I haven’t read a clearer story than this one from The Times. It’s so clear that I feel the need to share it with everyone I come across. The gist of the story is that your debts are never written off when you die. When you die, creditors will still have a claim on your assets.
With many of us in debt nowadays, increasing numbers of people die owing money, or leave money to beneficiaries who are in the red.
Many people mistakenly assume that their debts will be written off when they die. In fact, their creditors will still have a claim on their assets, including, potentially, their share of a jointly owned home. Similarly, if you leave money to someone who is in debt, it may be that person’s creditors who inherit. Robert Reid, president of the Personal Financial Society, says: “Most people assume that their debts are extinguished on death, but an estate is still liable and property can end up being sold to clear the debt.”
Where people own a property with their spouse, or civil partner, they do so either as “joint tenants” or “tenants in common”. Most couples have a joint tenancy, so that when one dies, the surviving partner inherits the other half automatically. With tenants in common, each partner owns a part of the property, which they can leave to whoever they wish. But neither form of ownership protects the deceased’s share of the property from creditors.
Beneficiaries can inherit only after funeral expenses, inheritance tax and creditors have been paid. Giles Hindle, of Beachcroft LLP, a law firm and specialist in debt recovery, explains: “Where a couple have joint tenancy of a property, it would appear that the executor has no access to it to pay off the deceased’s debts. But if the debts outweigh the deceased’s other assets, the creditors could petition for an insolvency administration order up to five years after death and could then require the property to be sold to pay off the debt.”
Mr Hindle says that personal insolvency administration orders are rare, partly because of a lack of creditor awareness. Another factor is that most debts nowadays are to credit-card companies, which he believes do not want to attract bad publicity, so may decide to write off the debt.
Putting property in a partner’s sole name may not protect it from creditors. Unless the transfer had taken place at least five years before death, it could be seen as an attempt to avoid paying your creditors, which means that a trustee in bankruptcy could seek access to those assets.
The best way to ensure that debts are paid off on death is to take out life assurance.
Mortgages should always be covered by life assurance, while families with dependent children should take out further life insurance to protect them against financial hardship in general, in case a parent dies. But it is important that this type of cover is written in trust to ensure that it is not paid into the deceased’s estate and claimed by creditors.
Jane Wheeler, of the independent financial adviser Direction Financial Planning, says: “We advise people to put policies in trust because it saves having to wait for probate – the money goes straight to the family and it also keeps it out of the estate for inheritance tax purposes. But if the deceased has any debts, there is also the advantage that it would not be available to creditors.”
Normally, life assurance companies provide appropriate forms to put a policy in trust when it is taken out. If you have a policy that is not in trust, ask your life company if it can be altered. Similarly, if you have an oldish personal pension policy, such as an annuity taken out before 1988, you will need to check that it is in trust.
Even if you are not in debt when you die, your beneficiaries might be. Peter Nellist, a partner at Clarke Willmott, the firm of solicitors, points out: “If one of your beneficiaries is seriously in debt, the assets you leave could end up being paid to that beneficiary’s trustee in bankruptcy. The usual defensive position is to write a discretionary trust, which puts up a shield.”
This way the trustees can decide on the most appropriate time to hand over the bequest to your beneficiary.
For free advice on debt, you can contact National Debtline (0808 8084000, nationaldebtline.co.uk), the Consumer Credit Counselling Service (0800 138111, www.cccs.co.uk) or Citizens Advice (adviceguide.co.uk).
Even if you have no creditors, the “wrong” people could benefit from your death if you have failed to make a will or keep it up to date. Marriage or re-marriage, for example, invalidates an existing will and intestacy rules will apply, as if you had not made a will.
If you die intestate and have no children, your surviving spouse or civil partner is entitled to the first £200,000 of your estate – £450,000 from February. The remainder is divided among your parents, siblings and other relatives.
If you have children, your surviving spouse or civil partner currently receives the first £125,000 – £250,000 from February – and a life interest in half the remainder, with the other half passing to your children. If you have no spouse, civil partner or children, your other relatives inherit. An unofficial live-in partner may receive nothing.
You can draw up a basic will in return for a charity donation of £75 at willaid.org.uk. Alternatively, call 0300 0300013 to find a local solititor.
Suzanne Carty, 32, and her husband Peter, 36, a taxi driver, from Sunderland, recently took out life insurance policies that they have put in trust for each other and their children, Hannah, 6, and Joel, 2.
Mrs Carty, a nursery nurse, explains: “We had insurance cover only for our mortgage. We realised that if something happened to one of us it would be difficult for whoever was left to manage financially. We took out separate policies for £250,000, rather than a joint life policy, so that if one of us dies the other will still have cover.”
She says that Lifesearch, the intermediary, recommended putting the policies in trust, adding: “This way, if the worst happens, the money will go directly to whoever survives and help to secure the children’s future.”