There are several misconceptions about what happens to your debts when you die. Many people believe that your debts die with you, or that family members become responsible for paying your debts after you die, but this is simply not the case in Scotland. In this article, we look at what happens to your debts after you pass away, and several circumstances which may arise out of debts on the estate.
In the event of your death, your debts will be paid out of your estate. Your estate is made up of all of your assets, including cash, property, investments and business interests. Your executor will ingather all of your assets and identify your debts; they will then have an overview of what is to be paid out of your estate and in what order.
If a debt is held in joint names, the surviving party will often take on liability for the full outstanding amount but much will depend on the nature of the joint debt and any written agreement.
Where borrowing is in your name only, the debt cannot pass to your spouse, partner or other family members unless they acted as a guarantor for the debt.
If you have a mortgage, you may have a life insurance policy in place to cover the outstanding mortgage amount in the event of your death.
When your debt exceeds the value of your estate and the cost of your funeral expenses, your estate will be deemed insolvent. In Scotland, liabilities in insolvent estates are paid out in a specific order as follows:
Each category must be cleared before moving on to the next in the hierarchy. There will be enough to pay some expenses and debts in many cases, but not all of them. If there is not enough to pay a debt fully, the debt will be written off.
If you have made provision for beneficiaries in your Will and your estate is insolvent, these will no longer apply.
Dealing with debts and financial institutions is the responsibility of the estate’s executor(s). As set out above, debts must be repaid in a specific order. Your executor or administrator must ensure that all debts on the estate are paid before any other claims are made. If an estate is insolvent and the executors are family members, they must seek legal advice. Dealing with the debts on an estate can be complicated, so you may wish to instruct a specialist solicitor to help you if you are acting as an executor on an insolvent estate.
If you have any questions about the issues covered here, or if you would like to discuss Executries or any Estate Planning matter with our lawyers, please complete our contact form or call us on 0131 225 1200.
We pride ourselves in providing attentive service that helps our clients to protect their assets throughout generations. We clearly outline the implications from initial contact, helping to dispel the mystery behind the law and legal process. We look forward to helping you.