Who pays your debts after you die? Is family liable?
It would be nice to think our debts magically disappear upon death however, this is not the case. If you haven’t planned in advance, financial debts can have a significant impact on those you leave behind. The executor of an estate will be responsible for liaising with creditors to repay debts and will need to manage the assets within the estate to do so. Creditors have first right to the assets within the estate to reclaim their money. If there are insufficient assets, then the estate may have to be declared bankrupt. Creditors have the right to place an estate into bankruptcy if adequate measures have not been implemented to repay debts, and can liquidate any assets held as security over those debts.
Can family members be liable?
A common concern is that family members will be left to repay debt that is not theirs. A family member or related party of a deceased person can only be forced to repay debt in the following circumstances:
- They own an asset that was used as security on debt obtained by the deceased (e.g. business debt secured against a family home);
- They were a joint borrower on debt with the deceased (e.g. husband and wife borrow to buy a family home);
- They have provided a guarantee over a loan for the deceased (e.g. Mum and Dad being guarantor for their child to purchase a home).
Estate planning debt issues worry many people and can come in very basic forms. Take a husband and wife with a family home and a mortgage for example. If the main income earner passes away the remaining spouse is responsible for the loan and may have no means of repaying it. This might then result in the home being sold unless there were adequate provisions put in place prior to death to prevent this.
Leaving specific assets that you still owe money on to a beneficiary through your estate requires you to make arrangements to have that debt paid out upon your death – unless the beneficiary is capable of repaying the debt owing on that asset. For example, leaving a house with a mortgage to elderly parents knowing they cannot afford the mortgage on the property. A provision to put in place in this instance would be sufficient life insurance so the creditor is repaid and your parents receive the house debt-free. Business debts, including those that are obtained jointly by business partners, or debts that have personal assets held as security, can create very complicated estate issues. These need to be addressed in your will to ensure the continuity of the business or the remaining partners or family members are not financially affected.
Seek professional advice
These are just a few issues relating to managing debts after death. Estate planning is a complex area and requires strategic planning to ensure loved ones and others are not financially impacted in the event of your death. It is important to use professionals in these matters, such as your solicitor and financial adviser, to guide you on the right path so that all your estate planning needs are covered and adequate measures put in place.
*The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.
If you own your own business, have really good people working with you, we assume you’d like to keep them and at the same time keep it profitable?
How about making your business even more profitable and engendering a high performance business culture.
How about becoming a profitable employer of choice, because you help your biggest asset, your staff, by helping them look after their own financial future and that of their family, right while they are at work.
According to the most recent research from the Exit planning Institute state of owner readiness survey – 64 % of privately owned businesses in the USA are owned by Baby boomers ( aged between 51 and 69 ) and significantly 80 % of their family’s total wealth is tied up with the business and related assets. In many cases the business was started 20 years ago and has grown significantly, over that period the owner has purchased assets – buildings, equipment etc sometimes in the trading entity but often in separate entities and structures for asset protection and taxation. In addition any lenders have taken security over various assets within the group.
This is a massive issue for baby boomer business owners who have not spent any time effort or money on exit planning ! Imagine running a successful business for 20 years and building up a substantial pool of assets and messing up the exit and therefore failing to crystallize that value and achieve a successful exit.
“The proper man understands equity – the small man, profits” Confucius 551 – 479 BC – this quote, though very old, focuses on this exact problem and builds profitable businesses!
Employees are keen to climb the ladder to equity equity – will you provide the ladder?
Article by Craig West – 10 July 2015
Confronting question, isn’t it?
There are a number of areas that need consideration when think about preparing for a sale or exit.
Have you taken the time to engage with a Certified Professional to assist you with the process?
Given that it could arguably be one of, if not the most, important financial decisions you’ll undertake, it would be good to plan the process.
Here are just a few of the action items to consider making sure you have comprehensively covered off:
- Valuation expectations checklist (9 points to consider).
- Personal Expectations checklist (8 points to consider)
- Shareholder Goals Checklist (10 points to consider)
- Payment considerations Checklist (6 points to consider)
- Value Readiness (11 points to consider)
- Marketing Documentation and Systems (7 points to consider)
- Employee & Management (23 points to consider)
And the list goes on. Still thinking of selling?
If you would like more info, CLICK HERE
Planning the exit of your business is one of the most important business decisions you’ll ever make?
Have you considered taking the personal readiness index test as a method to check and see if you are ready, both emotionally and financially?
If you are in Australia and would like a little more assistance, why not try and take our test by clicking here
Many business owners fall into the trap of wanting to increase sales at all costs.
Here is a simple method, that even if sales are falling, the bottom line can go up.
Today we’ll only concentrate on one aspect.
Assume our example company is a manufacturing company.
In example 1, the company has a turnover of $100 k, cost of goods of $60 k, gross profit of $40 k, expenses of $20 k resulting in an EBIT of $20 k.
In example 2, let’s say we reduce turnover by 2% and with astute negotiating with our raw material suppliers, are able to reduce the cost of goods by 8.3%.
Assume we can keep direct expenses flat.
A 7.5% increase in gross profit leading to a 15% increase on the bottom line.
But, you may say, that is theory. What about the practical side of it?
We’ve done it with several companies and increased profit. In one instance, the cost of goods was reduced by 11% !!
When those businesses come to sell, guess what?
They achieve a higher price, just because of a simple strategy.
Look out for our next practical tip in the days to come.