What happens to your debt and tax when you pass away in South Africa?

Debt is one of the scariest things to have to deal with, but what happens to it when we pass away? Sebastien Alexanderson, founder and debt counsellor at National Debt Advisors (NDA), says that to assume our debt will be scrapped is detrimental to the financial well-being of our loved ones left behind.

“In the event of someone’s death, his assets and liabilities are transferred to their estate, and the estate is then responsible for paying off debts and distributing assets as per will specifications. If the assets are distributed to them before the debts are settled, heirs may have to pay the debts from their share of the estate.”

How debt is dealt with after death is largely informed by whether the debt is secured or not.

“Secured debts are those that are guaranteed against specific assets. These are tangible items taken as security for loan repayments so that if payments cease, the bank can sell or use certain property to recover the amount owed,” said Alexanderson.

“Unsecured debts are the opposite of this. There is nothing attached to the debt, and if payments were to stop, the bank will not have anything to repossess. In these instances, to pay off debt, the bank must go to court and get an order charging for the sale of valuables to recover the funds.

He said that when it comes to secured debt and the person owing passes away, it is the responsibility of the person who inherits the house to pay off the balance of the mortgage on the deceased’s behalf. In the case of a joint mortgage, the survivor is still responsible for the balance.

“Keep in mind that the house serves as collateral for the debt. So, if the debt is not repaid, the bank can repossess the house and sell it to pay off the debt,” he added.

On the other hand, Alexanderson said that the repayment of unsecured debt is solely dependent on whether there is enough money or assets to service the debt in the deceased’s estate.

“While collection agencies may try to convince the heirs that they are legally required to pay the debts with their own money, the fact of the matter is, unless they were a co-signer to the debt, no one else has to pay anything towards the unsecured debt of the deceased.”

Inheriting someone’s unsecured debt is only possible if the estate is dissolved and distributed before the debts are settled.

National Debt Advisors pointed to an additional financial aspect to consider, namely tax.

“Not only does tax not disappear upon death, but it may even go up,” he says. If an estate earns income after death, it must pay taxes. The heirs of the estate may also have to pay taxes on inherited income. Furthermore, an estate tax may apply to the estate’s assets, which is separate from the income tax.”

One type of debt that can be forgiven after death is student loan debt, said Alexanderson. This can be upon the death of the borrower, or sometimes, the borrower’s parents. In these instances, proof of death has to be provided to either the school or the lender.

Alexanderson provides key tips:

• Credit life insurance. Designed to serve as a protective layer for any eventuality that could possibly prevent you from being able to foot your debt bill, credit life insurance can remove a huge burden on those left behind if you were to die while still servicing a debt. It covers the cost of your debt if you are, for one reason or another, no longer able to pay it back.

• An insurance policy for death in service. In some cases, employers provide death benefits for their employees if they die in service. In the event of the employee’s death while still on the payroll, a designated beneficiary will receive a lump sum. As a result, the family that remains will be less likely to face financial hardship.

• Life cover. Life insurance policies operate in such a way that when the policyholder dies, the beneficiary receives a cash sum. There are also other circumstances where the cover pays out, such as critical illness. Sometimes your life insurance can also be used to pay off your debts when you pass away so that you do not leave your family with having to face your debt problem after you die.

• Investments and savings accounts. There are numerous investments and savings accounts you can use to make sure you leave a healthy financial legacy for your family. Dead or alive, savings and investments are an essential part of any healthy financial management plan.

Alexanderson said there are ways to minimise and mitigate family members inheriting debt, but the best way to ensure only positive things are left behind after death is to maximise your wealth and financial well-being now.

“The most important thing is to leave a positive legacy for those we love – both emotionally and financially. Even though many things are out of our control, from a financial standpoint, we can take the necessary steps to ensure that our estate will be in good shape. Be sure to create or update your will to ensure that your estate is bequeathed according to your wishes,”  he said.

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