Debts aren’t written off when someone dies

Lawpack on March 27, 2020

Many relatives end up in a very difficult situation when a loved one dies leaving debts, especially if the death is unexpected.

At such a painful time, many people are reluctant to think about dealing with the debts of the deceased and how to make repayments.

Many people assume that the deceased’s debts will be written off, but this is generally not the case and the debts continue.

Dealing with a person’s assets and debts when they die

When someone passes away, a person name in the deceased’s Will – called an ‘executor’ – or the next of kin if the deceased didn’t make a Will – called an ‘administrator’ – will have to oversee the collection of the deceased’s assets to form their estate.

Whether a Will is made or not, any outstanding debts are paid out of the estate.

As part of their duties, the executor (or administrator) must collect in any money or property the deceased has left behind and cover and outstanding debts from the estate.

What to do if the debts can’t be covered from the deceased’s estate

If there are not enough assets to cover all the debts, the bills will need to be paid in order of priority, as follows:

  1. Secured debts (e.g. mortgage company) are paid first because they get their money from the security
  2. The costs of administering the estate along with funeral costs are then paid in priority to everything else.
  3. The remainder is divided in proportion to the value of the debts, i.e. if someone is owed 80% of the total they are paid 80% of the remaining assets.

The beneficiaries will only inherit what they have been left in the Will once all the accumulated debts have been repaid.

Who is liable for the debts?

No one else is required to pay for the debts unless they are already liable under the terms of the original agreement; for example, if the debt is in joint names or someone has signed as a guarantor. 

If the money left in the estate isn’t enough to cover the outstanding debt and you jointly owned a house with the deceased person, for example, you may have too sell the property to meet creditors’ demands.

What about money owed to the deceased?

It’s the executor’s (or administrator’s) responsibility to decide in cases when there is money owed to the deceased person, especially when there is a written agreement in place.

But if the borrower and the lender have agreed on the debt on a casual basis, it will likely remain irrecoverable since it could be impossible to prove.

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Applying for probate: Completing Form IHT205

Lawpack on March 27, 2020

When applying for a grant of probate to administer someone’s estate after they have died, you must complete various probate forms and send them to the Probate Registry. For more information on probate see Lawpack’s DIY Probate Kit.

The main probate form to use to apply for probate is a PA1 Probate Application Form. You will also need to complete Form IHT205 if you don’t expect inheritance tax to be due on the estate.

Do you need Form IHT205?

Form IHT205 is used where:

  • the deceased died on or after 6 April 2011; and
  • the gross value of the estate for inheritance tax is less than the inheritance tax threshold (£325,000) or is less than £1,000,000, and there is no inheritance tax to pay because of spouse, civil partner or charity exemption.

Completing Form IHT205 – Probate Application Form – Short Form of Return of Estate Information

In the IHT205 form, the following information is requested:

Gifts

  • Did the deceased make gifts totalling more than £3,000 per year in the seven years prior to the date of death?
  • Did the deceased make a gift, but continue to benefit from all or part of the gift (e.g. the deceased gifted their home to a child but continued to live in it)?

Assets

  • Did the deceased give up the right to benefit from assets held in trust within seven years of the date of death?
  • Did the deceased benefit from assets held in trust?
  • Did the deceased own or benefit from assets held abroad?
  • Did the deceased hold any life assurance policies?
  • Did the deceased’s have any pension policies?
  • What is the gross value of the deceased’s assets including, cash and money held in bank accounts and savings accounts?
  • Did the deceased have any stocks and shares?
  • Did the deceased have any partnership or business interests?
  • Did the deceased have any outstanding debts?

Sending Form IHT205 to the Probate Registry

Once you have completed Form IHT205, along with Form PA1, make copies of all of the probate forms and send them to the Probate Registry. Send the original Will and the deceased’s death certificate along with them. You should also make copies of the deceased’s Will and death certificate for your own records. If you cannot deliver these documents in person at the Probate Registry, you can send them by registered post.

Other information