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As baby boomers continue to age, they face a growing number of questions about how they’re going to manage in the last phase of their lives. Of the nearly nine million Canadian men and women who will reach retirement age over the next decade, most will likely have some debt. This leaves many older men and women worrying how they will cope with their debts on a fixed income and what will happen if they die before they can repay those debts.
Some common questions include:
Though most hope to leave a legacy for their loved ones, in many cases that won’t be possible given their current financial state. Understanding what happens to your debts after you pass away can help you remedy your situation with the time you have left.
Unfortunately, creditors will not simply write off your debts upon learning of your passing. Rather, these become the responsibility of your executor (also known as the estate trustee).
When you die, your executor will be responsible for notifying all your creditors, selling your assets and ensuring payment of all your debts. Only then can they begin distributing any remaining money or possessions to your next of kin or other beneficiaries.
Your executor will be accountable and could face penalties for overlooking any creditors, not paying them in full or not paying them ahead of your beneficiaries. It is therefore important they keep a detailed account of their steps and actions.
For the protection and peace of mind of your executor during this confusing, busy and often stressful time, it is advisable for you to:
Your creditors may write off your debts if the proceeds from the sale of your assets is insufficient to fully pay off the outstanding balances. However, your executor must be able to prove it’s not possible to pay the debts from your estate. In this case your creditors must accept a partial payment and your beneficiaries will receive nothing.
Your family members will generally not be responsible for your debts when you pass away. However, jointly held debts – such as joint credit cards or loans – are an exception. In that case, the individual who co-signed or guaranteed the debt will become responsible to pay any balance not covered by funds in your estate. A jointly held or spousal credit card, for example, can make the surviving cardholder responsible for the entire debt, not just their own purchases.
Although most estate cash and assets are available as payment to creditors, there are two main exceptions:
Life insurance policies – Creditors have no claim to any life insurance policy payout to named beneficiaries. If you have a life insurance policy with a named beneficiary, the full payment will go to the beneficiary – even if the person is also a beneficiary listed in the will.
Registered Retirement Savings Plans (RRSPs) – If you have an RRSP and have designated a beneficiary, the RRSP and its funds do not become part of your estate and are not available to your creditors. It is important to note, however, that if your beneficiary is not your spouse, they may be responsible for paying income tax on your plan - as the RRSP is deemed to have been cashed out upon your death.
As the number of retirees continues to grow, so does the importance of estate planning for many people. While it’s important to keep your will up to date – it’s also essential to consider how you’ll reduce or eliminate your debt before you pass away.
Meeting with a lawyer and financial planner are important steps to confirm beneficiaries and ensure there will be something to bequeath. But if debt is an issue, consider meeting with a Licensed Insolvency Trustee to get the Life-Changing Debt Solution you and your loved ones need.
With a bit of knowledge and planning now, you can be confident that what you have will go to the people you love – rather than be picked apart and sold off for the benefit of your creditors. It will make settling your estate less complicated for your executor and help leave a legacy to those you care about.
Based out of Kitchener,
Wes Cowan is a Licensed Insolvency Trustee and Senior Vice President at MNP LTD. To learn more about how MNP Debt can help, contact our local office at 519.772.7461 or toll-free at 310.DEBT (310.3328).
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*310-DEBT doesn’t operate in MB, NW ON and QC.
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