Can debt die, too?

In addition to the stress and sadness of losing a loved one, winding up an estate can be a significant burden to your executor and heirs.

Planning ahead goes a long way to understanding where your debt goes after you die, helping find the right solutions for you and making your executor’s life easier, before it's too late.

Debt is here to stay

Unfortunately, passing away doesn’t mean creditors will just write off your debt. In fact, it becomes your executor’s responsibility.

After you die, your executor first has to inform creditors of your passing, sell all assets and ensure any debt is settled. Only then will they be able to distribute what’s left out of the estate, whether it’s money or belongings, to close family members or other beneficiaries.

Executors can be held accountable and could incur a penalty should creditors not be made aware of the situation. They could also be bypassed altogether, reinforcing the importance of good, detailed record keeping.

Here are a few things you can do to offer your executors protection and peace of mind while navigating what can be challenging and stressful times:

1. Settle as much debt as possible before retirement
2. Ensure all outstanding debt is well documented and up to date

Creditors will only write off debts if proceeds from the disposition of property aren’t sufficient to cover the outstanding amount, forcing executors to prove that debt repayment is impossible. Creditors will settle for partial repayment, whereas friends and family end up empty-handed. Even worse, creditors could deny any debt write-off if they’re under the impression that the wind-up was poorly handled. Heirs would then be liable for any outstanding debt or have to incur cost to refuse their inheritance.

As for debt held jointly – credit cards, co-signing a loan – the surviving debtor becomes the sole individual responsible for repayment. Even if the co-borrower only used the credit card once, and most of the owing balance is due to expenses made by the deceased, he or she remains liable for the entire amount.

Creditors (don’t) take all

Although executors will have to sell assets until there is no longer any debt outstanding, two significant exemptions apply:

Life Insurance Policies

Estates don’t include life insurance polices if beneficiaries are named. Only beneficiaries are entitled to receive the entire amount. Even when executors are also beneficiaries, they cannot be forced to use that money to pay off debt.

Registered retirement savings plans (RRSPs)

Estates don’t include RRSPs if beneficiaries are named. Only beneficiaries are entitled to receive the entire amount. However, any beneficiary outside of your spouse might have to pay income tax upon withdrawal.

Debt or inheritance?

As we age, estate planning becomes more important. While most people update their will around retirement, very few will think about debt settlement. It is just as important to ensure your debt will be managed after your death as it is to plan how your estate will be distributed and what you will leave behind.

By acting now, you ensure your hard-earned nest egg will go to your loved ones instead of being used up to pay off debt. A Licensed Insolvency Trustee can help you find the solution you need to make your executor’s life easier so your loved ones keep not only good memories, but also a bit of money.