Head of Wealth Planning, Published May 23, 2016
“He that dies pays all debts – I defy thee! – Mercy upon us” – screams Stephano in Shakespeare’s Tempest, looking at the bright side of death. However, in the more modern world, a debt is often left best to the legal heirs to settle as part of their inheritance.
As one deals with the loss of a relative, it also prompts the question of inheritance and the related complications of it. As an inheritor, one should know the basic succession plan (joint ownership, nomination or a will) as well as costs of transferring the inherited assets. But it is the liability – be it taxes, loans and burden of other nature – that may accompany the bequeathed assets much to the chagrin of the inheritor.
In India, the law of succession is complex and depends much on whether a person has died with or without making a will. In the absence of a will, religion and customs govern the inheritance aspects. While most of us are familiar with the assets that we may inherit, we often ignore or fail to look at the debt or liability that may be attached to the inherited assets. Whether we like it or not, the debt follows the asset and the person inheriting the asset also inherits the debt.
The general rule is that the legal heirs can be liable for the debt of the deceased to the extent of one’s share in the inheritance, if not settled by the estate. It can be said that it is the moral responsibility of a legal heir to repay the loans taken by the deceased. However, the liability of legal heirs for the inherited debts is not the same in all situations. So, a legal heir may not be legally obliged to repay all such debts.
Here are some situations and the inheritor’s liability thereof:
Home / mortgage loans: In the event of a borrower’s demise, the bank or the lender will engage the legal heir to transfer the loan to him and to be responsible for it. If the deceased has a will and the beneficiary is someone else (than the legal heir), then the lender shall engage with such a beneficiary to protect its interests. In case of a co-borrower, the responsibility of repayment of the home loan and/or paying the EMI lies with him. It is prudent to take an insurance cover on the life of the borrower for settling the loan amount so that unnecessary financial burden on the legal heirs can be avoided.
Ideally, legal heirs/co-borrowers should convey the borrower’s death to the lender at the earliest. Legal heirs should bear in mind that if they fail to take any action, banks or lenders have the right to seek repayment by disposing off the property involved. If a bank or lender auctions the property to recover dues, legal heirs will receive any excess amount – after settling the loan amount – from the auction proceeds.
Unsecured loans: In today’s life it is very common for a person to use credit cards for making payments. Personal loans are also taken by many to meet their short-term liquidity crunch. The credit card outstanding and personal loans are unsecured loans and the recovery depends on each bank’s terms and conditions but in most cases, banks have the right to claim from legal heirs/successors. Generally, these can be met out of the liquid assets of the estate in the first instance. If these are insufficient, banks may opt to enforce legal proceedings against the estate. One has to, however, keep in mind that such loans are unsecured and such a liability should not fasten onto the personal assets of the legal heirs.
Personal borrowings (from family and friends): Many people borrow money from family and friends to meet their obligations and most often, such a borrowing is based on trust hence no documented accord. In the absence of a loan document, legal heirs have only a moral obligation to repay such a loan. However, if there is a legal document, then it can be treated as an unsecured loan.
Statutory Liabilities: Statutory liabilities should be paid or closed. Generally statutory liabilities – such as outstanding income tax – have the first charge on the estate hence it is the liability of the executor/legal heirs to discharge such liabilities. The income tax return of the deceased also needs to be filed by the executor/legal heir and PAN (of the deceased) should be returned to the department. Other taxes like those on the property are duly passed on to the legal heir who inherits the property.
Loan against securities: In case shares/mutual funds/bonds etc. are pledged against the loan, the legal heirs should pay off the loan amount and get the securities released else they will not get transferred to the legal heirs. In the first instance, the lender has a right to sell the shares in the market to recover the dues in the event of default. In case the value of a security (collateral) is insufficient, the lender can seek repayment from the guarantor, if any, else from the legal heirs. The legal heir should contact the lender at the earliest and agree to timeliness for repayment of the dues and release of the collateral securities.
Business liabilities: The executor/legal heirs should pay off all liabilities of the deceased that appear in the books of accounts of the business. These liabilities may include salaries of employees, statutory dues, and taxes among other liabilities the settling of which is a requisite to wind down the business else the liabilities will fasten unto the legal heir to the extent of his share in the estate.
In light of above it would be prudent if the Will details the manner in which the debts should be handled i.e. repaid in the first instance from the liquid assets and in case of insufficient liquidity an immovable property can be identified to set off the debts. Thus the legal heirs can be spared of some inconvenience.