Legal Tip 329: Who Pays Debts of a Person that Dies?

Dying doesn’t get you out of a contract. If a person dies they are still legally bound to pay their debts. The debts will be payable out of the estate. This may reduce gifts give under the will, but if there is more owed than there is in assets the creditors will have no one else to chase unless there were personal guarantees etc.



Example

Barney is a pisshead with no assets. He dies from liver failure and leaves 2000 empty cans worth $20 at the recycling plant, $200 in a CBA bank account and a debt of $10,000 for a personal loan taken a year ago from Citibank.

His will leaves the cash in his bank to Homer and everything else to Ned. Homer is appointed the executor.

Citibank can take the $200, but Homer even if Homer took on the role of executor, there is no more money or assets for Citibank, unless they want the cans.

Homer is not liable as executor and neither is Barney’s 22 year old child or former wife.

Being dead it is unlikely Citibank will ever see the rest of their money as his earning potential is not the best – but probably no worse than it used to be.

 

If his beneficiaries agree to continue paying the loan, can the facility be kept open?

What I mean is for example if someone dies with 100k debt on a really nice house which no one wants to be sold. The person who inherits it can’t afford to pay down the 100k, isn’t able to qualify for a 100k loan, but is able to continue servicing the loan...are they allowed to just continue ticking along? Or does the property need to be sold?

 

If the property is used as security for a loan it won't be able to be transferred unless the mortgagee consents. This will usually entail applying for the new owner to apply for a new loan to pay out the old loan. But usually as long as the existing loan gets paid and title doesn't change it will be ok. I am unsure how long this could continue for. The mortgagee won't generally know of the death unless they are informed.

see
Legal Tip 74: Loans Death and Inheritance Legal Tip 74: Loans Death and Inheritance

 

What's the timeframe for this? E.g. say I bought a house for my parents and it has a small debt on it. They're too old to qualify for a loan, but they have enough income to service it for a few months until they figure out a solution. It's highly likely they'll figure out a solution but they need some time. Do they have a few months? Or are they basically required to either take a loan straight away or sell? This is actually the situation I'm in as pretty much everyone named in my will would struggle to qualify for a loan as they're either too old or maxed out, would not want to sell any of my properties, but I know have assets and other backup plans they could use to figure something out within a few months.

 

It will depend who owns the property and if the property is mortgaged for the loan.\
If a couple owned a property that was mortgaged and one died the lender will generally consent to transferring title without needing to reapply. If it was an investment property owned by the husband and he died and left the property to the wife she would likely have to requalify for the loan to take ownership, or have the loan paid out in some way - her funds or the estate etc.

 

Thanks and yes I get this part of it but how long does the wife have to get her act in order and figure out a way to pay out the loan or rework her finances so that she'll be able to qualify? Is there a grace period of a few months or is it like...the moment the will is executed, you need to be ready to roll or the house goes on the market?

 

Nothing can be done until probate is granted, then the executor should generally administer the estate and transfer properties without delay, otherwise they risk being sued by beneficiaries. If all are in agreement it could drag on for a year or more.

 

Yes your legal tip 74 is a common concern. I have seen solicitors inexperienced in estates actually tell beneficiaries that the debt must be paid by the estate first. Your example of the son being $1m worse off than the daughter is a great example. I also had one who transferred shares to one sibling and the other 50% of the estate was cash to the other. The one with shares inherited a CGT liability so didnt get 50% of the estate. In both cases the beneficiaries sued the legal adviser who admitted to the law Society they were unaware and even sought (bad) tax advise froma ever less skilled tax adviser.

I often argue its best to use a experienced conveyancing solicitor for conveyancing and a experienced estate specialists for wills etc. You dont want to be approaching Denis Denuto for advice on constitutional law

 

Got it thanks.