Charlotte Lockhart: How to ensure your debt is not lumped with your loved ones once you are gone

Publish Date: Tuesday, 15 August 2017, 4:55PM

By Charlotte Lockhart, Perpetual Guardian Consumer Advocate

It's a worry every person with a family has: Am I going to pass on my debt to my loved ones?

More than half of New Zealanders over the age of 15 years were in debt in 2015[1]. This debt included real estate loans, education loans, and other loans including consumer durable loans (consumer durables typically include cars, motorcycles, boats, and household appliances). Of those reporting a debt, the average debt was just over $79,000 per person.

So, does that debt get passed on to your loved ones when you die? While the answer is generally no, it does become circumstantial. By putting in place various legal structures – such as a Will and Estate Plan – you’re able to ensure that your loved ones are not impacted. Here are some tips on how to do so:

Keep an up-to-date Will

While only around 50 per cent of Kiwis have an up-to-date Will, a Will is critical for providing fairly for your family, ensuring your children have guardians and putting in place arrangements for the sale and distribution of your assets.

No matter how straightforward your circumstances, having a current Will makes sure everyone understands what you’d like done with your estate. Your estate is everything you own and any debts you owe when you die.

If you die without a Will your loved ones may face difficulty sorting out your wishes and what happens may not be what you would want or expect.

Without a Will the law determines how your assets are divided and what happens to the people who depend on you.

Set up a Trust

A Will is the first important step in estate planning, but a Trust should follow a close second.

A Trust allows you to have more control over the money you leave to your loved ones once you are gone. For example, if you leave money to your children it can be put into a Trust and used for their education, or distributed when they reach a certain age. A Trust also protects that money from being put towards debt, since it cannot be taken from the beneficiary.

Ensure you have life insurance

Most people with a family or debts should have life insurance. In exchange for a relatively small annual premium, particularly when you are young, a lump sum (the sum assured as specified in your life insurance policy) is paid out in the event of your death.

Life insurance can cover the costs of your debts (including your mortgage, credit cards, business loans and overdrafts), funeral expenses, and living costs for your family members.

Debts are inherited in the same way assets are. For example, if you die without life insurance while still owing money on the mortgage the lender could ‘call in' the loan with the view to selling it to recover their costs. Any surviving spouse, partner or family would then need to re-finance the debt themselves, in order to avoid a mortgagee sale.

Often the survivor's ability to do this is compromised by the fact that they are receiving only half (or possibly less) of the household income they were prior to the death. If the property is repossessed in this way, a financial loss is suffered simultaneously with a personal one.

Life insurance allows your family to cope financially in the event of your death. It ensures that should you die your debt is repaid, leaving your family with one less thing to worry about.

About Charlotte:

Charlotte Lockhart is a business leader with more than 25 years’ experience in multiple industries locally and offshore. She watches out for the estate planning interests of New Zealanders in her capacity as a consumer advocate at Consumer Voice. Charlotte’s goal is to break down some of the perceived barriers and raise awareness by engaging with a variety of media and stakeholders.

In a previous role, Charlotte was head of partnerships and marketing at Perpetual Guardian (New Zealand’s leading trustee services company). During her time with Perpetual Guardian, Charlotte designed and implemented the new brand strategy and installed the new sales team across New Zealand. Perpetual Guardian believes that every adult New Zealander should have a Will and that every child deserves the protection of one.

Charlotte has an extensive background beyond the fiduciary services market, having worked in the financial and legal services sectors earlier in her career. In her 12 years with Mike Pero Mortgages, she won awards for her advisory services. She is passionate about ensuring New Zealanders protect their families and themselves from financial and legal problems which can often be avoided with a little planning.

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