Debt ridden estates: challenges for executors

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MEDIA RELEASE Managing the debts in deceased estates is an increasingly complicated area for executors and family members to deal with, and it is important they are aware of their responsibilities and rights, says Anna Hacker, Wills & Estates Accredited Specialist at Australian Unity Trustees.           

“In the past, it was fairly common for people, particularly elderly people, to die without any real debt – they would usually have paid off the mortgage, and they might not have a credit card, for example.

 “However today, we are seeing people in retirement who still have a substantial mortgage and other forms of debt, and who are more likely to leave some debt behind for their executor to deal with.

“As a result, we are increasingly talking to people about debt in estate planning – both those who are creating an estate plan, as well as those who have been named as executor and need advice on managing the estate.” 

Ms Hacker said that there are specific ways that debt must be treated when it is part of an estate.

“While it doesn’t have to be a complicated area if planned correctly, it can cause some headaches.

 “For example, people need to be aware that if a property automatically transfers through to a beneficiary via a joint tenancy and the laws of survivorship, any debt on the property also transfers.  As a result, the beneficiary is suddenly left with the whole of the mortgage to pay and no recourse to the estate. 

“So someone who might have planned to leave their house to one child and all their other assets to another child, believing these to be of equal value, may in fact be putting the first child into debt.

“To prevent this happening, they would need to include a direction in their Will for their executor to first pay off the mortgage out of the estate, so the property can be transferred free of duty or encumbrances.

“Another common misunderstanding is that life insurance will be automatically used to pay off debts.  Many Wills specify that certain forms of “property”, including life insurance policies, should not be used to pay off debt. If it is the intention of the Will-maker to do this, the Will must reflect this,” Ms Hacker said.

 Another area of potential risk is if an executor is too hasty in distributing an estate.

 “If the executor distributes the estate to beneficiaries too early, and there are still debts that must be met, the executor may need to cover those estate debts themselves.

“The role of executor is one of great responsibility and, while it can run smoothly, there is potential risk and concern, and small errors may result in significant stress and time.” 

She said that to help avoid pitfalls with debt in estates, there are a few immediate steps that executors should take: 

  1. Ascertain all assets and liabilities, including any utility or other bills that still need to be paid.  Also some debts, such as HECS, may not be required to be paid
  2. Contact the bank to advise them of the person’s death, so they can put a hold on any direct debits.  It’s also a good idea to keep the bank informed of progress in the estate
  3. Recognise what order to pay any debts or responsibilities.  For instance, paying for the funeral takes precedence over any other claim, and can even be done before probate.  However a wake cannot be paid out of the estate.  Likewise a particular memorial – such as a ‘space burial’ where ashes are sent into space – can’t be paid for by the estate unless permitted by the Will or agreement is reached by the beneficiaries
  4. Understand what is inside the estate and what is outside – such as superannuation, and where the responsibility lies
  5. Appreciate the order of payment of debts – the first payment must be for the funeral expenses, then the testamentary expenses (ie: legal costs), then statutory obligations (ie: taxation) and only then are the actual debts of the person who passed away to be paid (eg: mortgage, credit card debt etc)
  6. Get good advice if there are any concerns or areas of uncertainty.

 “Acting as executor for an estate should be fairly straight forward for most people but it can be a minefield if you don’t get advice at the right time,” Ms Hacker says.