Many people are unaware what happens to their finances when they die and therefore fail to plan appropriately which means their families are often left with financial burdens.
What happens to my debt if I die?
When you die any debt you leave becomes a liability on your estate.
If the estate has insufficient assets to cover the debts, the debts need to be paid in priority order until the assets are exhausted. Any remaining debts after this are likely to be written off. This means that your loved ones are not left with any assets from your estate when you die.
If the person left no estate or assets when they die, the debts usually die with them, they do not become the responsibility of the relatives.
Who needs to arrange payment of outstanding debts?
The executor of the estate or administrator is responsible for arranging payment of the debt using assets from the estate. The executor is not personally liable for covering the debt.
How do I know how much debt is left?
An executor will need to go through all financial statements and paperwork to establish the total amount of outstanding debt and who they are owed to. If there is no guarantor for the debts then it needs to be covered by the estate. If any of the debt does have a guarantor, they are liable to cover the debt.
Joint debt, such as a joint credit card or mortgage usually passes on in full to the surviving person(s).
To save your loved ones stress when working out how much debt is owed, Four Wealth Management provide clients with a ‘My Documents’ pack. This gives you a place to write down all existing assets, policies and debts and enclose any necessary paperwork. You can then let your executors know where your pack is kept when the time comes.
Should I take out life insurance?
One option you could consider to settle the debts you owe when you die is life insurance. Life insurance policies can be tailored to your individual circumstances but are commonly used to pay off outstanding debts or your mortgage. It could also be used to pay a lump sum to your beneficiaries to give you peace of mind knowing they are provided for.
Life insurance can also be used to settle the Inheritance Tax (IHT) Bill so that your beneficiaries do not need to sell assets to cover it.
The younger you are when you take out a policy, the lower the monthly premiums are likely to be.
A life insurance policy can also be used to reduce your Inheritance Tax liability, by setting it up and transferring it into trust so that it is outside of your estate. The policy held in trust will pay out the proceeds to the trust which the trustees, in accordance with your wishes, can appoint to the beneficiaries. As the proceeds are payable to the trust and not your estate they will not be assessed with the assets in your estate for IHT.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority.
Protect your assets today
Contact Four Wealth Management to book a no-obligation review to determine the best ways to protect your assets and pass on wealth to your loved ones.