Are beneficiaries responsible for debts left by the deceased?

Are beneficiaries responsible for debts left by the deceased?

Inheriting debts with assets

When someone inherits assets but there is debt attached to it we are often asked are beneficiaries responsible for debts left by the deceased?

Do you inherit the debt attached to the asset you are getting from a will?

Generally speaking, in Australia,  lenders cannot force family members to pay off a deceased person’s debts. But there are some special circumstances where a family member may be required to pay the debt. For instance, if they are a joint holder of a credit card or are a guarantor on a loan.

Inheriting a home or investment property with a mortgage

A  common issue faced by Australian adult children is inheriting a property with a mortgage attached to it.

The debts of an Estate must be paid before benefits under the Will are distributed. Part II of the Second Schedule of the Administration and Probate Act 1958 (Vic) sets out the order in which Estate funds are used to pay off the debts:

The debts must be applied to each category of property in turn until fully satisfied including:
1. Property undisposed of by will.
2. Property specifically given or directed to be sold, for debt payment.
3. Property charged with, or given subject to a charge for debt payment.
4. Property not specifically given but included in a residuary gift.
5. The pecuniary legacies fund.
6. Specific gifts.
7. Property appointed by will under a general power

Case Study

A recent case we took on involved a man who died leaving an Estate with 2 properties, property A and B. Property A and B were both valued at around $500,000.  In his Will, he gave each of the properties to his 2 children (his assumption was that he was providing for them equally).  What he failed to realise was that property A had a mortgage of $200,000 while property B had no mortgage.

The man’s Will did not mention any mortgage on property B. So all is well you may think.  Unfortunately, not in Victoria. The Law in Victoria states that if the Will does not dictate how the mortgage should be paid, the beneficiary will receive BOTH the property AND the mortgage.

This means that one of the children will be inheriting a property with net equity worth $500,000 while the other will only be inheriting a property with net equity worth $300,000.

Challenging an unfair outcome

In the case above the sibling getting the lesser equity property could make a Part IV Claim against the Estate on the basis of the other sibling will be receiving substantially more than him/her and no real reason to explain the discrepancy.

Although a lot of such claims are settled out of court it can lead to friction in the family and a lot of stress and legal fees.

Get the Will right

This should be a lesson to all Willmakers to avoid doing your own will without legal advice or drafting and to look out for pitfalls. The best thing to do would be to get in touch with a Wills & Estates Lawyer who will be able to take all factors into consideration when drafting a Will.


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