Picture: iStock
What happens to your debt when you die is probably not top of mind when you think of the end of your life, but an expert says it should be because it will not go away but instead be transferred to your next of kin.
In South Africa, about 20 million people or half the working population have active debt, advocate Sankie Morata CFP, chief executive of Sanlam Trust, points out.
“I always tell our clients who think their debt will be gone when they pass away that if they love their families it is better to settle their debts for their sake or be proactive with their estate planning. This means setting up a plan that clearly outlines who will receive or inherit your assets after you pass away and it ensures that your dependents are provided for when you are no longer around.”
Morata says if you do not do this, the executor or person administering your estate may be forced to sell some of the assets in your estate to settle the debt.
ALSO READ: Here’s what happens to your debts when you pass away
Morata explains that debt such as vehicle finance, personal loans, home loans and business loans must still be settled after death. In addition to debt, other financial burdens that may affect your heirs include:
What does this mean for your estate? Morata says a deceased estate must have enough money or insurance cover to settle debts, to ensure that the surviving family members do not face insolvency. “If there is not enough left to cover these costs, the executor may have to sell any available assets.
“It is a sad story that can often be avoided with proper estate planning and good financial advice.”
Morata says there are five strategies that could reduce the financial burden on your loved ones:
Optional credit life insurance can help to settle outstanding debt after your death for credit-based items such as vehicles and properties.
ALSO READ: Consumer debt: consumers still battling despite improved optimism
A credit or loan agreement is a legally binding contract between a borrower and a lender that documents all the terms of a loan, Morata says.
“It will be helpful information for whoever inherits your estate and debts, especially if it contains a clause on what should happen to the loan upon the death of either party.
If you own a business, clearly record any loans or agreements to ensure your family is informed and able to repay these or be prepared to cash out any insurance policies that could cover these costs, as this prevents the lender from suing your estate and can help to avoid a claim against the estate.
“Also consider taking out key person insurance or business insurance to help your company continue operating if a vital individual becomes incapacitated or passes away. These policies can cover essential costs, ensuring the business remains stable and survives despite the unexpected loss of a key contributor,” Morata says.
ALSO READ: All you need to know about a will and final testament
It is also important to ensure that your family has a list of the assets you own, any relevant passwords and other critical information.
If someone borrowed from the family trust, they must try to reduce the loan account annually, such as donating money back to the trust, Morata says. The loan account can also be left to an heir, allowing the heir to keep on reducing it instead of having to repay the trust in one go when the founder dies.
“It is a legal and smart way to avoid putting the estate in a difficult position when someone dies and there is still a lot of money owed to the trust.”
ALSO READ: How to start getting rid of your debt
Morata says it is critical to appoint an estate planner who can help you to structure the inheritance you want to leave to your loved ones.
“You need a financial advisor who can help you to save, invest and minimise your deb as well as a fiduciary specialist who can help you draft your last will and testament and assist your family in wrapping up your estate.
“If you design your estate plan to save costs, you increase your loved ones’ inheritance instead of relinquishing your assets to the state.”
Morata says these strategies are good tools for building a legacy in South Africa. “It all starts with a will. Your will must be clear to deliver your intent and empower your beneficiaries to live with confidence.
“Last year a survey on South Africans and wills conducted by Sanlam Legacy showed that 98% of respondents expressed a desire to leave a legacy, but only 39% had a will, indicating a clear disconnect that we must address. The time to get your affairs in order is now. Draft a will and have a plan to protect your family, now and after you are gone.”
Download our app and read this and other great stories on the move. Available for Android and iOS.
