Do You Inherit Someone's Debts When They Die?

Detailed Explanation

Letters from banks and debt collectors often arrive in the first weeks after a death, and many people fear they are now responsible for what the person owed. In most cases they aren't. The general rule is broadly the same across Australia, the UK, the US and most other countries: debts belong to the estate, not to the family. The detail, especially around spouses and insolvent estates, varies by country, and in the US by state. See the Wills, Probate & Estates hub for how debts fit into the wider job of settling an estate.

Debts are paid from the estate

When someone dies, everything they owned in their own name becomes their estate, and everything they owed becomes a claim against it. The executor named in the will, or an administrator if there was no will, collects in the assets, pays valid debts and expenses, and only then passes what is left to the beneficiaries.

That means debts can reduce what beneficiaries receive, sometimes to nothing. But the family doesn't have to make up any shortfall from their own money. As the UK charity Citizens Advice puts it, if there isn't enough money in the estate, creditors can't recover what is still owed from anyone else, including the person's surviving relatives. The US Federal Trade Commission gives the same general rule for the US.

When you can be personally liable

The exceptions are mostly debts that were already partly yours:

• Joint debts. A joint loan, joint credit card, joint overdraft or joint mortgage usually makes each borrower liable for the whole amount, not just half. That liability continues after one borrower dies.
• Co-signing and guarantees. If you co-signed or guaranteed someone's loan, the lender can ask you to pay if the estate doesn't.
• Household bills in some cases. Citizens Advice notes that in the UK, someone who lived with the person who died may remain liable for some property-related bills, such as council tax or water.
• Spouses in some US states. In US community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, and Alaska where the couple signed an agreement), a surviving spouse may have to pay certain debts from community property. Some other states make a spouse liable for particular debts, such as health care costs.
• Executors who get it wrong. An executor who distributes the estate without dealing properly with known debts can become personally liable for the shortfall.

Being a child, a beneficiary, or the executor doesn't by itself make you responsible for the person's debts.

When the estate can't pay everything

If the debts are bigger than the estate, the estate is insolvent. Creditors are then paid in an order of priority set by law rather than first come, first served. The order differs between countries, but secured debts such as a mortgage are generally met from the asset they are secured on, and reasonable funeral and administration costs generally rank ahead of ordinary unsecured debts such as credit cards and personal loans. Unsecured creditors often share what is left in proportion to what they are owed, and anything still unpaid is written off.

Insolvent estates have their own formal rules. In Australia, they can be administered under Part XI of the Bankruptcy Act 1966. In England and Wales, a separate statutory order applies. An executor who suspects the estate is insolvent should get advice before paying any creditor, because paying one in full ahead of others can leave the executor personally exposed.

Protections for executors

Many countries give executors a way to find unknown creditors before paying out the estate. In England and Wales, an executor can advertise for claims, usually in The Gazette and a local newspaper. Under section 27 of the Trustee Act 1925, once the notice period of at least two months has passed, the executor is generally protected from claims they weren't told about. US states run their own creditor-notice processes through probate, with deadlines that vary by state. Where these processes exist, using them is one of the simplest ways for an executor to avoid personal liability.

Things that often sit outside the estate

Some money never becomes part of the estate and so generally isn't available to the person's creditors:

• Life insurance paid to a named beneficiary usually goes straight to that person.
• Retirement and pension death benefits, such as Australian superannuation, UK pension death benefits and US retirement accounts with a named beneficiary, often pass outside the will. The rules differ a lot by country and scheme.
• Jointly owned property held as joint tenants passes to the surviving owner automatically. See what happens to jointly owned property when one owner dies.

Government debts and care costs

Governments can be creditors too. Tax owed by the person who died is paid from the estate, and a final tax return is usually needed. In the US, state Medicaid programmes must seek to recover certain long-term care costs from the estates of people who were 55 or older, but they generally can't recover while a surviving spouse, a child under 21, or a blind or disabled child survives. Recovery is from the estate, not from the family's own money.

How it works where you are

• In Australia: Do you inherit a person's debts when they die in Australia? covers joint debts, guarantees, insolvent estates under the Bankruptcy Act and what executors need to know.

Things to Consider

• Check what you actually signed. Many people don't know whether they were a joint borrower or just an additional cardholder until they look at the paperwork.
• Tell creditors who is dealing with the estate. Organisations need to be told about the death anyway (see who you need to notify when someone dies). Point them to the executor or administrator.
• Don't pay from your own pocket to make it stop. A payment you weren't obliged to make is usually hard to get back.
• Executors should list every debt before paying anything out. Wait until debts, tax and any creditor-notice period have been dealt with.
• Get advice if the estate looks insolvent, or if there are disputes with creditors or property in more than one country. These are the situations where general rules are most likely to miss something.

Common Mistakes

• Assuming children inherit a parent's debts. They don't, unless they were already liable through a joint loan, co-signing or a guarantee.
• Paying a creditor who wrote to the family. Collectors sometimes contact relatives because they don't know who the executor is. A letter isn't proof that you owe anything.
• Distributing the estate too early. This is the most common way an executor ends up personally liable for a debt that surfaces later.
• Paying creditors in the wrong order. In an insolvent estate, paying one creditor in full can leave others unfairly short, and the executor can be held responsible.
• Treating rules from another country as your own. Community property rules, for example, apply in some US states only, not in Australia or the UK.