Inheriting a loved one’s legacy can be a bittersweet experience. While many emotions can run high, a crucial, yet often overlooked, aspect of inheritance involves the estate’s financial situation. This can be a particular matter of concern for estate executors, who may not completely understand the estate’s debts and liabilities.
This blog post will explore estate debts and insolvency and will outline what executors and beneficiaries should know while working through the estate administration process. It will also provide practical tips on understanding asset exemption, navigating bankruptcy proceedings, and addressing liquidation issues.
Not Everything Can Be Inherited
It is important to remember that a deceased’s debts are not “inherited” in the traditional sense. In Ontario, a testator’s next-of-kin will not be responsible for or inherit their loved one’s debts unless they are a personal guarantee or co-signer on a particular debt or liability. However, a creditor may attempt to contact a next-of-kin or executor to recover the outstanding debt.
The deceased’s estate (through administration carried out by the estate trustee) is responsible for settling outstanding debts before beneficiaries receive anything. Moreover, a beneficiary is not responsible for ensuring that the deceased’s debts are paid up, unless they are acting as estate trustee.
Common types of estate debts include:
- mortgages;
- credit card or line of credit balances;
- outstanding loans, and;
- unpaid taxes.
Executors: Understanding Your Role When Debts Arise
As the executor of an estate, you are responsible for administering the deceased’s assets and liabilities. It is important to first review the deceased’s will and complete any legal prescribed duties, such as:
- Arranging a funeral;
- Identifying and securing assets;
- Applying for probate;
- Paying debts and taxes;
- Distributing assets to beneficiaries in accordance with the will; and
- Providing the Probate Court with a final accounting.
These duties may sometimes include dealing with estate debts or bankruptcy. As such, it is important to remember that debts do not magically vanish with the passing of a loved one. The estate is responsible for settling outstanding debts before beneficiaries receive their share. In some situations, the liabilities may be greater than the assets, and beneficiaries may not receive anything.
As the estate executor, it is critical to understand that you are not personally liable for the deceased’s debts beyond the value of the estate’s assets. However, acting outside your legal authority or failing to properly manage the estate could lead to personal liability.
In Ontario, the Estate Administration Act prescribes a specific order for settling estate debts. Generally, reasonable funeral expenses and estate administration costs take precedence, followed by secured debts (mortgages) and unsecured debts (credit cards).
Navigating Estate Insolvency
Sometimes, the value of the estate’s assets might not be enough to cover all outstanding debts, leading to estate insolvency. As executor, it is important to stay calm in this situation and take careful steps to address the situation. You must get a clear picture of the debts and assets of the deceased as quickly as possible and before moving further with the estate administration. Some debts may be easily settled, while others may require more time and attention. Creating a detailed inventory of estate assets and liabilities can help you determine the extent of the shortfall.
Navigating estate insolvency can be complex, so working with an experienced estate lawyer can ensure that you do not miss anything. They can advise you on your options and ensure that you comply with your legal obligations throughout the process. Depending on the circumstances, your options may include:
- Selling assets to pay off debts, however, it is important to remember that certain assets might have legal protections),
- Reaching settlements with creditors, or
- Filing for bankruptcy on behalf of the estate, which is done as a last resort.
Bankruptcy Proceedings
Under the federal Bankruptcy and Insolvency Act, an estate trustee must administer an estate and file for bankruptcy. However, the estate trustee or the creditors of the estate may file for a declaration of bankruptcy. In the event that an estate is declared bankrupt, the court will continue with bankruptcy proceedings under the legislation.
In bankruptcy proceedings, an official receiver will be appointed for the estate and, after the estate trustee has renounced their role as trustee, they will typically be relieved of their duties and obligations relating to estate administration. The receiver’s role in these proceedings is to ensure that assets are collected, the estate is administered and creditors are repaid as much as possible in accordance with the applicable laws.
Asset Distribution and Asset Exemption
Generally, beneficiaries will not receive anything from an estate that has been deemed bankrupt. However, certain assets may be exempt from seizure for debt repayment. Section 2 of Ontario’s Execution Act states that the following assets may be exempt:
1. Necessary clothing of the debtor and the debtor’s dependants.
2. Household furnishings and appliances that are of a value not exceeding the prescribed amount.
3. Tools and other personal property of the debtor, not exceeding the prescribed amount in value, that are used by the debtor to earn income from the debtor’s occupation.
4. One motor vehicle that is of a value not exceeding the prescribed amount.
5. Personal property prescribed by the regulations that is of a value not exceeding the prescribed amount.
However, if an asset is potentially exempt, the asset must be owned outright by the testator, and must be free of a lease, loan or lien. If it is determined that an asset qualifies as an exemption, it can be distributed in accordance with the terms of the will or under the rules of intestacy.
Key Takeaways for Estate Trustees Regarding Estate Debts and Bankruptcy Proceedings
Depending on the estate’s circumstances you are administering, you may or may not choose to file for bankruptcy after identifying the estate’s debts and other liabilities. If you know that the estate will eventually have sufficient funds to pay all debts, administration may be tied up while assets are liquidated. However, issues may arise at any point during this process, which is why it is important to consult with an estate administration lawyer who can assess the situation and advise you on all of your options moving forward. They can also help you better understand your general legal responsibilities under the provincial Trustee Act and Estate Administration Act.
Contact the Estate Lawyers at Bader Law for Assistance with Estate Planning and Administration
At Bader Law, our trusted team of estate planning and administration lawyers help clients navigate every stage of the estate planning and administration process, from initial will drafting, to estate plan amendments, and working with executors to complete the estate administration and probate process. From our offices in Mississauga and Oakville, we represent clients across Ontario. To speak with a member of our team regarding your wills and estates matter, contact us online or call us at (289) 652-9092.