Nobody wants to think about the financial impact of their death, though it’s very important to know what you’re leaving behind for your loved ones. Debt can’t be inherited, which is likely to come as some reassurance when you’re buying life insurance or writing your will.
Can Debts Be Inherited When You Die?
Any debts you own singularly cannot be inherited by your family when you die. If you have joint debts with your partner, they would become their responsibility. Your debts would still be repaid from your estate.
Debt won’t be passed on to your children. Debt can’t be inherited, but this doesn’t mean that your next of kin won’t experience some financial impact. Debt can still affect the loved ones we leave behind.
Despite this, there are many ways for the debt you leave behind to have an impact on the people you care about.
Read on to find out more about the truths and lies that surround inherited debt.
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Can Personal Debt Be Inherited?
Put simply; personal debt can’t be passed on to someone else. That said, it’s not always wiped away when you die.
Some creditors will cut their losses, gracefully accepting your death as a reason to give up on debt collection. In these cases, they’ll clear remaining debts and wipe the slate clean for your estate. Most creditors still want their money back so that they won’t wipe the debt straight away.
Debts Become Liabilities on Your Estate.
Your estate is made up of all your assets, like property and money left behind. When you die, your debts are paid back from the value of your estate. Debts are repaid in a specific order, starting with priority debts and moving down to unsecured loans. If your estate doesn’t cover the total value of your debts, they’ll be wiped once the money’s all gone.
It’s your executor’s job (as named on your will) to manage your estate when you die. They may be responsible for selling your property and paying back the money that you owed.
What Will Be Passed On?
You might die with hopes of leaving your loved ones with some financial security, but debts are considered a higher priority than money to be given to family, friends and charities. Put simply, whilst your children can’t inherit your debt, they might not inherit anything at all.
If all your money is used for debt repayment, there will be nothing left to give away.
What Happens to Shared Debts?
Whilst debts in your name will be cleared by your estate; joint debts don’t work the same way. If your debt is shared with someone else, it will become their responsibility. In most cases, this happens when a spouse dies.
Your spouse may still be liable for any joint debts and household bills. This is because they weren’t just yours, but were shared between the two of you and now fall to sole responsibility.
In the unfortunate event that you and your partner both pass away at the same time, the joint debts are shared between your estates and won’t pass on to your children.
Can Mortgage Debt Be Inherited?
Mortgage debt that’s solely on your name won’t be passed on to someone else. This is classed as a higher priority debt and will be paid back if it can be, using the value of your final estate. If your mortgage debt can’t be successfully repaid, your home will be repossessed.
Anyone else that shared your house, if the mortgage wasn’t in their name, will be required to leave the property so it can be repossessed and sold.
If you have a mortgage that’s shared with a spouse or partner, they’ll become liable for the full debt if you die. If you owned the house as joint tenants and your spouse or partner can’t keep up with repayments, they’ll risk losing the property.
Some couples own a house as ‘tenants in common’. This is slightly different from joint ownership. In this case, the house isn’t shared in full between two people but is split into two different shares. If you and someone else were ‘tenants in common’, you owned one share of the house.
This share of the house becomes part of your estate and could be sold to pay off your debts. If that happens, the remaining homeowner will need to buy your share or could be forced out of their home.
How Does a ‘Will’ Protect You?
Writing a will is an important way to express your final wishes. Your will tells everyone what you’d like, ideally, to happen to your estate.
Your will isn’t useful until your debts have been repaid. Though your debt won’t be inherited by those you leave behind, the will doesn’t give them protection and a right to your belongings. If your entire estate is swallowed up by debt, there will be nothing for you to give away.
Usually, wills specify how much of your estate should be given to different beneficiaries. Often, your estate is split into different percentages. If there’s anything left once your debts are paid off, what remains will be split between those that you’d named on your will.
People may lose out on certain items, like family heirlooms and sentimental items, if they’ve been sold to clear debts.
Protecting Your Loved Ones From Your Debt
Your loved ones will certainly feel the impact of your debt when you die. The people that feel the impact most are those that you’ve named as executors. At a time when they’ll be grieving, your loved ones might be chased by creditors.
Though nobody else is responsible for paying back what you owed, your will executors will be responsible for managing your assets and your debts. Executors don’t become personally liable, but still, have the stress of debt collection procedures.
You can protect your loved ones from your debt by making some financial plans. You may not have many assets but could probably afford a life insurance policy with a small monthly payment. The right kind of life insurance becomes an asset upon death – part of your estate that can be used to clear your outstanding debts.
Check the terms and conditions of your life insurance policy to see if it’s paid to a named beneficiary or will become part of your estate.
If you have a mortgage, your life insurance can help to pay the mortgage off and let your spouse continue to live there. That way, your spouse won’t lose their home whilst they’re also grieving your loss.
According to the Financial Conduct Authority, 17% of people aged 65 or older have some form of unsecured debt with an average amount of £1,130. Both of these figures are lower than with any other age group, but it is still a significant volume of people who may have debts that need paying off from an estate.
Your Financial Obligations When You Die
Your financial obligations, for the most part, stop with you. Debt can’t be passed down to your children, or on to your children’s children. This doesn’t mean that your debts can be completely ignored.
If you have debt when you die, you reduce the chance of any money being passed on to your loved ones. You might leave them with financial struggles that they may never recover from. In a worst-case scenario, though they’ve not inherited your debt, the financial impact of your credit situation could send ripples through several generations.
Wherever you can get on top of your debt as quickly and efficiently as possible, try not to owe money, and make sure that you’re protecting your family with good life insurance. We can’t predict the future, but you can make sure that you leave something positive behind.
Read our guides to managing your debt and what happens to your loans when you die.
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How Can Money Savings Advice Help Protect Your Family & Estate?
Here at Money Savings Advice, we have partnered with some of the UK’s financial brokers. They have already helped thousands of people reduce and remove a high percentage of debt, get the best life insurance deals and get Wills in place to protect their families and estate, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
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