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When you inherit more than the estate

Livemint, Jul 18, 2016

Inheritance of liabilities that are linked with the assets or even without the assets is also a common scenario

He that dies pays all debts. I defy thee! Mercy upon us”—screams Stephano in William Shakespeare’s The Tempest, looking at the bright side of death. But in the more modern world, debt is often left best to the legal heirs to settle as part of their inheritance.

Inheritance is often associated with the receipt of assets or properties. But inheritance of liabilities that are linked with the assets or even without the assets is also a common scenario.

Hindu law makes it a son’s pious obligation to discharge the debts of his father. However, the Hindu Succession Act, 2005, has finally abolished the doctrine of the son’s pious obligation and now the son cannot be made to discharge the debts of his father solely on the basis of his religious obligation. Thus, now the liability of the children to discharge debts of their father extends only to the extent of the assets inherited by them.

Before an inheritor starts to consider every bequest as onerous, it is important to note here that acceptance of bequest is completely optional. One cannot force a legal heir or a beneficiary to accept the bequest. But the beneficiary cannot choose to keep an asset refusing to take a debt associated with it. Also, there are many elements related to the ownership of an asset and parties involved in the liability transaction, which are important for the inheritor to be aware of. A person can inherit taxes or unpaid expenses or statutory or personal dues or normal liabilities against assets.

Usually, primary responsibility of the liability lies on the guarantor or the co-borrower of the asset that is pledged. But in absence of either of them, the general rule is that the legal heirs can be held liable for the debt of the deceased to the extent of one’s share in the inheritance, if not settled by the estate. 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 or mortgage loans: In the event of a borrower’s demise, the bank or the lender will engage with the guarantor, if any. In absence of a guarantor, the lender will approach the legal heir to transfer the loan to him and to be responsible for it. If the deceased has a Will and the beneficiary of the property is someone else (other 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 instalments lies with him. It is prudent to take an insurance cover on the life of the borrower for settling the loan and avoiding unnecessary financial burden on the legal heirs.

Ideally, legal heirs or co-borrowers should convey the borrower’s death to the lender at the earliest. They 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. 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 common for a person to use credit cards to make payments. Many take personal loans 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, lenders have the right to claim the outstanding loan from legal heirs or successors. Generally, these can be met out of the liquid assets of the estate in the first instance. If these are insufficient, lenders 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 or executors of the Will.

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 is made. In the absence of a loan document, legal heirs have only a moral obligation to repay such a loan. But 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 or the legal heirs to discharge such liabilities. The income tax return of the deceased also needs to be filed by the executor or legal heir, and the Permanent Account Number (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: If shares, mutual funds, bonds or other securities are pledged against a loan, the guarantor or 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 on timelines for repayment of dues and release of the collateral securities.

Business liabilities: The executor or legal heirs should pay off all liabilities of the deceased that appear in the books of accounts of the sole proprietorship. These liabilities may include salaries of employees, statutory dues and taxes, among others. It is a requisite to wind down a sole proprietorship business; else, the liabilities will fasten unto the legal heir to the extent of his share in the estate.

Prudently, Thomas Jefferson had commented that it was best left to the incumbent on every generation to pay its own debts; a principle, which if acted on, would save one-half the wars of the world.