Debts Don't Disappear When You Die: Here's How to Plan

Death isn’t exactly high on everyone’s list of favourite topics to talk about. But understanding how debt is handled after you die can help you make financial decisions that contribute to a solid estate plan.

More than half of Canadian adults (55%) currently have credit card debt — up from 43% a year ago, according to NerdWallet’s 2024 Canadian Consumer Credit Card report. What’s more, 51% of those who currently have credit card debt think it will take six months or longer to pay it off, the survey found. And credit cards are just one of several kinds of debt that Canadians might be grappling with.

When you pass, your loved ones don’t necessarily have to pay your debts, but they don’t just go away, either; your estate becomes responsible for paying creditors’ claims before any heirs get their share of the pie.

Which creditors are paid first?

When you pass away, your personal assets will be tallied up and put into a single pot. Creditors get paid by filing a claim against your estate for the outstanding balances left on your accounts.

However, there’s a certain order that’s followed, says Peter McSherry, an employment law and estate planning attorney in Guelph, Ontario.

Here’s a rundown of how creditors are paid, in order of priority.

1. Funeral and estate administration costs. When you die, your estate first pays your funeral costs and estate administration expenses, such as the executor and lawyer fees.

2. Taxes. The Canada Revenue Agency (CRA) and your provincial tax authority are paid next to settle any outstanding taxes you owe, with the CRA getting priority. Your executor (or liquidator in Quebec) will file your final tax return and pay your final tax bill on income earned up to the date of your death, including any capital gains, McSherry says.

3. Secured debts. Loans tied to an asset, such as your mortgage or a car loan, are next in line, says Martha Adams, a certified financial planner, author and money expert. If you plan to transfer ownership of a home or vehicle to someone, and they wish to keep it, they’ll become responsible for repaying the balance owed. Otherwise, if a secured debt isn’t repaid, the creditor can repossess the asset.

4. Unsecured debts. Credit cards, personal loans, lines of credit and other debts not tied to a specific asset, are last in line. Creditors of unsecured debt get whatever money is left over after secured debts are paid.

After your executor pays all creditors’ claims against your estate, your heirs will receive whatever is left over as enforced in your will.

If you’re listed as a co-borrower or co-signer on a debt (such as a mortgage, credit card or another loan), payment responsibility transfers to you if the other account holder dies, McSherry says. If you don’t have the means to take over payments, the estate could be liable for repayment if there are enough assets, he notes.

How to keep debt from becoming a burden after death

If you want your next of kin to receive an inheritance or certain assets after you’re gone, it’s critical to set up your financial accounts strategically early on. However, be careful about timing, because putting assets in someone else’s name simply to avoid repaying your debt won’t fly, McSherry cautions.

“If you decide at the start, before you’ve incurred debts, how to structure your affairs, then… there’s a lot of flexibility in terms of what you can do,” McSherry says. “But if you know you have a debt and something’s happened, and you’re just doing it to avoid payment, that can be seen as a fraudulent conveyance and would not be upheld.”

Here are some potential pre-planning strategies to safeguard your assets after your death.

Joint account ownership with right of survivorship. Joint assets (such as a bank account) transfer directly to the joint owner upon your death, bypassing probate and protecting those assets from creditors. If you don’t have a joint account owner or right of survivorship agreement in place, the money in your bank accounts becomes part of your estate and is subject to creditor claims. Remember, even if you name a beneficiary in your will for these accounts, creditor claims still take precedence before your loved one receives their share.
Beneficiary designations. If you have a registered retirement savings plan (RRSP), registered retirement income fund (RRIF) or a tax-free savings account (TFSA), naming direct beneficiaries avoids probate entirely, ensuring the funds go straight to your intended beneficiary. Keep in mind, though, that your estate may have to pay taxes on these distributions before the funds are transferred to beneficiaries.
Life insurance proceeds. If you have a life insurance policy with named beneficiaries, creditors can’t come after that money either, McSherry says. Life insurance coverage can help your heirs pay off the assets they want to keep, such as a home mortgage balance or vehicle loan.
Mortgage protection insurance. If you want to keep your home in the family but there’s still an outstanding mortgage balance, consider purchasing a mortgage protection insurance policy. This coverage — different than mortgage default insurance — pays your mortgage balance off in full if you die. It also ensures your loved ones can keep an inherited property without having to worry about making mortgage payments after you die.

Make sure you review designated beneficiary and jointly-held accounts at least once a year or after a major life event (divorce or death, for instance) and update them accordingly, Adams recommends.

“We can often have accounts that we forget are joint,” Adams says. “And if you’re [listed as] joint on something, God forbid, something happens to your previous spouse, you’re still liable.”

Probate and your estate: Planning ahead is critical

After you die, your estate goes through a legal process called probate to settle your final affairs and ensure creditors are paid. However, probate can be time-consuming, complex and expensive. Without a clear financial plan, settling your financial affairs can become a headache for those left behind.

That’s why it’s crucial to consult with a current credentialed financial planner about your estate plan and have your financial voice heard while you still can, Adams says. It’s equally important to create a will with an estate planning attorney and choose an executor/liquidator to administer your estate. You may also want to select a power of attorney to pay your bills and handle your affairs if you become incapacitated.

Adams recommends assembling a comprehensive financial binder detailing all of your financial accounts, assets, liabilities, a copy of your will and other key documents all in one place.

“[Make sure] your executor knows about it and knows where it is,” Adams says. It’s wise to revisit the binder — along with your estate plan — every few years or after major life events to ensure everything is up to date and consistent, she adds.