What happens to the debt when you die?

Hi Folks
Something that someone may be able to clear up for me.
What would happen to the debt on a property portfolio if for instance both husband and wife died at the same time? No trusts or other restrictions with all the properties being held in both names.
What would the process be?
Thanks
Simon

 

I'm no expert, Simon, but one would imagine that the debt would be carried on to the parties inheriting the properties, in this case your children?

 

I'm pretty sure the death of both partners is something things like Testamentary Trusts are set up for - to clear up the potential confusion when that happens. I'm guessing the lenders have the right to recover the debt when both borrowers shuffle off this mortal coil, so in the absence of some structure the beneficiaries might get stuck with some problems.

Nigel kindly pointed out some of the paperwork needed for our (slightly more complex) situation at :

http://www.invested.com.au/forums/22/bits-paper-do-we-need-146/

Might be a reasonable starting point to a meeting with your lawyer to get the right docs in place ? I think the only certain thing is that you can't assume things will necessarily go the way you hope once you're pushing up daisies

 

Thanks TH
In the past we have spent a lot of time and money looking into Wills and asset protection and the result so far is we continue going around in big circles.
I posted this same post on the somersoft forum and have had quite a lot of response and ideas from others.
I hope we can gain a better understanding of the legal process from open discussion on the subject.
Cheers
Simon

 

I guess its one of those things where you'll never know if the advice was good till you're dead ! I'm almost hoping my lack of admin skills pay back my beloved daughter for the current dose of terrible two's we're enjoying ... but then I probably don't mean that

 

We set up Term Life Insurance through our Super so that if one or the other 'passes' on then the insurance company pays the bank loans(neat), we also recently set up wills giving some direction and installing executors etc as well as talking to everyone .

a Testamentary Trust bears investigation though from what l've heard.

 

Hey Redwing - where does one (on death's door or otherwise!) find out more about Term Life insurance ? Sounds interesting
Cheers
Carl

 

If someone is on death's door it's too late to get life insurance

Your financial planner should be able to assist with your insurance requirements... Even if you don't use a planner for the "wealth" side of things, it's worthwhile to do so for the risk side.

not all life, income protection and trauma insurance is created equal.

N

 

Sorry for the delay in responding.

Usually the will has rules for determining who died first. Often the older person is deemed to predecease.

the deceased's legal personal representative is responsible for both getting in and distributing the assets per the will but also settling the deceased's liabilities. The bank's mortgage will remain in place on transfer of any property. The new owner will need to meet the repayments to the bank or they will exercise their power to sell the property to recover the debt.

As mentioned insurance can be a good way of clearing some or all of the debt to give the beneficiaries a helping hand.

If you want your good work and investing philosophy to be carried on after you're gone perhaps a testamentary trust where the capital must be prerved until the children are a suitable age, e.g. 25 could be used.

Cheers
N

 

This thread is interesting to me 'cos I have plenty of life cover and income protection but hadn't thought about insurance specifically to discharge debt (another thing which I have plenty of).

Yet another thing to learn

 

Thanks Nigel for your reply.
The above is what I'm really interested in finding out more about.
Firstly "The banks mortgage will remain in place on transfer of the property". Are there any criteria to be met or protocols to be followed by the inheritor of the property/ies in the legal regard to this transfer?
Secoundly." The new owner will need to meet the repayments........
Is that the only criteria required? Will the inheritor be required show serviceability to the lender to take on the debt?
Thanks for helping to clear this matter up for me.
Greatly appreciated
Simon

 

Hi Simon

I was probably a bit brief in what I said earlier. Talking the issue through with some of the banks I deal with (well they spoke to their retail banking sections and got back to me) it seems the general preference is to treat the deal like a refinance rather than a novation.

Okay so what does that mean in practice?

The beneficiary taking the property will need to sign loan and mortgage documentation. They will, as I mentioned also need to satisfy the bank's credit/debt servicing tests...which obviously may be problematic for say young adults inheriting Mum and Dad's multi-million dollar portfolio.

In a nutshell the reasons the banks prefer this approach are twofold. Firstly, the documentation is just the same as usually used, so there's no extra thinking or legal advice typically required by the bank. Secondly, recall what I said earlier about the legal personal representative of the deceased being liable for their debts. If it's done as a refi, then what happens is the deceased's loan is paid out by the beneficiary's new loan (although it's all the same bank's money ) what that does is let the LPR off the hook and saves them requiring the bank to release them (which banks are reluctant to do).

Given this is the bank's preferred approach this highlight's IMHO the importance of insurance to take out some or all of your debt on your untimely demise.

Cheers
N.

 

Are there any well-known and known 'paying' term life insurers anyone can suggest ? We don't specifically have a FP to do these things, and I'd be interested to at least find out what sort of premiums are involved.

Cheers
Carl

 

Thanks Nigel for that in depth answer. It is certainly worth concidering
Cheers
Simon