Debt when you die?

What happens to your debt when you die?

March 2017

Statistics Canada tracks the data and the numbers are getting scary! The debt to disposable income ratio has hit record breaking levels. On average Canadian households have significant debt burdens. Not surprisingly many folks are wondering what happens to all that debt when they die. Who pays it? Does the debt get passed to family members? Can you inherit debt? A comprehensive discussion on the matter is beyond the scope of this column, consider what follows an introduction to the subject.

First off you cannot inherit debt. Debt cannot be transferred by virtue of death, at least not without your signature. The details of how the debt gets paid and who pays for it is a little more complicated.

For the average Canadian a mortgage is the bulk of their debt. A mortgage is secured by the house. If you are the only name on the mortgage and you pass away, whether the home is sold or re-financed, one way or another the mortgage will likely be paid by the house.

Unsecured debts like credit cards and personal lines of credit are a little different. These types of debts are the responsibility of the person who incurred them. The exception is joint ownership or co-signors.If you co-sign for family member’s credit card or jointly hold a line a credit,upon their passing you are liable for the debt. Apart from joint ownership these unsecured debts will be paid by the deceased’s estate.

Secured debts, like a mortgage, will have first claim to the assets of an estate. The remaining assets in the estate will be used to pay any unsecured creditors, like credit cards and personal lines of credit. It is important to note that if you are an executor of an estate creditors come before beneficiaries. An executor must settle all debts of the estate prior to distributing assets to the beneficiaries. If assets are distributed prior to paying the estate’s debts the executor can become liable for the distributed money.

Assets with named beneficiaries, for example life insurance policies, RRSPs and TFSAs, are paid directly to the beneficiaries. They do not form part of your estate and will not be used to settle your debts. The remaining assets in your estate would be used to settle your debts, in general the more debt you have when you pass away the less money there will be for your beneficiaries.

If you pass away with a significant debt burden the assets in your estate may not be sufficient to pay your debts. In such a case the creditor may write the debt off as uncollectible and simply take the loss. In other cases the executor might declare bankruptcy for the estate. When this situation occurs it is strongly suggested the executor seek legal counsel.

Debt management is a key component of a well-structured financial plan. Often folks aim to be debt free by the time they retire and prior to retirement they have ample life insurance so their debt does not become a burden for their family.

Clinton Orr B.Comm(hons.), CIM, CFP, DMS, FMA  lives in Beausejour and is a portfolio manager with National Bank Financial.

 This information transmitted is intended to provide general guidance on matters of interest for the personal use of the reader who accepts full responsibility for its use, and is not to be considered a definitive analysis of the law and factual situation of any particular individual or entity.  As such, it should not be used as a substitute for consultation with a professional accounting, tax, legal or other professional advisor. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group.