What is a Deceased Estate?
After someone dies, all of that person’s property and belongings that have monetary value (such as real estate, vehicles, money in the bank, stocks and shares, insurance policies, and household goods and jewellery) form the person’s “deceased estate”. A deceased estate also includes domestic pets, which are treated as property for the purposes of distribution of the estate. Most people are familiar with this concept of a deceased estate as containing valuable items to be distributed to beneficiaries. It is perhaps less well understood that when someone dies, the debts and liabilities that they held during life often continue and must be discharged out of the estate. This article outlines the general rules about deceased estates and what is, and is not, included in these estates.
Who Is Responsible For Administering a Deceased Estate?
In many cases, when a person dies they leave instructions in the form of a will for the distribution of their deceased estate. It is important to understand that wills are instruments that deal exclusively with the distribution of property. Often parents will include instructions in a will as to the guardianship of minor children, but these instructions are not binding, and merely communicate the wishes of the deceased in a convenient form.
A will should nominate one or more executors who will assume responsibility for administering the deceased estate. During probate, the executors collect all of the deceased’s probate assets, pay creditors, and ensure that the remaining assets are distributed to the nominated beneficiaries.
If someone dies without a valid will, they are said to die intestate, and the result is a complicated, protracted and potentially expensive process of having the estate distributed according to law. Without a nominated executor in a will, the deceased is not able to decide who will take responsibility for administering their deceased estate.
Which Debts are Paid from a Deceased Estate?
A will should also make provision for the executors to pay for expenses such as the funeral or burial, and to discharge any debts out of the deceased estate. An executor will also ensure that a final tax return is lodged and applicable income tax is paid from the deceased estate. The estate must pay any other tax that falls due as a result of the liquidation of assets, such as superannuation payouts and capital gains on the sale of investments such as shares or property.
As a general rule, an executor will pay all debts of the deceased before any assets are distributed to beneficiaries nominated in the will. The exception to this rule is that the superannuation death benefits and life insurance of the deceased cannot be used to repay the debts of the deceased estate. All other assets of the deceased estate are available to the executor for the purpose of discharging debts, regardless of the instructions of the will as to the distribution of individual assets. On this basis, an executor is not able to, for instance, distribute the gift of a mortgage-free property to a beneficiary, if there are other debts in the estate that cannot be discharged without the sale of the property.
What Happens if the Debts Cannot Be Discharged?
If the estate does not contain enough assets to cover the debts owed at the time of death, the executor will pay the debts according to either bankruptcy provisions or the insolvent estate provisions. Fortunately, unless a family member was a guarantor, co-owner or joint borrower, they are not liable to repay debts of the deceased.
Bankruptcy and insolvency estate provisions ensure that the first priority is the funeral, testamentary and administration expenses. The executor will then discharge current and past tax debts, regardless of any instructions that the deceased has left in the will, followed by the repayment of secured debts such as home or car loans. The deceased estate will also prioritise the payment of delinquent child support and make provision for the ongoing payment of child support for the dependent child. If there is a HECS-HELP education debt outstanding at the time of death, the balance of the debt will be extinguished.
The final debts to be paid out of a deceased estate are unsecured debts, and it is this class of debts that are most likely to remain unpaid if the estate is insolvent. This means that even if a will makes a provision, for example, that an unsecured debt to a family member is to be repaid, this debt will be paid only after all secured debts are discharged. This can be an issue where family members have provided substantial unsecured loans towards the purchase of a home or investment in a business. This is one of many reasons that family loans should always be formalised and registered against the appropriate security.
For friendly and professional advice about drafting a will or if you need help with a deceased estate, please call Armstrong Legal on 1300 038 223 or send us an email to make an appointment.