Debt follows us to the grave, and understanding what happens to it after death is a key part of sound estate planning. How your debt is handled depends on several factors, including your estate’s solvency, the type of debt, whether it’s co-signed or guaranteed, your marital contract, and the provisions in your will. Here’s what you need to know.
The role of the executor: Once your death is reported to the Master of the High Court, an executor is appointed to administer your estate. This person becomes your estate’s legal representative, responsible for settling all debts before any assets are distributed to heirs or beneficiaries. Your executor will begin by meeting with your family and preparing an inventory of your assets and liabilities.
Advertising for creditors: One of the executor’s first duties is to place notices in a local newspaper and the government gazette, calling on creditors to submit claims, and these adverts remain open for 30 days. It’s important to remember that death does not extinguish debt, and creditors retain the right to claim from the deceased’s estate.
Secured vs unsecured debt: The executor must assess whether your debt is secured or unsecured. Secured debt, like a home loan, is backed by an asset that can be repossessed if payments aren’t made. Unsecured debt, such as a credit card or store account, is not tied to an asset, making a recovery more complicated if the estate lacks liquidity.
Joint debt and guarantees: Joint or co-signed debt can complicate estate administration. If you share a credit card or home loan with a spouse, both parties are equally responsible for the debt. If your estate lacks the funds to settle the balance, the surviving spouse may be held liable for the full amount.
Similarly, if someone stood as guarantor for your debt, and the estate cannot settle it, that person could be legally responsible for repayment. Also worth noting is that if you leave bonded property to your children, they may have to take over the bond or sell the property if they’re unable to qualify for a loan.
The impact of your marriage contract: Your marital contract plays a significant role in how debt is dealt with after death. Notably, if you were married in community of property, your estate is considered a joint estate with your spouse, and both partners remain jointly and severally liable for any debt, including debts incurred before the marriage. When one spouse dies, the joint estate is dissolved, and the executor must settle all debts, including loans and credit agreements. Only after settling liabilities can the surviving spouse claim their half share of the net joint estate.
Life policies and debt settlement: Life cover can be a valuable estate planning tool to ensure there’s enough liquidity to settle your debts, although the structure of your policy is critical. If you nominate individual beneficiaries on your life policy, the proceeds will bypass your estate and be paid directly to those individuals. However, note that these proceeds are considered deemed property in the deceased’s estate, subject to a few exceptions. To this extent, if you intend to use life insurance to settle estate debt, it is advisable to nominate your estate as the beneficiary.
Estate liquidity and solvency
A major challenge in estate administration is liquidity—whether there are enough liquid assets (like cash, investments, or policies) to cover debts, taxes, and administration costs. If the estate is found to be illiquid, the executor may need to sell assets such as property, vehicles, or collectibles, which can have serious consequences for heirs, especially if these assets were intended as inheritances. Keep in mind that forced sales often result in lower returns, create delays, and may trigger capital gains tax, adding further complexity and cost to the estate. Naturally, forced asset sales are not ideal as they are time-consuming, carry risks, and can delay the winding-up process significantly.
Planning ahead: Understanding the nature of your debts and putting strategies in place to manage them after death is an essential part of estate planning. Whether it’s ensuring sufficient life cover, avoiding unnecessary joint debt, or providing for liquidity, careful planning can protect your heirs and ensure your estate is administered efficiently.
* Tapfuma is a Certified Financial Planner professional at Crue Invest.
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