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On debt and dying

Your parents always had what seemed like a dream life: a house in the country, a three-car garage and the latest everything. But now that they're gone, creditors are turning what you thought was a sizable inheritance into a mere pittance. Everything your parents worked so hard for is now in the hands of the repo men and their estates owe money to a laundry list of individuals.

Nobody wants to be left holding the bag when their loved ones die. To find out how to avoid being left on the hook for your parents' debts, read on.

Calling all creditors
When someone dies, it is the executor's job to tally up his or her assets and distribute them to all parties named in the will. But before anyone receives an inheritance, all creditors must be paid.

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Many children don't know anything about their parents' debts. Oftentimes, parents don't involve their children in the ins and outs of their estates because they feel it's none of their business or they don't want to worry them. But the executor is the one person who needs to know.

"When someone is approached to be the executor, they have to ask, 'What am I getting myself into?'" says Sandra Foster, author of You Can't Take it With You: Common-Sense Estate Planning for Canadians. If the executor doesn't know who the creditors are, Foster says it is common to take out an ad in a local newspaper so that the creditors can come forward.

"The creditors may come forward asking for money, which may be very little, but they are paid out of the estate," she says. You may be able to work around paying them by producing a death certificate -- depending on the size of the debt, the creditors may choose to absolve it. Either way, children are not held responsible for their parents' debts -- they are paid by the estate.

Death and taxes
But there is one creditor you can't avoid: the Canadian Revenue Agency (CRA).

"A person can die bankrupt," says Foster. "However, if they have left their RRSP, RRIF or other registered plan to a named beneficiary, the estate and the beneficiary are jointly and severely liable for the tax on the registered plan." If there isn't enough money in the estate to cover the tax on those plans, the CRA will send a letter to the beneficiary requesting the taxes owed; the taxes are then recovered from the plan's funds. "The moral of the story: Don't spend it before you know it's yours," says Foster.

There are other tax issues to keep in mind, such as the provincial estate administration tax, which in Ontario accounts for 1.5 percent of the asset value passing under probate. "It's best to try and avoid this tax, especially if you're dealing with an estate with substantial assets," says Ian Hull, co-founder of Hull & Hull estate, trust and capacity law firm, in Toronto, and co-host of the Hull on Estates podcast.

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-- Posted: Dec. 07, 2007
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