Inheritance and Settling Debts 2018

As we explained in our article about Wills in Israel, a person is entitled to write a will in which he leaves an inheritance from what was his, to anyone or any organization he so chooses as he chooses (he or she, the same for both genders)

This is his last request and should be respected. But what if this person, the “testator”, has not only an inheritance but also debts? Who will be responsible for his debts?

Debts Made When Still Married

In Israel the law is quite simple. Whatever you have must be shared with your spouse: Money, real estate, pension funds, etc., including debts.

Your debts are your spouses’ debts—or anyone who inherits your legacy— and in case of death it might also become your heir’s debts, in the case that you have something to inherit (but no inheritance was left, no debt will be imposed on the spouse).

Here is a scenario (a real story with different details in order to keep the real people’s privacy): Harry was a very rich man and he made his fortune 30 years ago in real estate. Harry was married to Sandy who never worked outside the home. Harry was free to work and become a successful business man. Sandy was never aware of the intricacies of the business and she did not know much about the wealth they had accumulated.

After 35 years of marriage and a very comfortable life, Harry died in a car accident.

After the mourning period, Sandy had to start her life again and the first place to go was to the finances. She contacted the family lawyer and received a copy of the Will. She was the sole benefactor of the Will, receiving control of the bank accounts, real estate they had, pension fund, and a life insurance policy.

In total she figured a 7-digit figure, not including the house and a small plot of land. The insurance policy was a small one and the pension fund wasn’t worth much, a total of $350,000.

Sandy, new to the Israeli legal system, asked her lawyer to go to court and have the Will “notified” or “acknowledged”, a simple, not expensive and fast process.

In the meantime, “others” were also working hard to find what Harry had left as an inheritance. The reason: Harry was a gambler and he had left debts all over the country. Sandy’s nightmare was about to begin.

When Sandy tried to withdraw cash from the bank, she found that there was an attachment (a freeze) to the account therefore she could not use any of that cash. Harry left a huge debt in the bank as a result of a loan he took but never paid back. The loan was worth more than the cash in the bank account.

The same problem occurred regarding their house. She could not sell the house and found out that Harry took another mortgage on the house, owing the bank even more than the real market value of the house due to the fall of the real estate value in the recession time.

Almost every asset they had, had been attached and therefore could not be used. She received an evacuation order from court.

Sandy’s lawyer did an extremely fine job and after less than two years he had reached an agreement with every one of the creditors. Sandy was not left too badly after all. How come?

The law in Israel protects two assets, and fortunately for her, she had enough money to live well in the coming years using those assets. The law stipulates that these two assets are not to be part of the inheritance and they will go directly to the person the testator left them: In this case, Sandy.

The insurance policy was the first asset to be released by the court. Sandy now had enough money to pay the legal expenses and many other expenses she had since Harry’s death.

In addition to the insurance policy, the pension fund and some other savings were “defended or protected” by law, therefore becoming “untouchable” to the debtors.

But the real case was around whether the wife of a gambler is responsible for the debts of her husband. Every side in the case agreed (including the debtors) that Sandy was never aware of Harry’s bad habits and she never signed one piece of paper. Because of that, Sandy’s lawyer could reach a decent agreement in which 30% of the total inheritance was left untouched to Sandy.

There are many other cases and scenarios but the general idea is that the inheritance is not saved from debts. The case above is a rare exception of the rules and even if you try to ignore debts that you know exist, you may find yourself not only paying these debts in the end, but also losing the entire inheritance.

Please be aware of the facts and the laws and regulations in Israel concerning Wills and Inheritances.

Consult a lawyer and do write a Will. This can save your loved ones not only any future problems, but also a lot of money. There are ways of preventing your partner’s debts from becoming your debts in the future.