Updated October 2026
Wills - Potential Problem #14: Not Accounting for Debts
Properly managing debts in your estate planning is essential to protecting the inheritance you intend to leave. A home or investment portfolio may look valuable, but mortgages, personal loans and other liabilities can substantially reduce what beneficiaries receive. If there is insufficient cash, the executor may need to sell assets.
In NSW, a will cannot cancel a creditor’s rights or guarantee that a particular property will remain in the family. Planning should account for what you owe, what others owe you, and how the estate will meet its obligations.
1. Start with the net estate
Legal Aid NSW’s guidance on assets and debts explains why executors need financial records before calculating the estate’s value. Keep an accessible register of mortgages, loans, credit cards and money owed to you, alongside account details and supporting documents.
For example, a property worth A$2 million with a A$1.4 million mortgage has A$600,000 of equity before other liabilities and sale expenses. This is an illustration, not a valuation or court case. Leaving that property to a child does not make the mortgage disappear.
Include personal guarantees and disputed liabilities in the review. Ask your accountant and solicitor which obligations belong to you personally and which belong to a company or trust. Business involvement alone does not make every business debt an estate debt.
Also check which assets enter the estate. Do not assume superannuation death benefits or jointly held assets will provide cash for the executor; ownership and beneficiary arrangements matter.
2. Do beneficiaries inherit the debts
Beneficiaries do not usually become personally responsible for a deceased person’s debts merely because they inherit. However, a surviving joint borrower or guarantor may already have separate obligations, and a lender’s security over property can remain enforceable. Cancer Council NSW’s debt guidance explains these distinctions.
For a mortgaged gift, the will’s wording and the rules governing secured debt determine which part of the estate bears the burden. A general instruction to pay debts is not a substitute for examining the mortgage and the available funds.
If the family wants to retain a property, discuss whether funds can lawfully come from other estate assets, a beneficiary’s contribution or lender-approved refinancing. None of those options should be assumed before the finances and legal position have been checked.
3. A real NSW case about mortgages and inheritance
In Winn v Harding (2017), two estate properties were subject to a mortgage securing debts of approximately A$114,760 at the deceased’s death. The will expressly directed that the remaining estate be used to discharge the mortgages, but those funds were insufficient.
The NSW Supreme Court found that, to the extent the debt remained unpaid from that source, the properties bore the mortgage burden in proportion to their values under section 145 of the Conveyancing Act. It allowed time for arrangements to address the debt and indicated that a sale application could follow if necessary.
The judgment did not immediately order a forced sale. Its practical lesson is that even express instructions to pay mortgages need adequate funding; wording alone cannot produce the money.
4. What the executor must do before distributing
Legal Aid NSW’s estate-distribution guidance explains that executors must collect assets, address debts and tax obligations, and administer the estate carefully. Improper administration can expose an executor to personal liability.
Where liabilities exceed the available estate assets, obtain advice before paying selected creditors or distributing anything to beneficiaries. AFSA’s guidance on insolvent deceased estates explains that administration may proceed under state law or, where appropriate, Part XI of the Bankruptcy Act. The applicable payment priorities must be followed.
A Notice of Intended Distribution is optional and may help protect an executor against unknown claims if the statutory conditions are met. It does not erase known debts. Obtain advice on the notice period and timing of distributions.
5. Christine on acting before a company collapses
I remember acting for a client with a claim against a construction group. We moved quickly and filed the statement of claim shortly before the company went into liquidation. We got the claim underway before the position changed, and that timing is what stayed with me.
When someone owes you money, it is easy to keep hoping the next conversation will sort it out. My advice is to bring the paperwork in early so we can assess the claim and the options while there is still time to act.
Filing a claim, obtaining a judgment and actually receiving money are different stages. Filing before liquidation does not, by itself, give a client priority over other creditors or guarantee recovery. Speed matters because delay can narrow your options; it does not remove the need to assess the evidence and the debtor’s financial position.
6. Money owed to the estate needs attention too
An unpaid loan or other enforceable claim owed to the deceased can be an estate asset. The executor should investigate its recoverability promptly rather than treating the full amount on paper as money available for beneficiaries. Keep agreements, invoices, correspondence and payment records together.
ASIC’s liquidation guide for creditors explains that unsecured creditors generally cannot start or continue proceedings against a company in liquidation without court permission. They may need to prove their debt to the liquidator, and payment depends on available funds and statutory priorities.
Some payments received shortly before liquidation can also be challenged as unfair preferences. Early advice should therefore consider the recovery strategy and insolvency risks, rather than assume any pre-liquidation payment is beyond challenge.
For context, ASIC’s June 2026 insolvency update reported that construction accounted for 24.4% of appointments by industry from 1 July 2025 to 31 May 2026. This is the sector’s share of appointments, not the percentage of construction businesses that failed.
7. Practical steps to protect the estate
Step 1 — List assets and liabilities. Update balances when borrowing changes, a property is bought or sold, or a guarantee is given. Tell the executor where the records are kept.
Step 2 — Test the funding plan. Work out how repayments and estate obligations would be met if income stopped. Check whether any insurance proceeds would actually be payable to the estate.
Step 3 — Match the will to the finances. Identify how mortgage debts should be allocated and what should happen if the preferred source of payment is insufficient.
Step 4 — Review outstanding claims early. Establish who owes the money, the supporting evidence and any applicable deadline. Ask whether pursuing the debt is commercially sensible.
Step 5 — Keep beneficiaries informed. Explain the difference between gross asset values and the amount available after liabilities. Avoid promising a particular distribution before the position is clear.
Step 6 — Review the plan regularly. Revisit it after refinancing, business changes or major family events. Prompt investigation should be followed by properly timed administration and distributions.
8. What does planning cost
A straightforward single will starts from $440 including GST. We confirm your fee in writing before we start. Business guarantees, complex mortgage arrangements, estate administration and debt-recovery proceedings require separate assessment and pricing.
Contact CM Lawyers for help with wills and estate planning or estate administration, including identifying liabilities and assessing money owed to the estate.
