Estate planning – do your debts die with you?

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What happens to debts when you die? Is your family responsible for paying them off? Rod Cunich explains what happens next.

If only our debts died with us … but they don’t. As with ghosts, they live on to haunt those we leave behind.

Generally speaking, creditors come before your beneficiaries. Your deceased estate must pay all your debts before a distribution can be made to beneficiaries. If that means selling assets to pay the debts, the executor must do so; even if it reduces the assets available for distribution to beneficiaries.

If there are insufficient assets available to satisfy all your debts, your deceased estate can be bankrupted in the same way an individual can be bankrupted.

There are some very important exceptions to this scenario. Some assets are sacrosanct and can’t be touched by creditors. Your beneficiaries will receive the benefit of these assets even if the deceased estate is bankrupt.

So what are these protected species of assets? They include:

• superannuation death benefit payments received by the estate
• proceeds of life insurance policies received by the estate
• the proceeds from a compensation claim which form part of the estate

If you or one of your beneficiaries is exposed to financial risk because of your/ their occupation, then the use of these protected assets can play an important role in your estate planning.

On the other hand, these same assets can be used to pay off debts when no other funds are available. Your will must authorise your executor to use protected assets to pay specific debts. A common example is to authorise your executor to use life insurance proceeds to pay off a home mortgage. Life insurance can be a very valuable asset in your estate if you have debts you wish to cover for the sake of your family.

Be wary of the dreaded personal guarantee. We often guarantee business debts or debts of family members – then forget about the 

exposure. The business or family member pays the lender the home repayments, unless you die and the debt has not been discharged. Most guarantee documents allow the lender to call in the guaranteed amount upon the death of a guarantor … even if the borrower is 

up-to-date with payments. A lender could serve a demand on your executor for payment, which puts at risk some or all of the gifts to beneficiaries. Again, this is an issue for planning.

Lastly, executors should act with extreme caution. If they distribute all the assets to beneficiaries before they pay all debts of the estate, then they may be personally liable for payment of the debts. Being the executor of a deceased estate is no easy task and carries with it a modicum of financial risk.

The information in this article should be considered general in nature and legal advice should be sought. This information has been provided by Rod Cunich, author of Understanding wills and estate planning.  Rod can be contacted via his site, where you can learn much more, and also buy a copy of his book.

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Total Comments: 24
  1. 0

    and then there are always the smart asses that go after a widow, when they die with nothing to their name and threaten her with court and all sorts of stuff, it’s illegal but they still do it, my father-in-law died without a stamp to his name, so they went after his wife even after they had taken the car, it was not until I met the guy at the door and then called the police that he decided discretion was the better part and he never returned

  2. 0

    At last REALLY honest and valuable information


  3. 0

    An Insurance Bond is considered to be Life Insurance Policy. I will go out on a limb here and say…. as Superannuation taxes increase and company taxes reduce, then Life Insurance Bonds become more popular. Particularly for those taxpayers who are in danger of increased super taxes. Insurance Bonds could become the new Superannuation.

    • 0

      There are two things with Insurance bonds that worry me Frank.

      1. They don”t pay enough interest it always appears less than Banks.

      2. What happens if the insurance company is bankrupted, I tell you what you do your money.
      But saying that they are tax free.

    • 0

      Started a comminsure child advancement Bond (basically an insurance bond) for each of the 5 grand children but now management fees have been jacked up to 2%. Unfortunately their returns are not as impressive as their fees.

    • 0

      Yep, I know what you mean. There is a fair wack of salesman’s commission in the bonds unlike a fully franked dividend from a blue chip listed company.
      mango, don’t the Comminsure Bonds offer a choice of investment funds? I guess they all perform lower than their reputation for paying on claims?

  4. 0

    G’day folks;

    After reading the above article, ” an eye-opener for me ” I believe that in all fairness regarding the issue discussed, providing the “deceased – has never defaulted” on monthly debt payments & through prudent financial management over many years has amassed a considerable, though modest asset balance to their name.

    Therefore banks & lenders, by legislation upon receiving official notification of a “client’s passing” must be required as a respectful goodwill gesture to immediately & permanently cancel all remaining debt & not seek redress from the deceased person’s estate beneficiaries. Besides; Banks & lenders annual publicized profit statements, as required by Law, clearly show they make insane profits through “other various means” that by comparison make a late client’s remaining debt a piffling drop in the ocean.

    • 0

      There is no goodwill with banks Drewbie.

      I was widowed suddenly when my husband died in an Industrial accident in 1985.

      Even though I had three little kids I sat in the bank managers office while he explained I would lose my home etc because of my husband’s business debts.

      Fortunately my father had insisted on life insurance and mortgage insurance when our first child was born and that saved the roof over our heads and paid out the business loans.

      I’ve never seen a more relieved person as that manager who dreaded what he had to do to me and the kids.

      I cannot recommend insurance like this more highly to anyone with debts and dependents.

      When something like this happens it is bad enough without losing your home as well.

      Never count on compassion from corporations as they are not human.

    • 0

      Drewbie what happens if you owe a large amount say one million big ones and die I think the banks will certainly chase that, I know a lot of people who owe a lot more than that.

  5. 0

    Leave Nothing….No debt….No Assets……It saves a whole world of heartache for Family & Friends!
    Organise it properly….it is your responsibility….
    ot that of others!

  6. 0

    Drewbie,that’s the funniest thing I have read since someone wrote “Collingwood for the Flag 2016” Having worked in Banks & Credit Control/Debt Collecting,I nearly fell off my chair laughing!

  7. 0

    If you run a business never have your personal assets in your name period. The only thing I own here in Aus is my car and they can have that one. They cannot touch my wife’s assets if she has no involvement in my affairs.

    • 0

      That is how business people view the world……take the money and if it goes pear shaped well, stuff it at least my wife and I are not out of pocket! How honest is that? On the Gold Coast where I Iive there are several ‘millionaire’ business men that have done this numerous times, and guess who loses? The little people like tradies and sub-contractors awaiting payment for work done, that was never intended to be paid for by these businessmen mongrels. And you, Vincent, think that is fair? Get a life!

    • 0

      Yes vincent. It is not that hard to set up a Limited Liability Company to protect assets. We learnt about that. All my businesses have been under that umbrella. The tax advantages are worth the effort alone.

      These days a handshake means nothing.

      I was forced to sell an investment property for 3/3rds it’s value because a bank manager lied about interest rates.

      I simply don’t trust anyone in business now.

    • 0

      Rae, how did you calculate the value of the property to be 3/3rds?

      Diamond Jim, tradies need to work smarter on the GC and use progressive invoicing to minimise their losses.

      Vincent, I know you don’t speak for anyone but yourself. There are many many business owners who give personal guarantees.

    • 0

      Meant 2/3rds Frank. Took a 30% discount during the business loans hitting 23% era. Admittedly I learned a lot about what not to do when leveraging and never had problems after. A nice young couple bought the house 2 hours after it went on the market.

      So when a crash comes or an interest rate rise you can sell quickly at the right price.

      No point whining about it as I was lucky I owned it to sell otherwise I’d have lost everything eventually at those interest rates.

  8. 0

    You are a mug when you give a personal guarantee.If it is not worth it if pursuing it through the normal financial avenue’s does not work, it is not worth being involved and that includes family members. Business is business do not get personally involved. Nobody gave me a leg up and I had to get there under my own steam, I expect others to do so as well. We can.\’t all be winners.

  9. 0

    Oh Diamond Jim. I ALWAYS have paid my bills and never have left a genuine supplier out of pocket. Do not make presumptions when you do not have the details. And do not judge me when you don’t know me.



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