During the early days of the mortgage business, brokers would require a lot of paperwork…
Now you can listen to our blog, “What Happens To Your Debt When You Die?” while on the go.
Before we can adequately answer this issue, we must first understand what happens to your assets when you die. Actually, a lot of it hinges on whether you were able to make a will before you died.
What Is Your Estate?
After you die, your assets and liabilities are transferred to an estate, which is a legal entity separate from you. To put it another way, it’s the properties and belongings you own or have a legal interest in.
If you make a will before you pass away, whatever you leave can be distributed among any family members. It can also include friends or other individuals you’ve chosen as beneficiaries. You’ll also have appointed one or more executors to ensure that your wishes are carried out.
If you don’t have a will or leave any instructions about what should be done with your belongings, your province or territory’s government will usually declare that you died “intestate” and set their own terms for the financial process after your death. Whatever you have left will be passed down to your relatives.
If you have no living relatives, the government will simply assume your estate, including any income or obligations.
What Is An Executor’s Role?
An executor is a person you appoint to study the terms of your will and ensure that they are followed. Although one of the executor’s principal responsibilities is to disperse any assets to their lawful beneficiaries, they must also:
- Make contact with the firm or legal representative that is in charge of protecting your will.
- Have your belongings and assets assessed
- Make funeral preparations.
- Create an estate bank account.
- Collect any cash made by your estate assets or accounts payable by redirecting or cancelling any mail, memberships, or licences in your name.
- Make an application for probate (if required)
- Take care of any expenses that arise from the estate (taxes, debts, etc.)
What Constitutes a Beneficiary?
A beneficiary, as the name implies, is someone who stands to inherit the money or property you’ve left for them. While an executor may take months, if not years, to complete all aspects of your will, your beneficiaries are legally entitled to receive their inheritance as soon as it becomes available.
If the matter moves to probate, which is a legal court process in which your will is verified and your executor is officially elected, your beneficiaries will also be notified. Beneficiaries can contest the terms of the will and object to any executors or other beneficiaries named in it during these proceedings.
If you have an executor, it is also their responsibility to contact your creditors and settle any outstanding bills. Normally, the funding to pay off those debts will come directly from the money generated by your estate assets. If your assets are insufficient, however, a slightly different procedure may be followed.
If your debts are big enough, your estate may be subject to provincial or territorial regulations. That allows your creditors to take everything. Although your beneficiaries would not receive any of your assets or things. They will not have to pay out of their own wallets. In fact, unless they’re named as a cosigner, no one you know will be responsible for your obligations.
Can You Inherit Your Parents, Spouse, Or Common-Law Partner’s Debt?
Fortunately, the same logic applies to any debts incurred by your loved ones. So, unless you’re a co-borrower, even if a parent, spouse, or common-law partner has a lot of outstanding debt when they die, their creditors can only go after the money in their estate.
However, if you’re a beneficiary of their estate, you may feel as if you’re paying for their debts. Because any inheritance they left you may be used to repay their creditors. Who will almost always demand payment regardless of the circumstances.
When Can Debt Be Transferred To You in The Event of Death?
Unpaid debts cannot be transferred to you under normal circumstances, regardless of your relationship with the deceased. Nonetheless, you may be responsible for some debts if a parent, spouse, or common-law partner dies, including but not limited to:
- Loans with cosigners
- Mortgage payments are made jointly.
- Accounts on joint credit cards
- Additional credit cards (if you had a secondary credit card)
In essence, you will only be liable for someone else’s unpaid debt if you originally entered a contract with them. Otherwise, all debt payments will be made immediately from the estate assets of the deceased person. If the estate does not have enough money to pay the creditors, it might file a consumer proposal or declare bankruptcy.
How Can I Prevent My Loved Ones From Inheriting My Debt?
We are fortunate in Canada to have rules that restrict creditors from passing financial responsibility to individuals we leave behind. When we die unless they willingly consented to be a cosigner prior to our death.
Nonetheless, some creditors and collection agencies will attempt to hold your family ones liable and will go to whatever length to compensate them for their losses. As a result, it’s a good idea to take some of the following precautions before you pass away:
Purchase life insurance – If you have a history of accumulating debt and your estate is the recipient, a life insurance policy may be worthwhile. Your dependents will be covered, and a percentage of the money you earn will be utilized to pay off obligations.
Make a will – Even if you don’t expect to die, having a will in place is great. It is one of the best methods to ensure that your loved ones are treated fairly once you pass away. Otherwise, your remaining assets will be subject to the laws of intestacy in your province or territory. This is what happens if you don’t identify any beneficiaries. Make careful to appoint a reliable friend or family member to serve as your executor.
Set up a recurring payment plan — If you don’t want the money to come from your estate, you can set up a plan with your bank that will automatically settle your debts if you die unexpectedly or become too unwell to care for them on your own.
Seek legal advice — Hiring a lawyer who specialises in wills, trusts, and estates is another approach to provide your beneficiaries and assets further protection. While competent legal advice can be costly, it may be worthwhile because it relieves the burden on your loved ones after you pass away.
Know your rights — A lawyer can inform you and your loved ones what creditors and debt collectors are authorised to do legally if you die in debt. The money you owe could be taken from your estate, but unless you’re a co-borrower, they can’t demand payment from a beneficiary or executor. Even if this is the case, creditors are not allowed to threaten or contact debtors outside of certain hours.
The Bottom Line
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