Most Canadians are unaware of the consequences of having debts outstanding upon their death, according to a survey by the Lawyers’ Professional Indemnity Company (LAWPRO) released on Monday, which means that people may not be planning properly to retain their wealth.
“[With] the accumulation of wealth,” says Ray Leclair, vice-president, public affairs at LAWPRO in Toronto, “if you can plan for it there may be ways that you can retain more of it for your children.”
For example, in some cases life insurance might be a better way to handle mortgage debt after a person’s death rather than mortgage insurance, says Leclair, as there may be money left over from the cost of the house that can be paid to the beneficiaries.
LAWPRO’s survey found that 67% of Canadians don’t realize what will happen to their debt after they die. More specifically, 65% of people don’t understand the risks of joint ownership of assets when there is debt involved.
For instance, those children or joint owners will be responsible for any remaining debts related to those assets, such as a house, says Leclair. Family members should also be aware that the estate must pay off any credit card debt, if the cards were not properly insured, before any inheritance can be paid out.
Despite this gap in knowledge around debt, most people do want to leave some kind of legacy to children or other beneficiaries. Fifty-six per cent of people surveyed said they wanted to leave a financial legacy to their families. Other final wishes included leaving possessions to beneficiaries or organizations, making a donation to a favourite charity, setting up an endowment fund or even leaving money for the care of a pet.
While the majority of people are misinformed about debt after death, the survey did find that some people have a better understanding of the issue than others. For example, 24% of men surveyed did not understand what happens to debt after a person’s death compared to 32% of women. As well, 42% of Canadians over the age of 55 who were surveyed did not understand what happens to debts after death. Finally, the study found that 37% of homeowners surveyed understood what happens to their debts after they die compared to 28% of renters.
Leclair believes that the discrepancy between homeowners and renters stems from the likelihood of the former having sought the advice of a professional such as a lawyer or mortgage broker who explained what could happen if they were to die with a mortgage on their house.