Plan Today For Your Death And Debt Not Tomorrow
Three topics some people single or married don’t talk about are Death, Wills, Debt, and Inherited debt.
Can you really inherit debt? Let’s find out.
It’s so important to protect your family from head to toe with insurance, debt-freedom, and planning of your departure from earth.
We need to do more planning and talking so it makes things a bit easier for a widow or child looking after your financial affairs.
I can tell you from experience that it’s a big job and one that can wear you out for years.
What Happens To Debt When You Die?
Holding debt for Canadians is just a way of life especially mortgages, vehicles, loans, and so forth.
Not everyone is debt-free and can enjoy the luxury of not worrying about anything more than home maintenance and utility bills.
There are two answers I’m going to give you about whether you can inherit debt.
- No, you cannot inherit debt if you did not sign an agreement or your name is not associated with the debt. A debt cannot be transferred.
- Yes, you can inherit debt if you co-signed for credit with the deceased.
There is no transferring of credit when a spouse dies if you did not co-sign.
Pretty simple but every creditor has regulations when it comes to the death of a customer.
Our son’s teacher has been teaching the class about fairy tales for a project.
I can clearly hear her tell the class, “Remember friends what a fairy tale always ends with, and they lived happily ever after.”
Doesn’t the happy ever after life sound good?
Unfortunately, life doesn’t always go as planned as people are dying and there’s not much we can do about our time.
Inherited Debt And Downsizing
However, one topic that you don’t hear lots about is, can you inherit debt after the death of a loved one?
As mentioned above the answer is no unless you co-signed and this includes your children or any other family member.
Often you might hear about parents co-signing for their child to get a loan or a new car.
If your child dies and you co-signed then you just bought yourself a vehicle.
This could be a spouse, child, mother or father, grandparents, and step-parents.
Creditors have no shame and will try to contact anyone related to the deceased to get payment.
Typically the debt collector will go for the estate first to get their money but not everyone sells their estate.
By this, I mean that any debt of a deceased person stays with the home.
Sadly, if you inherit debt and do not have cash, investments, or help to pay for inherited debt an estate sale may be your only option.
This is why we see a house up for sale after the death of a loved one.
- First of all the house might be too big for one person or children living in the house.
- The mortgage payments are just too high to pay on one income.
- Some people simply don’t want to live in a house if their loved one died in it.
Life Insurance, Pensions and Work Benefits
Before I get into this I want you all to know that before you sign anything to read the fine print.
Talk to a professional to see what your best options will be and the effect comes tax time for the deceased.
Always compare life insurance policies as there are many life insurance advisors to choose from.
I always encourage my readers to get some form of term life insurance at least to have something.
To be fair term life insurance is not that expensive at all especially if you don’t smoke or have health issues.
For years now we’ve paid $70 a month for the two of us since we quit smoking in 2012.
Back when we were both smokers we were paying well over $130 a month.
Due to Mrs. CBB’s disability, her life insurance policy was half of what I received.
We are transferring over to a different insurance policy since our investments are over the 100k mark.
We’ve also enrolled our son and are paying his life insurance policy for 10 years at $500 each month and he’s set for life.
It’s kind of our little gift to him that we hope he appreciates.
As well, some employees have work benefits have life insurance for the employee but your choice if you pay into it.
Unions or defined benefits plans may pay your beneficiary a year or even two years of your income if you die.
We purchased life insurance from Manulife Canada and are very happy with our advisor.
We’ve been with him for 15 years and if we have any questions he answers them quickly via email.
Life insurance policies can pay out big depending on what it’s worth and the situation.
It could leave enough money to pay off a mortgage, vehicle loans, debts so the family home doesn’t need to be sold.
As for works pensions consider if you want to release the funds but be warned you’ll get hit with massive tax bills.
We know, we went through it but in the long-term my mother-in-law became mortgage-free.
Selling The Estate If You inherit Debt
For those that do sell, it’s often to take the equity and pay the debt in both names and move on.
Be sure to check whether you’ve been paying for mortgage insurance as you may find they will pay the remaining mortgage owing.
Personally, we have life insurance and skipped mortgage insurance for one reason.
Mortgage insurance pays off the remainder of the mortgage
Life Insurance gives you the money and the entire house would be covered not just a remaining portion.
For example, if you paid $400,000 for a house and owe a $200,000 mortgage insurance would give you the $200,000 whereas life insurance that you’ve been paying for is for 1 million dollars then you’ll get 1 million dollars.
See the difference?
If you lived alone in your home any debts and taxes will be paid first once the estate is sold.
The executor or spouse/partner can also sell any assets to earn more cash to help pay the debt collectors.
Also when you draw up you’re WILL make sure that each of you leaves the right to survivorship of the estate to each other as beneficiaries.
If this is not in each of your WILLS you may be forced to sell everything and the assets to pay off any debts.
Inherited Debt From Credit Cards
Be wise when you sign up for a credit card because it can get costly if you don’t pay the bills.
A friend of ours asked us if we thought credit card insurance was worth paying for.
My answer was it depends on how much debt you plan on putting on the card.
If you’re diligent and pay your credit card off in full every month I wouldn’t bother.
At the same time if you have a large debt and pay minimum payments it may be worth it.
Most interest rates are atrocious and will take years and years to pay if you don’t pay it off.
Nevertheless, if you both jointly co-signed for a loan and one of you dies the estate is not responsible for the debt, you are.
Yet, if you applied for a credit card there will be the owner of the card and an authorized user.
That’s how my Canadian Tire Mastercard is set up with me be the owner of the card and Mrs. CBB an authorized user.
Thankfully she’s a frugal bird and won’t go hog-wild spending money on stuff we don’t need.
Even so, my first credit card in Canada was set-up where I was able to use my wife’s credit card but not be responsible if she were to die.
She gave me the right to use the credit card as an authorized user to spend and she’ll pay for it.
Remember that you need to read and understand the implications of co-signing anything.
Final Income Tax Return Of The Deceased
Lastly, there is still a final income tax return that has to be submitted to Revenue Canada of the deceased.
With so many deaths from Covid-19 and updated guidelines for preparing returns for a deceased person, there are lots to do.
Are you the legal representative?
You are the legal representative of a deceased person if you are in one of the following situations:
- You are named as the executor in the will.
- You are appointed as the administrator of the estate by a court.
- You are the liquidator for an estate in Quebec.
- The estate designates itself.
- You are requesting to be recognized as the person who will manage the CRA tax matters for the deceased person, where there is no will or other legal documents.
They may or may not owe money for taxes and if they do that payment will also come from the estate first.
Money In The Bank To Pay Debt
The executor of the WILL may also have access to a bank account left by the deceased.
Again, this is a bit of a process and you will always have documents you’ll need to bring.
Just a tip, get lots of death certificates because everyone wants one.
The funeral home can help with this if you let them know in advance.
I believe we got about 10 of them.
Deceased Bank Account Is Frozen
If any debts need paying off they can use the cash in the deceased bank account.
This is why I mentioned if you are married to make sure both of your names are on any bank accounts so they don’t get frozen.
We went through this and paid for any debts out of pocket until the bank unfroze the account.
Once that is complete then the Executor of the estate can distribute to the beneficiaries unless the spouse is still alive then he/she gets the cash.
Downsizing Your Living Arrangements
If you were married searching for an apartment to rent or a smaller home that is affordable is reasonable.
You may also have children or family that may allow you to live with them for free or for a small rental fee.
When we bought our home the homeowner had lost her husband and she had to be in her 80’s.
Her daughter sat with her during the real estate negotiations while we were outside.
She was no longer able to care for the home and moved to an apartment that suited her needs.
I’m sure the sale and move took a weight off her daughter’s shoulders.
This scenario is not uncommon at all whether you are young or older.
The last thing you want to do is live paycheque to paycheque so make wise choices.
Get Rid Of Debt As Soon A You Can
Death is a dark time for anyone close to the deceased so dark that they may not make decisions in the right state of mind.
When Mrs. CBB’s father passed away she told me the world was just a big blur.
The last thing she wanted to deal with was bill collectors if there were any.
Thankfully there were not and the house was paid in full and no credit card debt.
Technically that’s the best scenario for anyone which is why we paid our mortgage off fast.
There becomes less red tape to deal with after the fact if you or the deceased are debt-free.
If you or your spouse or partner have a Will drawn up this is even better.
This way you will have a Power of Attorney set up to deal with all the hoops to jump through.
Being a power of attorney for financial needs and health care is not an easy job.
I will explain more about that in another post but beware of your commitments before you say yes.
Will You Inherit Debt For School Loans
What happens to your student loan debt if you die?
If the borrower dies, all federal student loans will be forgiven. In order to have Canada Student Loans forgiven, contact the National Student Loan Service Centre.
For the provincial or territorial part of the loan, contact the province or territory of the borrower, or the financial institutions responsible for the student loans.
As well, if you become disabled and have a student loan the government may forgive the loan.
No Money In Estate To Pay Off Debt
What happens to your debt if you die with no estate?
As always consult a professional when it comes to whether you will inherit debt.
If you die and there is no estate to take from whoever you owe a debt to likely will have to write the debt off.
Not everyone owns a house or has equity in a home to pay for debts in the deceased person’s name.
If you live alone in a house you can’t afford selling it may be the only option along with any contents to pay any debts.
However, if the living partner or spouse continues to live in the house he/she could talk to their banker to get an equity line of credit.
This will allow the spouse or partner to pay off any debts of the deceased that is in both of their names.
If you start to get calls from credit companies for payments of the debt ask them for a copy of the debt receipt with both your signatures.
No signature on the debt by you then it’s not your debt to pay back.
Creditors are thirsty for their money so they will go after anyone such as family members but likely will try to get money out of the estate.
Do I Inherit Debt From Credit Cards?
A deceased credit card debt can be tricky but there’s only one thing that can save you.
If your name is on the credit card application and your partner or spouse dies you are responsible for the credit card debt.
Why? You signed your name on the application.
If you had not signed your name you would not be responsible.
However, if there are assets in an estate the credit card company can take from there first.
If you have no estate and you die then the credit card company will likely write the debt off since there is no money to take from.
Overall Thoughts – Can I Inherit Death?
What I’ve learned through experience in Canada and educating myself on inherited debt all I can say is to plan ahead.
There are many things we need to prepare for before we leave this earth that can leave those behind with a sense of peace.
If you make their role in your death easier then start with a Will, Life Insurance, and pay off debts including all credit cards.
Make a list of all the assets, debts, credit cards, loans, investments, etc. for your Power of Attorney or living spouse.
Always remember that rules can change so don’t leave death to rest revise any changes year by year.
It’s kind of weird prepping for death but trust me when you’re gone everyone will appreciate the efforts.
I’ll be working on a budget binder sheet for the tracking I mentioned above and post it on the Free Resources Page shortly.
Discussion: Have you ever been in a situation such as this and would like to share your experience comment below. Thanks