The answer is nope.
Debt is not cancelled out upon one’s death.
Here, let me share with you my recent encounter with a client. He is 25 and has just begun his career with his first job. Last month, his mother passed away and he was referred by another client of mine to me to work on his mother’s affairs. When we met up for the first time, my client shared that his mother had no will written, had RM 50,000 in outstanding credit card debts, and she was paying as much as RM 5,000 a month in servicing two mortgages prior to her death. Also, his mother had no life insurance policies apart from a handful of MRTA policies.
My client asked if he can contact his mother’s banks to instruct these banks not to impose interest charges on these credit card debts as his mother had already passed on.
My answer to him was far from optimistic.
I told him that his mother’s banks would not entertain such requests.
My client proceeded to enquire about his mother’s properties. I had discovered that his mother’s MRTA policies were insufficient to settle her mortgages. Thus, in my client’s case, I told him that he has to continue servicing the mortgages in order to keep his mother’s properties. Otherwise, he risks losing the properties. This is because the banks could take over possessions of the properties and will have them auctioned off at the auction market.
Next, my client shared that his mother had some cash in her bank accounts and he asked if they could be used to settle all of her credit card debts and continue to service the two mortgage payments.
My answer to him was a yes.
But, there is a problem.
His mother’s savings and fixed deposit accounts have been automatically frozen upon her passing. This means her money is untouchable.
It requires a will document to unlock these cash.
However, my client’s mother passed on without a will. As such, in his case, he is required to apply for the Letter of Administration (LOA) to unlock these cash for debt settlement purposes. The application of the LOA would take 18-24 months and it would cost my client a few thousand Ringgit in legal fees.
Next, my client asked me about the interests on his mother’s outstanding credit card debts. Will they continue to be compounded in the 18-24 months period?
Sadly, I told him that they would continue to compound. In addition to that, the banks could impose late payment charges on top of these credit card debts.
As I explained, I saw my client sitting there, feeling despair, taking it all.
He realised that his mother had left him such a financial predicament and there is nothing much he could do to have them resolved quickly. My client is facing a handful of prospects such as:
1. Continuous compounding interests on his mother’s credit card debts.
2. The risk of losing possessions of his mother’s two properties to her banks.
All in all, it has been really tough for my client.
What His Mother Could Have Done Before Her Passing?
Personally, I believe, the above situation could have been avoided, if his mother was aware of the importance of estate planning.
In his mother’s case, let’s say she has RM 50,000 in credit card debts and a total of RM 500,000 in mortgages that are not covered by her MRTA policies today. It is possible for her to set up a simple living trust where she could assign her own life insurance policies and deposit a sum of money into her living trust. She may nominate her son as the beneficiary to her living trust.
In her trust deed, she could instruct the trustee, upon her death, to offer a sum of cash to her son so that he could use the money received to:
1. Settle all credit card debts to avoid issues of future compounding interests.
2. Service both mortgage installments to retain ownership of her properties.
3. Pay legal fees to obtain the Grant of Probate (GP) to execute her will.
4. Finance all other immediate expenses such as his own living expenses.
This is possible as cash placed into her living trust will not be frozen upon death as the cash does not form part of her estates. Typically, a trustee could disburse the cash placed in the living trust to the beneficiary (her son) in 7 days after any triggered event stated in the trust deed, which includes premature death.
In addition, his mother can write a will to bequeath her properties, cash, and as well as her other belongings to her son. The estate distribution process through a will document is faster and more efficient than via obtaining the LOA.
The cost to write a will and setting up a trust is around RM 2,000-RM 3,000 and it is subject to the number of clauses one wishes to include. But, the two would be useful to not only relieve her son from the financial burdens as stated above but also to leave behind a tangible legacy to her son and other beneficiaries.
This would add financial security and certainty to her son.
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