What happens to your debt when you die?

A deceased estate is a term for your assets, income, and liabilities after you pass. This is vested in the Master of the High Court, who appoints an executor to manage the affairs of this estate – including: collecting assets, liquidating the estate’s liabilities, and distribution of the balance to heirs. The executor is your legal guardian and representatives, thus making them responsible for ensuring that debts are paid off, keeping in mind that SARS gets their money first. Should you pass intestate, the distribution will take place according to the laws of intestate succession.

After locating and collating the assets in the estate, the next step is for the executor to determine your estate’s liabilities. It is important to note that no beneficiaries can receive any inheritance until all the debt in the estate has been settled and the estate has been wound up, which could take months or even years.

If there is sufficient liquidity or cash in the estate to settle the debt, the executor will pay your creditors accordingly without having to realize any assets in your estate. Once settled, the executor can proceed with distributing the balance of the estate accordingly. On the other hand, if there is not sufficient liquidity in your estate to meet its debt obligations, the executor may need to sell certain assets and use the proceeds to pay the creditors. In doing so, the executor may look for equity in the form of life policies, property, vehicles or other assets to pay the estate’s creditors. If having sold all the assets in the estate, the executor is still unable to settle all the debts, the estate can be declared insolvent and the laws of insolvency will then apply to the estate.

Where you have secured debt (such as home loans), your property is security for the repayment of the loan. This means that the bank can repossess the home and sell it to pay off the debt. To protect against this, many bondholders take out bond cover to ensure that there is sufficient liquidity in their estate to pay off their home loan should they die. In doing so, they would nominate their estate as the beneficiary on the policy to ensure that the proceeds are paid directly into the estate in the event of death – allowing the executor to pay off the home loan. It is therefore advisable to ensure that your policies are correctly structured to ensure that the executor can settle your home loan without having to realize assets intended for your loved ones.

If you own property jointly with your spouse and your surviving spouse is unable to make the monthly bond repayments, the property may be repossessed by the bank. If you are married in community of property, in the event of your passing, all the debts in the joint estate must be settled and only then will your surviving spouse have a claim for their 50% of the net estate.

If you leave bonded fixed property to your children without providing liquidity for the home loan to be settled, they may need to register a bond over the property in their own and take over the monthly home loan repayments. If they do not qualify for a bond, they may be left with no choice but to sell the property, which is contrary to your intentions. When paying off the estate’s debt, bear in mind that secured debt is given priority over unsecured debt. In the case of unsecured debt, such as credit card debt which is not tied to any asset, the lender has no asset that they can seize and they will need to take legal action to recover their money according to normal procedure.

If you have joint debt, such as a joint credit card with your spouse, both you and your spouse remain responsible for that debt. If you die, the executor can use money from your estate to settle a portion of the joint debt. However, if there is no money available to do so, your spouse can be held responsible for the full amount, placing an additional financial burden on them. Where the debt is held in your name but you have appointed another person to stand surety for that debt, they can be held responsible for the debt in the event of your death and, if the debt is secured, the creditor will be entitled to repossess and liquidate the asset to recover their monies.

Something that is often overlooked in the estate planning process is that minor children and surviving spouses have a legal right to claim maintenance from a deceased estate, and these claims outrank all other claims, including those of heirs and legatees. In the absence of an express provision in a will, minor children can exercise their common law right to claim maintenance from the deceased estate. Similarly, a surviving spouse who has not been provided for financially by the deceased can bring a claim against the deceased estate in terms of the Maintenance of Surviving Spouses Act for reasonable maintenance, and such a claim ranks in the same order of preference as a minor child.

As is evident from the above, estate planning is as much about dealing with the assets in your estate as it is making provision for the debt in your estate and is best navigated with the assistance of an expert. Our financial experts have been unpacking and providing practical advice on the best ways to preserve your financial freedom. Contact our financial advisors to ensure that you are receiving shariah compliant finance advise.

Anglowealth is an Authorized Financial Service Provider (FSP Number: 46755)

(Source: Moneyweb, 2020)


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