What exactly happens to someone’s debt after they die? Do the spouse or children get saddled with it, or does it just dissipate, thanks to some well-wishing pact on the part of creditors? Wouldn’t that be nice.
The answer lies somewhere in the middle. Debt is non-transferrable without a signature—that is, unless you’ve co-signed on a loan or mortgage. Just as your spouse’s university debt doesn’t suddenly become yours upon marriage, a family member’s overloaded credit cards (if they’re under his or her name alone) aren’t your responsibility. On the other hand, if you’re a joint cardholder, the debt transfers to you, but not if you’re merely an authorized user, according to Yahoo! Finance.
So where do the creditors direct their attention after a death? To the deceased’s estate, otherwise known as the sum of their real estate, money, and all-around stuff left behind. If there’s money to be had in the estate, outstanding debts will be deducted from there, meaning that the inheritance you expected may shrink. On the other hand, if the debt exceeds the value of the estate, then the surplus doesn’t become your burden; the creditors must simply take the loss.
Probate is the term for how an estate is processed and transferred after a death. In the U.S., probate courts proceed based on state-by-state rules, and in Canada, each province has their own probate fees and the wills (or lack thereof) are gauged by each province’s laws. In Ontario, for instance, a probate court will determine if a will is legal and then decide how to handle the will’s probate requirements.
According to Estate Planning for Dummies, the estate gets distributed in a fairly standard order (with minor differences between states), beginning with legal fees and administration costs, followed by family allowances and funeral costs. Creditors are next in line, and must be notified of the person’s death by the estate trustee, usually by advertising in a local paper. Fortunately, they’re only permitted to file claims during a certain timeframe. Outstanding debts on a mortgage or car will take precedence over credit card debt—but all will take precedence over any inheritance.
According to MSN, “a loan collateralized by an asset usually stays with the asset,” meaning that assets such as cars or homes can be repossessed if the estate is insolvent and nobody steps up to settle the debt, and also that if a will bequeaths you a house with an outstanding mortgage, it becomes your responsibility. Interestingly, if you own property in one or more states in the U.S., you will have multiple probates, and each will be subject to that state’s laws.
Fortunately, not all assets qualify as probate estate. Assets that have a named beneficiary, such as life insurance policies, RRSPs, and pensions don’t count—unless your estate is the beneficiary. Likewise, joint property (as between spouses) can bypass probate, through a niftily named process known as right of survivorship.
However, there’s another option. According to a recent article in the Globe and Mail, children cannot be held liable for the debts of their parents after death, and they can even opt to bankrupt the estate by spending whatever money is tied up in it before the debt can be repaid. This is technically true, but only if creditors don’t pounce on the estate during the timeframe laid out in the newspaper notice, which is generally not shorter than 30 days, and could last up to 90 days. The trustee must also give the creditors fair notice. If an estate trustee doles out the estate to its beneficiaries without waiting on the creditors, they may become liable for paying the debts themselves.
Authorized users on cards belonging to the recently deceased should beware, though. Your credit score may be negatively affected, and continuing to rack up charges after the death of the primary cardholder is illegal, as is using a card knowing that the estate is bankrupt.
They say that nothing’s certain except for death and taxes, and as it turns out, taxes after death. While creditors might sometimes get shortchanged, the tax man is not so lenient. The Canada Revenue Agency says you should notify them with the deceased’s date of death as soon as possible, and then make arrangements to stop or redirect payments of HST, working income tax benefit, and/or Canada child tax benefit.
Then comes the tricky part.
If you’re named as the executor of the deceased’s will, you have some responsibilities thanks to the Income Tax Act. These include filing the morbidly dubbed “final tax return,” ensuring that all outstanding taxes are settled, informing beneficiaries which amounts from the estate are taxable, and getting a clearance certificate to indicate that the deceased’s business with the CRA is officially completed. Don’t expect a break due to grief—as with any other return, the CRA is firm, stating that “If you file the final return late and there is a balance owing, we will charge a late-filing penalty.”
Any way you look at the situation, it’s a sticky one. Needless to say you should consult with a legal representative immediately after a loved one’s death on how to proceed, and regarding whether you need probate or not.
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