts, and if they amount to $10,000 or more, the creditor may ask the Court to appoint a bankruptcy trustee to the Estate. The Executor is also entitled to ask the Court to appoint a bankruptcy trustee if they believe the Estate assets are insufficient to pay all the deceased’s debts.
Secured vs unsecured debts
A secured debt is fixed to one or more of the deceased’s assets (e.g. a home loan secured against the deceased’s home by a mortgage). An unsecured debt is not attached to any asset (e.g. a credit card debt). The Executor will generally pay secured debts before unsecured debts, as if a secured debt is not paid, the mortgagee will exercise their right to sell the property to recover the debt.
If a beneficiary is bequeathed an asset that secures a debt, they are receiving only the equity the deceased held in that asset. Provided there is no contrary intention expressed in the Will that the debt is to be paid from the deceased’s other assets, If the beneficiary wants to retain the asset they must take on the debt attached to the asset. They must either repay or refinance the secured debt before the asset will be transferred to them.
An Executor must use the deceased’s assets in accordance with the order prescribed by the Act when paying unsecured debts. All unsecured debts have equal standing so no unsecured debt can be paid in priority to any other unsecured debt.
Are any debts passed on to beneficiaries?
Beneficiaries are only held responsible for paying off the deceased’s debts if:
- the debt was jointly incurred by the deceased and the beneficiary (i.e. the deceased and the beneficiary were co-borrowers and were both liable for the whole of the debt); or
- the beneficiary personally guaranteed the deceased’s unsecured debt; or
- the debt was secured against an asset owned by the beneficiary.
If the deceased’s assets are insufficient to pay out the deceased’s debts, beneficiaries will not be held liable for satisfying the debts of a deceased, including a HECS-HELP debt, credit card debts, taxes or home loans, unless one of the above situations applies.
Order in which assets are used to pay debts?
When paying the deceased’s debts the Executor must pay them in the following priority:
- Secured debts from the assets securing them; then
- Funeral expenses; then
- Testamentary and administration expenses (e.g. legal costs in obtaining Probate); then
- Unsecured debts.
Where the Estate is solvent, the Act sets out the order in which assets should be applied to pay debts. If the Will contains specific gifts of money amounts, the Executor must first set that money aside from the Estate assets that have not specifically left to a beneficiary. The order of application of assets to pay debts is:
- Assets undisposed of by the Will (e.g. lapsed or void gifts); then
- Assets not specifically disposed of by the Will but included (by a specific or general description) in a residuary gift; then
- Assets specifically appropriated for the payment of debts; then
- Assets charged with, or disposed of by the Will (by a specific or general description) subject to a charge for the payment of debts; then
- The fund, if any, retained to meet monetary gifts; then
- Assets specifically disposed of by the Will, proportionably amongst them according to their value.
What assets can’t be used to discharge debts?
Assets that were owned by the deceased as joint tenant with another person (e.g. bank accounts, shares, real estate) will not form part of their Estate. They pass by way of survivorship to the surviving joint tenant/s.
If the deceased has Life Insurance or superannuation and has nominated a beneficiary to receive those assets on their death, they will be paid directly to the nominated beneficiary.
The above assets do not form part of the Estate and are not available to the Executor to pay the deceased’s debts.
If the deceased did not nominate anyone as the beneficiary of their life insurance or superannuation benefits, the Life Insurer or Superannuation Fund may pay the benefits to the Estate. In that event, the Executor can use the benefits to pay for the deceased’s funeral and the Estate’s testamentary and administration expenses. They cannot use them to pay any of the deceased’s other debts unless a provision of the Will specifically permits the benefits to be used for this purpose.
Contact us for assistance obtaining a grant of probate or administering a deceased estate.