Estate Will be Passed on to Beneficiaries, How about Debt?

Recently, will writing is a hot topic. I’ve heard the radio advertisement by OSK Will Writing services on MyFM. Rockwills also spent a great advertising budget earlier to be seen on TV. Did you take the advice to save more money by having your will written properly?
The main reason to write a will is to make the estate distribution process smoother so that our beneficiaries can receive our accumulated assets in no time. Estate is passed on to our heirs as we wish, how about the outstanding debt? Your mortgage? Your car loan? Your business loan? Are those automatically distributed according to our will too?

As for me, I want the asset, but definitely not the debt. But some debts is not forgotten even though we are no longer in this world.

One of my very first clients asked these question:

Debt is not passed to your beneficiaries, right?  How does the creditor know that someone has passed away? If someone has passed away and his assets have been distributed to his beneficiaries, can the creditor request for payment from the beneficiaries?

Image: Care for your beneficiaries
Photo Credit: chelle

Is unsettled debt passed to our beneficiaries?

Before I can answer this question, we would need to know the net worth of the deceased.

1. Negative net worth
If the deceased has nothing left except debt, the situation is regarded as insolvent. An insolvent estate is someone’s estate that has insufficient assets to cover its debt. In this case, there is actually no beneficiaries because there is nothing to be distributed. They are not required to settle the debt either.

2. Positive net worth
If the estate is solvent, which means it is capable of meeting the financial obligation, all the debt would have to be cleared before the remaining estate is distributed to the beneficiaries. In this case, you can say that the debt is distributed to the beneficiaries. However, there is enough resources to settle the debt from the estate. No worry for them either.

How does the creditor know that someone has passed away?

This is a good question. I personally think that this is somehow a disadvantage to the creditor. Why do I say so? Let’s look at the duties of the executor of an estate, taken from Rockwills:

(a) Locate a Will;
(b) Make funeral arrangement;
(c) Apply for a Grant of Probate;
(d) Assemble, protect and insure all assets;
(e) Pay for the debts and liabilities;
(f)  Pay income taxes;
(g) Prepare and complete detailed accounting; and
(h) Distribute assets of the estate according to the Will.

Note that (e) & (f) are the duties of executor to pay all debts, including unpaid income taxes. Please also note that distributing the assets is the last thing to do. Is it the lowest priority? It might be the highest priority in our intention. But in reality, it is postponed until the end.

This is an excerpt from Section 74 Income Tax Act 1967:

(5) the Executor must not distribute the estate unless made provisions for full or reasonable tax payment.
(6) failure to comply with (5), the Executor will be liable to pay a penalty equal to the amount of tax payable.

To be sure that there is no creditors left out in the process, this is what the executor must do:

1. Inform Inland Revenue Board (IRB) about the deceased estate. He will be required to fill in some forms and declare all the assets of the deceased. IRB will assess the outstanding income tax for the very last time.
2. Publish about the deceased estate in the official Gazette of Malaysia to inform other creditors to come and collect the due debt.

If the creditors missed the Gazette, that’s too bad.
Are you a potential creditor? Please share with us how do you know that someone who owes you money has passed away.

Can the creditor request for payment from the beneficiaries?

According the Income Tax Act 1967 Section 74, the executor will be liable to pay the tax debt. As for other debts, if the executor failed to perform task 2 – Gazetted – he will be liable to pay the debt, not the beneficiaries. However, any dispute can still cause a fight on court.

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