Law Talks Episode: Death and debts

Robyn:  Good morning and welcome to another edition of 4CRB’s Law Talks. And today we are joined once more by Attwood Marshall Lawyers Partner and accredited aged care professional, Debbie Sage, who will be discussing some of the obstacles people face when stepping into the role of executor of someone’s estate and dealing with debts and liabilities as part of the estate administration process. Welcome back, Debbie. 

Debbie: Thanks, Robyn. 

Robyn: Can you explain to our listeners what happens to someone’s debts after they die? 

Debbie: So, when someone passes away, their debts become part of the estate administration process. The debts can start to accrue while waiting for the official death certificate to arrive, which can take anywhere up to six weeks.

So, during this time, your loved ones or your personal representatives, such as your executor, should really begin to notify organizations like utilities, banks, council, etc. about your passing. This will just make sure that they’re aware that they are dealing with a deceased estate now and if the estate is solvent, they may need to wait a few months before bills can be paid.

We find that many people give a lot of thought to their assets when writing a will about deciding who will inherit them. However, it’s important not to overlook debt. Most people have some form of debt like credit cards, mortgages, car loans, bills. So, these debts really need to be considered alongside the expenses related to your estate administration such as funeral costs and legal costs.

Robyn: What is an executor’s role in paying the debts of a deceased person? 

Debbie: So, the executor has a duty to ensure that all debts are paid if they can be as part of the administration process. However, the executor must be careful to ensure that the estate has sufficient assets to be able to pay for those debts and must also be very careful to ensure that the debts are paid correctly.

Sometimes a debt may be attached to a particular asset in the estate, so the executor will need to be very careful and consider the terms of the will when attending to payment of debt. So, for example, if a property is being gifted to a particular beneficiary in your will and that property has a mortgage over it, then the executor must check the terms of the will to see if that property is meant to be given to that beneficiary free of any encumbrances such as a mortgage.

Okay, if the terms of the will do not say that the property is to be given to them free of any encumbrances then the beneficiary will need to decide whether they want to take over the existing mortgage to keep the property or they may need to instruct the executor to sell the property to pay off the mortgage and they’ll receive whatever’s left over after all those debts associated with the property, even capital gains tax, have been paid.

The executive really needs to be careful when paying debts and ensure that the estate has sufficient assets to cover all existing and future liabilities. Unfortunately, I’ve had many instances where executives have been very quick to pay debts, not realizing that the estate’s insolvent.

So before paying debts, executives should really have a good understanding of what’s in the estate.

Robyn: And what happens if someone has less money in the estate, then what’s owed to debtors? 

Debbie: So, if the estate owes more than what it has, it’s considered insolvent. In this case, executors should not pay any debts until they fully understand the extent of the insolvency.

The executors must inform creditors about the situation and that the estate might be insolvent. Sometimes, creditors might agree to waive the debt or come to an agreement as to how it can be paid or reduced. An estate can be declared bankrupt. just like a person can during their lifetime. So, it’s important to note that executives can be personally liable if they pay debts in the wrong order.

So, for this reason, among many others, it’s crucial to get legal advice early to protect both the executor and the estate. Now in Queensland, the priority for debt payments is funeral and administration expenses first, followed by secured debts and then unsecured. So, creditors are usually patient with deceased estates and appreciate regular updates from the executor and communicating realistic timeframes brought to them.

Robyn: What about if someone’s debt is jointly held debt, such as if a property was mortgaged and owned jointly by two parties? 

Debbie: So, just like a joint bank account, any debts held jointly with another person don’t usually form part of the estate. So, if an executor is unsure if the estate is liable to pay a debt held by the deceased with another person, or it’s been co-signed or guaranteed by another party, then they should seek legal advice immediately to determine who’s liable for that debt.

So, in the case of a jointly held mortgage, the surviving co-owner typically becomes responsible for the entire mortgage. Now this can be a significant financial burden, so it’s important to plan ahead and factor this in when you’re doing your estate plan. And then as part of the estate planning process, co-owners should also consider how their surviving owner is going to manage repayments, so mortgage repayments, if one owner was to pass away. So, this could include life insurance policies that cover mortgage balances or setting aside funds to ensure that the mortgage can be paid. 

Robyn: So just on that, talking about superannuation and life insurance, can an executor rely on these to pay a deceased person’s debts? 

Debbie: So generally, life insurance policies and superannuation funds are protected from being used to pay debts of a deceased estate.

However, this protection doesn’t extend to funeral and testamentary expenses, which can sometimes be paid from life insurance proceeds. So, when drafting your will, you really need to consider this. Life insurance policies can only be used to pay estate debts if the policyholder explicitly directs it, either through a contract or by specifying it in their will.

So, using life insurance to pay debts can sometimes be advantageous because it doesn’t incur capital gains tax and it can protect other estate assets from being sold down. So, making the decision to use life insurance policies to pay estate debts really requires a holistic view and consideration of all your estate assets and liabilities when you’re doing your estate planning.

Special care really needs to be taken when drafting any directions in your will because inaccurate or ambiguous wording can have unintended effects on your estate and it can incur unwanted tax implications or legal fees. Now when it comes to superannuation, the proceeds are usually distributed in accordance with the nomination under the policy or as directed by the Superfund Trustees if there’s no valid nomination.

And when it comes to insolvent estates, both life insurance policies and super funds are protected from creditors under the Bankruptcy Act.

Robyn: Okay. So, let’s just recap the steps an executive should take when determining what debts need to be paid and how they should be paid. 

Debbie: Okay, so the first thing is to assess solvency.

So, an executive must review the estate assets and liabilities to determine if the estate is solvent or insolvent. The next step is to identify the liabilities. So, an executive must understand what liabilities form part of the estate, their attachment to assets if that applies, like mortgage or car loans, and how they must be handled according to the will.

Now the next step would be to notify the bank. Executors should inform the deceased’s bank of their passing and request payment of funeral expenses from the deceased’s account if there’s no prepaid funeral.

The next step would be to seek assistance if needed. Now if estate assets can’t cover burial or cremation costs, check for government assistance. There are bereavement allowances and there’s also state funeral assistance schemes as well.

Now, the next step is to inform creditors. The executor should contact organizations with outstanding bills and inform them that the debt is now part of a deceased estate. You should then record payments. If the estate is solvent and debts are paid by the executor or another party, keep a strict record of the payments, including invoices and receipts, for future accounting to the beneficiaries.

And lastly, legal advice. If an executor finds the process complex or unfamiliar, they should seek legal advice to ensure that their duties are being fulfilled properly and efficiently to avoid the risk of personal liability. 

Robyn: Yeah, I imagine some of these matters can be quite complex to manage during what’s already a very stressful time. And as you pointed out, Debbie, best to engage professionals who can give you the expert advice both during the estate planning process and also with administering the estate. Thanks for your time today, Debbie. 

Debbie: Thank you so much.

Robyn: You’ve been listening to Law Talks here on 4CRB, which you can hear every Friday morning from 9 o’clock. And this interview is available on our website 4crb. com.