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Liabilities / Debts

Also known as: Debts, Estate Debts, Outstanding Liabilities

Definition

Liabilities are financial obligations—such as debts, taxes, and funeral expenses—that must be paid from your estate before any inheritance can be distributed to your beneficiaries.

Understanding liabilities is crucial because they reduce what your loved ones will inherit. The good news: in the UK, family members don't inherit your debts unless they co-signed loans or held joint accounts with you.

What Do Liabilities Mean?

Liabilities are the money you owe when you die. Under the Administration of Estates Act 1925, your executor or administrator must identify and pay all financial obligations from your estate before distributing anything to beneficiaries. Common liabilities include mortgages and secured loans (debts tied to property), credit card debts, personal loans, overdrafts, utility bills, tax liabilities including inheritance tax, funeral expenses, estate administration costs like probate fees, and overpaid state benefits that must be returned.

Your executor must pay these liabilities in a specific legal order set by statute. First come secured debts like mortgages, then funeral expenses, followed by estate administration costs, then tax debts, and finally unsecured debts like credit cards and personal loans. The executor must advertise for creditors by placing a notice in The Gazette, giving them two months to come forward. What remains after paying all liabilities becomes your "net estate"—the amount actually available for your beneficiaries to inherit.

Consider Sarah, who owns a house worth £280,000 with a £95,000 mortgage, plus £35,000 in savings and £20,000 in other assets. She has £4,500 in credit card debt, a £6,000 personal loan, and funeral costs will be approximately £3,500. Her gross estate totals £335,000, but her liabilities total £109,000. After the executor pays these debts in the correct order, Sarah's children will inherit a net estate of £226,000—not £335,000. Understanding this helps Sarah set realistic expectations and consider whether life insurance could cover these debts.

If your estate doesn't have enough money to pay all liabilities, it becomes "insolvent." David's estate has assets worth £153,000 but debts totalling £165,000. His creditors are paid in statutory order until the money runs out, and any remaining debts are written off. His beneficiaries receive nothing, but—and this is crucial—his family doesn't inherit the unpaid £12,000. Those debts simply disappear.

Common Questions

"Do I have to pay my parents' debts when they die?" No, you don't inherit your parents' debts in the UK. Their debts are paid from their estate only. You're only personally responsible if you were a joint account holder, guarantor, or co-borrower on specific debts. If the estate can't cover all debts, the remaining amounts are written off.

"What happens to my mortgage and credit card debts when I die?" Your mortgage and credit card debts become liabilities of your estate. The executor pays these from your assets in statutory order—secured debts like mortgages first, then unsecured debts like credit cards. Only what remains after paying all liabilities is distributed to beneficiaries according to your will.

"If I die with more debts than assets, will my family have to pay the difference?" No. When debts exceed assets (an "insolvent estate"), creditors are paid from available assets in statutory order until funds run out. Remaining debts are written off. Your family isn't personally liable unless they co-signed loans or guaranteed your debts.

Common Misconceptions

Myth: When someone dies, their debts die with them and don't need to be repaid.

Reality: Debts don't disappear when you die. They become liabilities of your estate and must be paid from your assets before any inheritance is distributed to beneficiaries. Only if there's insufficient money in the estate are debts written off—but this means beneficiaries receive nothing from the estate.

Myth: As a child, I'm automatically responsible for paying my deceased parent's credit card debts and loans.

Reality: You do not inherit your parents' debts in the UK. Debts are paid from the deceased's estate only. You're only personally responsible if you were a joint account holder, acted as guarantor, or co-signed the loan. If the estate lacks sufficient funds, unpaid debts are written off and creditors cannot pursue family members.

Understanding liabilities connects to these related concepts:

  • Estate: Liabilities are one component of your estate, which consists of both your assets and your debts.
  • Assets: Your net estate is calculated by subtracting your total liabilities from your total assets—the difference is what beneficiaries can inherit.
  • Insolvent Estate: When your liabilities exceed your assets, your estate becomes insolvent, meaning creditors are paid in statutory order until funds run out.
  • Creditor: Each liability represents a debt owed to a creditor, who has legal rights to claim payment from the estate before beneficiaries receive anything.
  • Funeral Expenses: Funeral expenses are a specific type of estate liability that must be paid early in the statutory order, typically before most other debts.
  • Debt and Your Will: What Happens to It?: Understand how different types of liabilities affect your beneficiaries and strategies for managing debts in your estate plan.
  • How to Protect Your Estate from Business Debts: Learn how business liabilities can impact your personal estate and what protections business owners can put in place.
  • How Does Bankruptcy Affect a Will or Inheritance?: Explore how severe liability situations and bankruptcy interact with wills and inheritance.
  • What Happens When Probate is Granted?: See how executors identify and settle estate liabilities during the probate process.
  • How to Value an Estate for Probate: Get step-by-step guidance on accurately identifying and valuing all estate liabilities for probate.

Need Help with Your Will?

Understanding your liabilities helps you plan realistically for what you can pass on to your loved ones. Whether you have a mortgage, business debts, or other financial obligations, knowing how they'll affect your estate is essential for effective will planning.

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Legal Disclaimer: This glossary entry provides general information about UK legal terminology and does not constitute legal advice. For advice specific to your situation, consult a qualified solicitor.