What happens to your debt when you die?

Most of us have debts, but what would happen to those debts if we died suddenly? Who would pay the amounts owing, and what would occur if there wasn’t enough money to cover them?

We investigate different debt scenarios, and consider the role of financial planning in creating a trouble-free legacy.

Tip: Did you know debt consolidation can help to protect your legacy, if you are struggling to keep on top of your payments? Find out more here.

What happens when you die?

When someone dies, their assets and liabilities must be listed on an estate reporting form, which is submitted to the master of the High Court, along with a will (if there is one) and the nomination of an executor of the estate. The master issues a letter of executorship, which gives the executor the power to take control of the assets and liabilities of the deceased.

“There is a misconception that when you die, all your debts die with you. This is far from the truth. Those debts become due and payable, and it is the responsibility of the executor appointed by the master of the High Court to settle such debts when administering the estate,” explains advocate Monica Moodley, legal manager at Old Mutual.

Known debts must be reported when the assets and liabilities of the deceased are reported to the master – and creditors can bring their claims to the executor of the estate so these can be factored into the final accounts.

Who will be held liable for your debts?

“There is no automatic obligation for a third party to settle your debts, unless the debt is shared, or you’re married in community of property - in which case, your spouse will be liable,” explains Moodley.

A spouse is also liable if they co-sign a suretyship or have equal ownership of a house, even if married out of community of property.

If you’ve co-signed on a loan, the executor of your estate will have to assess the loan to make sure the debt is paid equally by both parties, according to Craig Torr, director at Crue Invest.

“If the estate is insolvent, meaning there’s no liquidity to pay for the loan, the other co-signee will have to pay the full amount owing, because all signatories to the debt are responsible for repaying it,” he says.  

If you’re in debt counselling when you die, any outstanding debt balances will be transferred to your estate. Your executor must ensure that all debts are paid before distributing the deceased’s assets to beneficiaries.

The value of life insurance

The best way to protect and pass on assets to your beneficiaries is to ensure there’s enough cash in your estate when you die, which you can achieve by taking out life cover.

When co-signing a loan agreement, it’s a good idea to ensure that both parties have life cover so the loan can be settled after death, and the remaining party won’t be obliged to sell their personal assets to cover this.

If you own a home worth R3 million, and R2 million is still owing on the bond, the house may have to be sold to pay the amount outstanding if there’s no life cover in place. This is true even if the house has been left to the surviving spouse, for example.

If you die with a life policy in place and you have nominated your estate as the beneficiary, the proceeds of the policy will be paid into the deceased estate, says Torr. These proceeds will be included for estate duty purposes and can be used to provide liquidity in the estate.

“Where the deceased has nominated a beneficiary in the policy, like a spouse or a child, the proceeds will be paid directly to the beneficiary – but they’ll be deemed property in the estate, so estate duty will be charged,” he explains.

Additional ways to protect your assets

There are additional vehicles that protect your assets from creditors, Torr says.

“Money invested in approved retirement funds, such as pension, provident, preservation and RA funds, is protected subject to a few exceptions. These include money accruing to SARS and money owed in terms of a maintenance claim,” he explains. “Funds invested in a living annuity are protected from your creditors, even though the income from this investment is not.”

Torr points out that debts owed in a deceased estate rank alongside claims for maintenance by a surviving spouse and minor children, so the executor must pay all debt before distributing any funds from the estate to the deceased’s heirs or beneficiaries.

Moodley notes that, although you can leave your assets to anyone you like when you die, assets may be sold to settle debts if there’s not enough liquidity in the estate.

“You can consider setting up a trust that can be used as a vehicle to protect your assets against being attached,” Moodley says. “A testamentary trust can be set up to hold assets for your minor children – but there are initial costs and running costs to consider.”

It's useful to speak to a financial planner who can perform an estate planning exercise. This doesn’t only focus on debts, but also on unforeseen costs paid after death, including executor’s fees, capital gains tax on assets, estate duty, and master’s fees. A properly conducted exercise can help to identify opportunities to provide an income for your loved ones after you die.

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