Debt follows us to the grave and understanding what happens to it thereafter is critical to effective estate planning. To a large extent, what happens to your debt depends on your estate’s solvency, the type of debt owed by the estate, whether the debt is guaranteed or co-signed, the nature of your marriage contract, and the terms of your will. Here’s what to know.
Understanding the role of your executor
At the outset, it is important to understand the important role that your executor plays in handling the debt in your deceased estate and the extent of their mandate in administering your affairs. In the event of your passing, all your assets, income, and liabilities are referred to legally as a ‘deceased estate’. Once your death is reported to the Master of the High Court, the office’s first task is to appoint an executor to your estate who will thereafter become your estate’s legal representative whose job will include discharging the debts in your estate. When it comes to settling the estate’s debt, keep in mind that the executor is required to settle the estate’s liabilities before distributing anything to the heirs or legatees.
Advertising for creditors
After holding preliminary meetings with your loved ones and preparing a draft inventory, one of the executor’s first jobs will be to advertise in the local newspaper and government gazette for creditors of the estate to come forward and lodge their claims. In this regard, keep in mind that credit does not die and continues after the debtor’s death – thereby giving creditors the right to claim from the deceased estate. As far as the advertising process goes, the executor is required to leave the advert open for a period of 30 days.
The nature of the debt
When assessing the debt in the deceased estate, the executor will need to determine whether the debt is secured or unsecured as this will have bearing on how it is settled. Secured debt is protected by a particular asset, such as fixed property, where the financing institution can hold the property as security in the event of default payment. On the other hand, unsecured debt – such as credit card or retail debt – is not protected by an asset and, in the event of default payment, there is no asset for the bank or financing provider to repossess in order to recover costs.
The existence of joint debt is another factor that can cause complications in a deceased estate, such as where a couple shares a credit card or jointly owns a bonded property – bearing in mind that where debt is shared with another person, all signatories to the debt are responsible for the repayment thereof. So, for instance, if a couple has a joint credit card, the surviving spouse can be held responsible for part or all of the debt on the credit card and, if there is insufficient liquidity to settle the credit card, the surviving spouse may be held responsible for the full amount owing.
If a couple jointly owns a bonded property and the surviving spouse is unable to make the monthly bond repayments, the property may be repossessed by the bank. Where bonded fixed property is bequeathed to one’s children, they may be required to register a bond over the property in their own name and, if unable to qualify for a bond, may be forced to sell the property. Further, keep in mind that where a person has signed as guarantor to the deceased’s debt, that person may be held personally liable for settling the debt if the estate is found to lack liquidity.
The nature of your marriage contract
The nature of your marriage contract has direct bearing on how your debt will be dealt with in your deceased estate. Where a couple is married in community of property, both spouses remain jointly and severally liable for all the debt in the estate, including any debt that was incurred before the date of marriage. Upon the death of the first-dying spouse, the joint estate will be dissolved on the basis that a joint estate cannot have one owner. In doing so, the executor will settle all the debts in the estate, including home loans, credit cards, and contractual debt. Once all debt has been settled, the surviving spouse has a claim for 50% of the original joint net estate.
Using the proceeds of life policies to settle debt
Life cover can be used effectively as an estate planning tool to ensure that there is sufficient liquidity in your estate to cover your debt, although the correct structuring of the policy is vital. Remember, if you have nominated beneficiaries to your life policy, the proceeds of the policy – while considered deemed property in your estate for the purposes of estate duty – will be paid to those beneficiaries in the event of your passing. To ensure that the proceeds of your life policy are available to settle the debt in your estate when that is your intention, it is advisable to nominate your estate as the beneficiary of the policy as this will allow your executor to use the proceeds in discharging your estate’s debts.
Estate liquidity and solvency
Estate liquidity will also have a bearing on how debt is dealt with in your estate. A common problem faced by many executors is that of illiquidity, which is where an estate lacks sufficient liquid assets to cover its debt and other financial obligations. In such circumstances, the executor will look to assets in the estate that can be realised such as property, vehicles, collectibles, and equity. Selling off assets that were intended for the benefit of the deceased’s heirs and legatees can have devastating financial consequences for the loved ones left behind and can leave them in a financially vulnerable position.
When it comes to debt in an insolvent estate, the executor is required to notify creditors in writing of the insolvent status, following which the estate will be administered in terms of Section 24 of the Insolvency Act in conjunction with the Administration of Estates Act. Remember, the forced sale of an asset to cover the debts in an estate is never ideal as it is less efficient, riskier, and more time-consuming, and can significantly delay the winding-up process. Further, a forced sale could have unintended capital gains tax consequences for the estate.
As is evident from the above, understanding the nature of the debt in your estate and putting mechanisms in place to ensure that your debt can be honoured thwarting your objections is an important part of the estate planning process that should not be overlooked.
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