Monday, March 12th, 2018
Canadian households lead the world when it comes to debt. According to a recent report by the Organization for Economic Co-operation and Development, Canadian household debt, expressed as a percentage of the size of the economy, is the highest in the world, at over 100%. But since you won't live forever, what happens to your debts when you die?
When you die, all of the assets (your worldly possessions) and liabilities (your debts) in your name go into a separate legal entity called your estate. Your will names an executor (or more than one) who is responsible for managing the assets and liabilities in your estate and making distributions to your beneficiaries (the people you've named in your will to receive an inheritance). An executor can be a trusted friend or family member who's willing and able to do the job, or a professional trustee.
Your executor is legally required to pay the estate's expenses, locate your creditors, and pay your legitimate debts from the assets in your estate. According to Sandra Foster, author of You Can't Take It With You: Common-Sense Estate Planning for Canadians (6th ed), "legitimate debts include outstanding credit card balances, car loans, mortgages, unsecured and secured loans – the usual life stuff."
Your executor must also file tax returns and can obtain a clearance certificate from the Canada Revenue Agency to indicate that all outstanding taxes have been paid. After all expenses, fees, taxes, and debts are settled, then your executor (or administrator if you didn't have a will) can legally distribute any remaining assets to your beneficiaries in accordance with your will.
If your estate assets don't cover all of your debts and other obligations, "your executor must pay off the debts according to the provincial formula," says Sandra. "If there's no money left, there will be no assets to distribute to the beneficiaries."
The inheritance your beneficiaries may have been counting on may not materialize, but take heart in knowing that your debts are not inherited. "If my children are my beneficiaries," explains Sandra, "they're not responsible for my debts unless they signed for them. My debts are taken care of at the estate level."
The exception Sandra refers to is if someone, like a parent or sibling, co-signed for a loan, (for example: a credit card) and their name never came off. When you die, the person who co-signed would be responsible for the outstanding balance.
If there isn't a way to satisfy the creditors through the provincial formula, the estate could declare bankruptcy. Despite this, "creditors may still come knocking at the door, trying to get the surviving spouse to satisfy debts of the deceased, even though they aren't legally responsible," warns Sandra. "That's where getting legal advice can be really valuable. And having an executor who knows what they're doing when it comes to debt."
If you're in a high debt phase of your life, you may want to look into purchasing life insurance. If the beneficiary is your estate, the payout from the policy could extinguish your debts and take care of your partner and any dependents after you're gone.