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What happens to debt when you die?

When you take on a mortgage, use your credit card or get a new vehicle on finance, you know it is important that you can make the required payments and keep on top of your debt. However, people don’t tend to think about what happens to those debts when you die.

So, what does happen to your debts when you die? The answer is, it depends. It depends on the type of debt, the estate and your next of kin.

The Estate

To understand what happens to debt, you need to understand what an estate is and how it works.

When someone dies all their individually held assets, such as property, cars, Kiwisaver and other investments, become a part of their estate. Jointly owned assets pass to the co-owner, and do not become a part of the estate.

If you have a will you will have identified an executor, and that person will distribute the assets of the estate. Usually debts are paid first, and what remains is distributed to the beneficiaries of the will. If you die without a will (which is called dying intestate) an administrator will be appointed by the courts to administer the estate.

Any funeral costs or legal costs for managing the assets are paid by the estate.

Mortgage

For most people, this is the largest debt they will have in their lifetime, and because of the way mortgages are set up the bank will likely have “first dibs” on the estate to recover what is owed.

If the property is jointly owned, the surviving party will now be responsible for the mortgage. If this isn’t the case, the executer of the estate will need to use money from the estate to pay off what is left on the home loan. If there isn’t enough, they may have to sell the property to pay back the bank.

This is where life insurance plays a key role. If a home is jointly owned, or you will be survived by someone you want to be able to continue living there, making sure your life insurance pay-out is enough to cover your mortgage is a key factor in how much insurance cover you need.

Credit Card

As with a mortgage, the debt on a joint credit card will fall to the remaining party. However, an individual credit card will have the outstanding balance paid by the estate.

With the high interest rates on credit cards, keeping on top of the debt is important at the best of times, so if you find yourself with a lot of credit card debt it is important to put a plan in place to reduce this.

Finance arrangements

That car that is still being paid off, the sofa, TV or fridge on hire purchase, all need to be paid for from your estate. If there isn’t enough in the estate to do this, they may be repossessed.

Tax

If you die with tax owing this is considered a personal debt, so is paid from the estate. If you have business debts, and the business is in your name, this also applies.

Outstanding Bills

You will need to cancel or transfer accounts for phones, internet and power. If you transfer accounts the new account holder will be responsible for any bills owing. If you cancel them the estate will be responsible.

What is there isn’t enough?

Sometimes the debts owing are more than the assets available to pay them off. Unless someone was jointly liable for the debt (such as a co-owner of a property or business, or someone who has provided a guarantee for a loan) family members cannot be held liable to pay off debts. 

We work with our clients to make sure if the worst should happen their loved ones are taken care of. We look at the whole picture to make sure the level of insurance you have is just right for your circumstances. Talk to one of our advisers today.

What happens to your debt when you die
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Let’s get uncomfortable

The ‘she’ll be right’ attitude is an interesting quirk of New Zealand’s culture, and is rightly celebrated. Just getting on with it, not getting too worked up, and believing everything will work itself out are great traits, but like all things there is value in moderation. We need to understand that there is a darker side to this attitude, and there are times when it is okay and other times when it isn’t.

New Zealanders seem to have a deeply entrenched fear of confronting difficult issues. This shows in the 1500 Kiwis dying annually without a will, New Zealand’s dismal suicide statistics, poor succession planning, only half of us having an enduring power of attorney, and having one of the most underinsured populations in the OECD.

So we think it is high time New Zealanders get uncomfortable and have those difficult conversations – we must balance living for today with preparing for tomorrow. And the beauty of getting uncomfortable now is that it removes a lot of stress around the future, and you can move on in the comfort of knowing that things have been taken care of.

Wills

No one likes to think about the world without them in it, however it will happen one day, and there are consequences to dying without a will. It is called dying ‘intestate’, and means the law determines who will inherit property and possessions, with it usually divided between parents, spouses and children. It takes longer, is much more stressful and may not reflect your wishes.

Taking the time to think about who you want to inherit your estate and how to make things as easy as possible for those left behind is an important process.

  • If there are children involved who would be their guardian? (Note: this person or people are not obligated to care for your children, but will make the decision on who will)
  • Beyond inheritance of your assets, are there particular items, such as jewellery or art, that you wish to leave to someone special?
  • Who will make sure your wishes are carried out? This is your executor and needs to be someone capable of handling this responsibility. If there is no one you think is appropriate you can choose someone independent to take on this role 
  • Saying goodbye – does your family know if you want to be buried or cremated? If you have any requests for your funeral you can include these in your will
  • Who would care for pets?

Succession Planning

Succession planning is important for any business but is absolutely critical for family businesses or family farms. Making sure everyone knows what is going to happen well ahead of time helps to manage expectations and means everyone knows where they stand.

  • Will someone within the family inherit or buy the business or farm?
  • Is there a trust involved?
  • What is the timeline for succession?
  • What rights or decision-making powers will other family members have?

These conversations can be hard to have, so you may consider engaging a specialist facilitator to lead the process.

Organ donation

In New Zealand we can indicate our wishes regarding organ donation on our driver’s license, however our next of kin still make the final decision. Make sure your feelings about organ donation are understood by the person or people that would be tasked with making that decision. You may also want to donate your body to medical research or science, and if so, it is important to make sure that your loved ones know why this is important to you.

Enduring Power of Attorney

Having a will is important, but so is planning for a situation where you are unable to make decisions for yourself, or unable to communicate those decisions. This is where enduring power of attorney (EPA) comes in. You can choose different people to manage your health and finances and you can list people that need to be consulted. If there isn’t an EPA in place your next of kin will have to go through the courts to be granted an EPA, which is a stressful process at what is probably an already taxing time.

Retirement savings

Statistics on retirement savings in New Zealand are grim, as is the long-term affordability of NZ Super. While it is never to early to start saving for retirement, it is also never too late and carefully selecting your Kiwisaver provider and scheme can make a big difference. Making sure young adults understand compound interest, the changing generational demographics of New Zealand and why they should start saving early is also important.

Mental Health

We all know things are bad in New Zealand but so often we don’t know what to do about it. Talking to someone you are worried about can feel confronting, and it might feel easier to just leave things be. She’ll be right.

There are a multitude of helplines available but there are also Mental Health First Aid courses, which give everyday people the skills and confidence to support people in getting the help that they need and some guidance in starting those conversations.

We are on your team

At Plus4, we are in it with you for the long haul and we want to help you prepare for the future, and this goes beyond just helping you get the best insurance policies in place. If you want us to recommend anyone to help you with any of these difficult conversations, get in touch

have important discussions to prepare for the future
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Why you need a will, and how to write one

Everyone knows that having a will is really important, but it can seem overwhelming and hard to start the process of creating it.

Like having life insurance, health insurance and trauma insurance, the benefits of a will are easy to appreciate. It is all about looking after the people we care about should something happen to us. It also makes things easier by ensuring both your assets and any taonga are allocated as you wish, and without any unnecessary delay.

How to write a will

If you don’t have a will we strongly recommend getting one in place as soon as you can. There are a number of ways you can go about this.

  • Visit a lawyer
    Most lawyers create wills for their clients but, as they are charging by the hour, this can be an expensive process.
  • Trusts
    Many trusts, like Public Trust, will offer to help you write your will for free. This can be a great service, as they do they really know their stuff. But, be aware that they can come with a heavy administration fee – so make sure you know all the details first.
  • Do-it-yourself
    There are a number of DIY options, from booklet style kits to online templates. If your will is likely to be straightforward, one easy and legally sound option is the online tool My Bucket List, developed by New Zealand lawyer Mai Chen.

At Plus4 Insurance Solutions, we provide our clients with a template they can use to help them identify what they want their will to include. There are two good reasons to use this template. Firstly, you can go over it in detail in the privacy of your own home and hash out the details. Secondly, once you have done that you can then take it to a lawyer. As you have already done most of the decision making, it will save you time (and therefore money) on legal fees.

What you should consider

Before you write your will, there are a few issues to understand and consider. While it can be unpleasant to deeply consider the consequences of our own passing, it is important to remember that your will is not for you, but for the people you love.

  • Beneficiaries. There are two types of beneficiaries – primary and contingent. The primary beneficiary is your first choice to inherit your estate, such as your spouse. The contingent beneficiary is the next option, if the primary beneficiary has died or cannot be located, such as your children or a sibling.
  • Bequests. A bequest is a gift given in a will. This could be a sum of money donated to a favourite charity, or to a person who is not a beneficiary of the will. It could also be an item, such as jewellery or heirlooms, you wish to be given to a specific person.
  • Guardianship. Deciding who gets your grandmother’s piano is far easier than choosing who will care for your children in your absence. You can appoint someone in your will to take over guardianship, if your children are under 18 years of age. This person is a testamentary guardian. It is important to note their role doesn’t include the day-to-day care of the child, or children, but they can make major decisions about how they are brought up, and by who.
  • Financial planning. If you are responsible enough to be making a will, we hope you also have life insurance in place. In setting up your insurance you need to consider various scenarios and where this money would end up. For example, if you have given someone guardianship of your children – how will you fund that?

If you want to discuss your life insurance, or would like a copy of our will template, contact one of our advisers today.

Why you should have a will

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