Factoring Debt in Your Estate Planning

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When creating an estate plan, most people focus on the gifts of assets they plan to leave behind for their loved ones. While the property and money you have acquired over the course of your life can make a significant difference for your children or other friends and family members, you also need to consider one other important factor in your estate plan as well: the debts that you have acquired.

Debts do not just disappear when you pass away. While your beneficiaries will never be personally liable to pay back debts you have acquired (unless they co-signed for the obligation), debts do need to be paid from the estate in most circumstances. An experienced estate planning professional at OHL Lawyers can help you to understand the impact that your debts may have on the estate you leave behind and can provide guidance for exploring ways to minimize or eliminate debt obligations so you can maximize the inheritance your loved ones receive.



How Do Your Debts Affect Your Estate Plan?

 To make informed choices about the gifts you give to your heirs, consider these key facts about how debt is going to affect your estate plan:


  • Jointly held debt is going to become the responsibility of co-debtors.

If you have a spouse who shares the mortgage on a family home or if you and any of your children or business partners have taken on debt together, the co-debtors are going to become fully responsible for repayment of all of the debts when you die. Many people opt to purchase a life insurance policy to make sure their loved ones or business partners can repay shared debts upon an untimely death. Even if you opt out of buying insurance, be sure to consider the debt obligations you are leaving for your loved ones as you distribute assets.

  • Secured debts don’t go away upon your death.

If you have a home or other assets that you owe money on, the secured debt does not disappear when you pass away- even if you were the sole debtor. If you leave the home or asset to someone, your heir takes title to the property subject to the registered mortgage. In most cases, the bank calls upon the person who takes title to repay the outstanding debt. In other words, your child who you leave your house to may be required to repay the mortgage when you have passed away. If there is not enough money available to repay the debt owed, the property may be sold and your heir would get only the residue from the proceeds of the sale after the debt has been paid.


  • You are the only one responsible for non-secured debt.

The debts must be paid out of your estate- but if there is not enough money in the estate, your children or spouse do not have to pay back debt that is held in your name only.


  • Your estate must repay debt before heirs can inherit.

If you owe money to creditors, creditors can make a claim on your estate. The creditors are going to need to be paid out of the estate’s funds before the people you have left money or property to are able to inherit. Even if you wish to give your child 100 per cent of the available cash you had in the bank and you make this desire clear in your will, creditors can still take what is owed out of these funds first. If there is not enough cash but debts are owed, property may need to be sold.

  • Executors are responsible for making sure debts are paid out of the estate.

If an executor pays back debts out of his or her personal funds, the executor has the right to be reimbursed from the estate.


  • Estates can be declared bankrupt.

If there is not enough money to repay debts that the estate owes, the estate can be declared bankrupt. A bankruptcy trustee may be appointed to finalise the debts and to distribute any available funds among creditors in order of priority.

Because debts need to be paid first, your heirs may have a long wait to inherit as creditors are given time to make claims on the estate and as money is paid to creditors or property is sold to satisfy creditors. You may wish to consider debt repayment or arranging for the transfer of assets outside of the probate process if you don’t want debt to have an adverse impact on your efforts to leave behind money and property for those you love.

OHL Lawyers aims to help clients create a comprehensive estate plan that takes debt into accounts and that considers all other factors relevant to the gifts you are leaving for those you love. We also provide legal representation to individuals who are named as executors and who have the responsibility for making sure the wishes of a deceased individual are carried out after death. Call us at 1800 770 780 or contact us via [email protected] to schedule an appointment with one of our experienced estate planning lawyers.

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