By Liz Maroney, Westlawn Wealth Adviser
21 July 2016
What happens to your debts after you die? While it’s something we don’t like to dwell on, it is an important question. After all, we don’t want our loved ones to be burdened with our debt after we’ve gone.
It’s not the kind of legacy we want to be remembered by.
So, how are any outstanding debts we leave behind dealt with by our estate?
It’s the responsibility of the executor to distribute the assets of the estate. And as a general rule, creditors come before beneficiaries. Therefore, outstanding debts must be paid before any assets can be distributed to your beneficiaries. The executor may need to sell assets to repay debts, reducing the assets available to beneficiaries.
If an executor distributes all the assets to beneficiaries before paying all debts of the estate, then they may be personally liable for payment of any outstanding debts.
But, as in life, there are also exceptions to the rules when it comes to repaying debts and distributing the assets of a deceased estate.
For some debts of the estate, other people may be responsible for repayment. Such debts include those that:
- Are secured against a particular asset that is owned by someone else
- Are in joint names with someone else (such as a credit card debt or mortgage), or
- Have been guaranteed by someone.
Assets protected from creditors
Not all assets of your estate are available to creditors either. There are certain assets that will be out of reach to creditors and therefore your beneficiaries can receive the full benefit of those assets. These protected assets can include:
- Superannuation death benefit payments received by the estate
- Proceeds of life insurance policies received by the estate, and
- Proceeds from a compensation claim which forms part of the estate.
Protected assets can play an important role when planning how your estate will be passed onto your loved ones.
While these assets are protected from creditors, they can still be used to pay off certain debts, however. To do this though, your Will must authorise your executor to use protected assets to pay specific debts. For example, your Will could authorise the executor to use life insurance proceeds to pay off the mortgage on the family home.
Life insurance can therefore be a valuable asset in your estate if you have debts you wish to cover to protect your family’s future financial security.
What if I die without a Will?
This is something you really don’t want to happen. Yet according to the NSW Trustee & Guardian, which is the NSW government body responsible for the management of deceased estates, “on average 45% of Australians do not have a current Will”.
If you do die without having a current Will in place, you are said to die ‘intestate’. If this happens, the government will use a default Will, appoint an executor of their choice and divide your assets, including your house, according to a process and formula specific to your particular state. You have no control over how your assets are distributed.
Here’s how the NSW government handles the distribution of an estate where someone dies intestate.
Planning your estate
Careful estate planning can help ensure that your assets are passed onto your loved ones in the most appropriate, tax-effective manner, according to your wishes.
As a Westlawn Wealth Adviser, I can help create an effective estate plan that takes into account your assets, family situation and the needs of your intended beneficiaries to:
- Reduce the risks of your Will being contested
- Ensure your intended beneficiaries receive the right assets when they’re in a position to responsibly manage those assets
- Protect your beneficiaries’ inheritance from bankruptcy or divorce
- Utilise tax-effective structures such as testamentary trusts and superannuation, and
- Plan the continuation or winding up of your business through effective succession planning.
To ensure you leave the kind of legacy you want to be remembered by, please contact Liz Maroney to discuss your estate planning needs.
- Call 02 6642 0433.
- Email firstname.lastname@example.org
It’s important to note that I am not a legal adviser. For legal advice in relation to your estate, you should consult your solicitor or other legal adviser.
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Liz Maroney and Westlawn Wealth Management Pty Ltd ABN 32 124 861 409, Authorised Representatives of GWM Adviser Services Limited ABN 96 002 071 749, Australian Financial Services Licensee, 105 -153 Miller Street North Sydney NSW 2060.