Death and debt
by Tim St. Vincent
People often say that death and taxes are the only two sure things in life. Well, they’re partly right, I would say death, debt, and taxes are the only sure things in life. At some point in our lives all three of these things will come together.
We will all eventually pass away and when we pass, we’ll no doubt have some debt in our lives and taxes will still have to be settled. As the purpose of this article is not taxation, I won’t comment much on that, beyond stating that the odds are pretty good that you can file two tax returns when someone passes. You’ll likely be able to file what is called the terminal return (the final return for the deceased) and an estate return. There can be some tax advantages to filing the two returns. Please consult with a lawyer, financial planner, or accountant regarding tax consequences regarding death.
So then what about death and debt? What happens to my debt when I pass? Well, to some extent, you don’t have to worry about that, I mean, you won’t be around – but what about your survivors? Your children? Does the debt pass to them? Do we have a debtor’s prison?
Let’s start with a few basic points. No. Canada doesn’t have a debtor’s prison; your debts do not pass to your children. Now that we have that out of the way, let’s get into some details.
Generally speaking, all of your debts are considered to have passed to your estate when you pass. What does that mean? Well, when you die, your assets (the things you own) are passed along to your beneficiaries through a document called a will. (Talk to a lawyer about what happens if you don’t leave a will. There are certain laws that will determine who gets what.) This can take a bit of time to sort out, and someone has to look after all of it. This person or persons is/are called an executors. While they are looking after all the paperwork, your assets are held in what is called an estate, usually referred to as “the estate of ______ (insert name of the deceased).” It is the responsibility of the estate to pay all your bills. In order to pay your bills, your estate, through the executor can sell assets or draw against your savings to pay your bills. This includes any debt that has been transferred to the estate; things like credit card bills, lines of credit, car loans, utilities, and mortgages that still need to be paid off.
If there isn’t enough value in the estate to settle all of your bills, the debt does not pass to the children of the deceased. If the debt is greater than the value of the estate, then that portion of the debt is forgiven. There is an order in which debt is paid. Secured creditors are paid first (things like a car loan, or a mortgage), then unsecured creditors are paid next (things such as credit cards, utility bills etc.). Some creditors may forgive some or all of the debt on compassionate grounds, or settle for a lesser amount. That is somewhat rare and at the discretion of each individual creditor.
Banks, credit unions and other financial institutions will typically freeze the accounts of the deceased once they are aware of the death of an account holder. Be aware that these financial institutions maintain the “Right of Offset” once the person passes. What this means is that they have the legal right to take funds out of the account of the deceased to pay any debts that the deceased may owe to that financial institution.
Sometimes people are concerned that family members may find out about their debt once they die. The only person who should be aware of this is the executor. Of course, there is no guarantee that the executor won’t share this information, but as part of their job, they are supposed to keep this type of information confidential.
The best way to minimize any worries about debt after death is to do your best to reduce debt. Have a budget, track your expenses, stay on track and pay off debt as quickly as possible. If you can stay on top of things, ideally the only debt that should be left once you pass are a few small utilities bills and maybe rent. As is almost always the truth, the best way to stay on top of your bills is with a solid budget. This applies in life and in death.
• The information in this article is not a legal opinion and should not be relied upon as such. Please consult with a legal professional regarding all estate settlement matters.
Tim St Vincent is a retired CFP and is a Certified Educator in Personal Finance with the Credit Counselling Society, a non-profit organization. If you wish to contact the Society for further information, assistance or to attend a webinar, please call 1-888-527-8999 or visit www.nomoredebts.org or www.mymoneycoach.ca.