One common question that we often are asked in estate administration is whether a spouse or other family member will inherit or become responsible for the debts of a person after they die. This question is fuelled by some creditors who have been known to contact family members after the death of a loved one and suggest that they are now responsible for a debt.

In this article, we tackle this question and identify which debts might be inherited after death. Later this week, I will discuss some debts that generally cannot be inherited after death.

Please note: The following blog is intended to be general information only. The treatment of debts after death can often be a rather complex situation to navigate. As always, we recommend contacting us for advice that is specific to your situation.

Debts That May Be Inherited

When a person dies, their personal debts form part of their estate pursuant to section 2 of the Estates Administration Act. This means that any debts outstanding at the time of their death are paid off using their assets before anything is distributed to their beneficiaries. It is the responsibility of the executor to ascertain both assets and liabilities of an estate, including income tax liabilities, before making any distributions.

However, secured debts and jointly held debt are treated differently than other debts. These debts may pass on to other individuals and include:

Mortgages: If the deceased person had a mortgage on a property, the mortgage will normally be assumed by any beneficiary to that property, unless a contrary intention appears in a will pursuant to section 32 of the Succession Law Reform Act. Pursuant to the Act, a contrary intention does not exist simply through the usual “payment of debts” clause in the will.

In this scenario, the beneficiary will be responsible for paying off the remaining balance of the mortgage, or they might consider disclaiming the gift if the balance of the mortgage exceeds the value of the property.

Further, if multiple individuals are joint borrowers on a mortgage, the surviving borrower will typically be responsible for assuming the entirety of the mortgage and continuing payments.

Mortgage insurance is one way in which co-borrowers can alleviate the burden the death of one borrower may have on the other.

Car Loans:  As with mortgages, any co-borrower or co-signer of the car loan will typically remain liable for the debt. However, depending on the nature of the relationship with the deceased, their estate may agree to assume this debt. For example, it would be unjust for the co-signer of an auto loan to assume this debt when the vehicle is the subject of a bequest to a third party.

Secured or Joint Lines of Credit: If the deceased person had a secured or jointly held line of credit, the debt may be inherited by the beneficiary of the collateral or the co-borrower. For example, if the line of credit was secured by a property, the beneficiary (as described above) of the property will be responsible for paying off the debt in the same way as a mortgage.

If you’re unsure about your rights and responsibilities as an executor, or as the beneficiary under a will, it’s always a good idea to consult with a lawyer who specializes in estate administration such as the lawyers of Hull & Hull LLP.

Thanks for reading. Mark Lahn.