In general, people don’t like to think about death. But it’s inevitable, and it’s important that we understand the legal consequences of death, so we can better plan for things when we’re alive.
Making a will is usually focused on how one’s assets are distributed. However, it’s important to know that before any distribution to beneficiaries can happen, the deceased assets have to first be used to settle any debts they are liable for. Not understanding this will lead to disappointment over the eventual size of the bequest left behind for loved ones.
This article provides a brief overview on the legal aspects of debts after death for educational purposes but is not meant as legal advice. Please seek professional legal advice for your specific situation.
What Happens When You Pass Away (Legally-Speaking)
Everything of monetary value that the deceased leaves behind makes up their estate. This includes bank accounts, properties and investments. The exception to this is assets held in trust, which is a separate legal entity and does not come under the estate (and thus, cannot be touched by creditors).
Correction: An earlier version of the article incorrectly stated that CPF monies are part of a person’s estate. CPF monies do not form a person’s estate and are distributed by CPF nomination procedures.
The person designated in the deceased’s will to handle the estate is known as the executor, who is usually a trusted family member, friend, or lawyer. If the deceased did not make a valid will and has an estate not exceeding $50,000, the surviving family members may apply to the Public Trustee for them to administer the assets of the deceased according to the Intestate Succession Act.
Once someone passes away, all their assets will be frozen. The executor will then apply to be granted probate, which is a court order that empowers the executor to settle the deceased liabilities and distributed any assets that are remaining.
Funeral costs would take precedent. Following that, the executor will use the estate, including taking steps to liquidating investments, to pay off any outstanding debts. These include debts owed to the government (for unpaid taxes), financial institutions (for loans, mortgages, and credit card bills) and companies (for telephone and utility bills).
Only after the court is satisfied all debts have been paid can the remaining assets be distributed to the beneficiaries, in accordance to the will.
If the estate is found to be insolvent, where the debts of the deceased exceed their assets, then the order of debt repayment will follow the Bankruptcy Act, after funeral costs are paid for.
Will Your Family Members Be Liable For Your Debt?
In Singapore, surviving family members are not legally responsible for the debts left behind by the deceased, which will have to be written off by creditors.
The exception to this is when the deceased has a joint loan account with a surviving family member. That person will then take on the deceased’s debt responsibilities. These include joint personal loans or mortgages.
If there is joint homeowner or if someone inherits a property with a mortgage on it, they too would be responsible for that debt. They would then need to either pay it off to retain control of the property, or get a new home loan. If there aren’t any joint owners, the executor will need to sell off the property to pay off the mortgage.
In such instances, mortgage insurance will come in handy to settle the outstanding mortgage and allow the beneficiaries to keep the property. Having to sell the property at short notice rarely gets you a good price.
Its worth noting that if you sell the home for more than the mortgage, you get to keep the difference, but it you sell for less, the mortgage debt is considered as settled.
For HDB homeowners using CPF to service your mortgage, you already have a mandatory mortgage-reducing insurance, known as the Home Protection Scheme (HPS). It protects families from losing their HDB flat in the event of death, terminal illness or total permanent disability. HPS insures members up to age 65 or until the housing loans are paid up, whichever is sooner.
What Can We Do While We’re Still Alive?
If you haven’t already done so, you should take stock of your current assets and liabilities, and make a will that includes a plan to ensure your financial matters are handled in accord to your wishes.
For example, you might have assets like investments and property. You think it makes sense if you pass on to liquidate the investments so that your family can continue to live in the property. If you do not make that clear in your will, your executor might see the property (and accompanying mortgage) as a big liability and decide to sell it at a loss, while keeping your investments.
You should also also gather up your life insurance policies and retirement plans, so that your executor and family members can claim from the insurance companies.
If its possible, you should request to remove joint account holders for personal loans, but this is at the discretion of banks. That’s why its really hard to take out a personal loan as an individual when you’re a senior. On the other hand, you should think of adding joint account holders for bank accounts.
Lastly, making a CPF nomination is not compulsory, but its a good idea, unless you’re happy with the default arrangement as dictated by the Intestate Succession Act.
Understanding your legal debt obligations and having a plan to deal with them will help your loved ones settle your affairs once you’re no longer around. It will also ensure that the assets you’ve accumulated over your lifetime are distributed according to your wishes.