When we die we are all likely to have some debt within our estate. This could be a house mortgage, a car loan or something small such as a store account which is up to date but does have an amount outstanding. What happens to it?
To help us to learn the answer Ruan Jooste wrote an article headed “What happens to your debt when you die” in the Personal Finance of 21 September 2022. You can find the full article at d704-41d2-a6ed-3fcaf3060913 but this blog will give a short insight.
First it is important to know that all debt goes into your estate and how it is handled depends on the type of debt, what is in your will, whether or not you are married and under what circumstances and the insolvency of your estate. When you die, all of your assets and liabilities (debts) are transferred to a Deceased Estate Account and it is the responsibility of the Executor to pay your debts and distribute your assets in accordance with your Will. If you do not have a Will, the Master of the Court will appoint an Executor to do the administrative work.
There are 2 types debts – secured and unsecured – and how a debt is handled is dependent upon into which category a debt is placed. (Sebastien Alexanderson, founder and debt counsellor at National Debt Advisors) eg. A car loan is a secured debt whereas a store account is not. Thus, a secured debt can be covered by the company where the car is repossessed and sold to recover the debt. An unsecured debt is not able to be repossessed as there is nothing to repossess. If there are sufficient assets, in cash or kind, in the estate the debt is repaid. If there is not enough the debt is written off. It is NOT inherited by the heirs.
In the rare situation that debts may be inherited is where an estate is dissolved and distributed before the debts have been considered. Some collection agencies try to convince heirs that they are responsible for deceased person’s debts but this is not the case UNLESS the heir was a co-signee to the debt.
Important financial costs to be considered are Estate Duty paid to South African Revenue Services (SARS), Master’s Fees and Executor Fees. There is a pecking order to these payments and SARS is usually first in line followed by the bank if there is still a mortgage on a home. (Wouter Fourie CEO of Ascor Independent Wealth Managers)
Where the deceased’s employer or pension fund is making payments with benefits for a spouse or other named beneficiary or there is a life insurance policy in place, a lump sum is paid directly to the beneficiary(ies). The money is not included in the estate and so does not get included in any estate costs. Should these beneficiaries choose to do so, debts could be paid from these lump sums but it is not a requirement.