The next-of-kin do not inherit the debts of their relative. If your father died with more debts than assets, you are not immediately liable for any of his debts (unless you co-signed or guaranteed). As next-of-kin or a possible beneficiary, it is not your responsibility to ensure that the debts of the deceased are paid, unless you act as the estate trustee, even if you are named in a will as the executor. In fact, if you are not the estate trustee, you do not even have a duty to notify creditors of the death of the debtor.
RULE 1
An executor named in a will is not automatically liable for the debts of the deceased just because they are the executor.
When you step into the role of the estate trustee of an estate you do not automatically become personally liable for all of the debts of the deceased.
Many creditors (and collection agencies) will attempt to hound an executor or next-of-kin into paying their debt by claiming that the executor/next-of-kin is liable for the debt. This is false.
However, see Rule 3 for how an estate trustee can become personally liable if they do not handle the deceased’s debts properly.
[Remember, an executor named in a will is not obligated to act as estate trustee – you are always entitled to renounce the role as long as you do not ‘meddle’ with the estate. Paying for a funeral is not meddling. More here.]
RULE 2
The estate trustee is personally liable for all debts that the estate trustee incurs after the death of the deceased. For instance, if the estate trustee hires movers, accountants, or lawyers to assist with the estate, then the estate trustee is responsible for ensuring that those debts are paid.
RULE 3
An estate trustee is liable for ensuring that the debts of the deceased are handled properly. It is the duty of the estate trustee to ensure that all of the creditors of the estate are treated equitably, and if possible, are all paid in full from the estate.
An estate trustee will be liable if one creditor receives more (as a % of their debt) than another creditor. Also, an estate trustee will be held personally liable if they distribute any of the estate to beneficiaries and without first ensuring that all creditors are paid in full to the extent of the ‘mispayment’. A trustee who does not act properly is not automatically liable for all of the debts of the deceased – they are liable to the extent of the funds that they did not apply properly.
STAY CALM
There is nothing wrong with the deceased leaving a few unpaid bills at death. However, too much debt can make administering the estate very difficult for a prospective executor.
It is very important for a prospective estate trustee to get a clear picture of the debts and assets of the deceased as quickly as possible and before going any further with the estate. Some estate debts are easily handled, and some are a potential nightmare for the trustee so you must be careful.
INVESTIGATE BUT DO NOT INTERMEDDLE (yet)
“Intermeddling” is the formal term for ‘starting to act’ like the estate trustee. It is triggered by such steps as ‘paying debts’ and ‘selling assets’.
Dealing with a funeral and burial are generally not intermeddling, nor is collecting Canada Pension Plan death benefit, nor collecting assets which pass directly to beneficiaries outside the estate (jointly owned houses and bank accounts, RRSPs, RRIFs, TFSAs and life insurance with named beneficiaries), nor collecting information about the assets and liabilities of the estate. Put another way, ‘investigating’ or ‘inquiring’ is not intermeddling, but ‘dealing with, buying, selling, giving or paying’ likely are intermeddling.
If you intermeddle with an estate, you can no longer ‘renounce’ (see below), you can only ‘resign’. An estate trustee who resigns must pass their accounts in order to be released by the Court from further liability. Note, as above, that intermeddling does not necessarily create personal liability for the debts of the deceased – the “three rules” set out above remain apply.
As a general rule, an executor who does not intermeddle does NOT have an obligation to do anything – no duty to notify creditors, no duty to file tax returns, no duty to assign the estate into bankruptcy, no duty to probate. If, after your investigations, you decide that the estate is solvent, then you can (and likely should) move forward promptly to administer the estate.
SORT AND TOTAL THE DEBTS
First, you need determine how much the debts are and who they are owed to. Sort them into 3 groups –
- taxes,
- secured debt (eg. Mortgages); and
- unsecured debt (for instance, credit cards)
IDENTIFY AND TOTAL THE ASSETS IN THE ESTATE
Second, determine what the assets of the estate are and how difficult they will be to convert to cash.
It is important to confirm which ‘assets’ are in the estate. For instance, jointly owned real estate is not an estate asset but a portion of a house owned as a ‘tenant in common‘ is part of the estate.
It is very important to verify ‘who gets what’ for pensions and RRSPs., RRIFS and TFSAs:
- RRSPs and pensions that pass to named beneficiaries pass outside the estate and are not estate assets.
- While RRSPs and pensions are usually exempt from seizure in bankruptcy when the plan-holder is alive, if an RRSP or pension does not pass to a designated beneficiary or pay out to a surviving spouse but ‘falls into the estate’ upon death, then these assets pass into the estate, are no longer exempt from seizure, and are estate assets available to pay creditors.
ARE ASSETS GREATER OR LESS THAN DEBTS?
Third, determine if it will be possible to pay all of the debts in full (eventually) or not. This is the crucial step.
If the assets are more than the debts, then the estate is solvent, and you can (and likely should) move forward with administration.
If the debts are greater than the assets, then the estate is insolvent (bankrupt) and likely should be assigned into bankruptcy.
NOT ENOUGH CASH NOW, BUT ENOUGH ASSETS TO PAY ALL DEBTS EVENTUALLY
If it will be possible to pay all of the debts in full, you may have ‘liquidity’ problems for a while (i.e. not enough cash on hand to pay the debts) but ultimately, you should be able to pay everyone in full after you liquidate the assets.
Estates with liquidity problems can be handled, but they require a strong hand and good professional advice ideally from a lawyer with knowledge of bankruptcy law and creditors’ rights. Executors without experience or the temperament for debtor/creditor disputes may want to renounce the right to be estate trustee, in favour of someone else with more experience handling unhappy creditors.
We have a lot of experience with these difficult situations, both as advisor and executor and welcome inquiries.
NOT ENOUGH ASSETS TO PAY ALL DEBTS: BANKRUPT (INSOLVENT) ESTATES
If the estate’s debts are greater than the estate’s assets, it will never be possible to pay all of debts in full. This is the definition of an insolvent or bankrupt estate. You will not want to intermeddle in the estate – do not start dealing with assets or liabilities. (recall, there are many things that you can do that are not intermeddling).
HANDLING A BANKRUPT ESTATE
As a potential estate trustee of a bankrupt estate you must be very careful. In particular, do not pay some creditors and not others. Do not get hounded into paying the creditor who is screaming the loudest. To avoid personal liability you absolutely must not pay non-tax creditors of an insolvent estate before paying all income taxes, and except as set out below you must not pay money or transfer assets to beneficiaries. By definition, there will be nothing for the beneficiaries (either by will or under intestacy legislation) of a bankrupt estate beyond the exempt assets (see below).
REASONABLE FUNERAL AND BURIAL EXPENSES
Generally, it is acceptable to pay reasonable (or ‘modest’) funeral and burial expenses first, before paying any other creditors. This means someone who paid these expenses first can be reimbursed from the estate, even if the estate is insolvent. It is possible to collect the CPP death benefit without probate to reimburse funeral and burial expenses.
EXEMPT ASSETS
Some assets of the deceased are exempt from ‘seizure’ and thus can be dealt with by inheritance (either by will or the rules for intestacy if there is no will) even if the estate is bankrupt.
The rules of exemption in bankruptcy are provincial and thus vary from province to province. In Ontario, the assets exempt from seizure and which can thus be transferred from an insolvent estate include:
- A vehicle worth up to a prescribed maximum (currently $7,117)
- All clothing
- Furniture, equipment, tools, fuel and food to a prescribed maximum (currently $13,150)
- Home equity up to a prescribed maximum (currently $10,783).
For many insolvent estates these exempt assets are the only assets. However, before distributing any of these assets it is important to verify that they are truly unencumbered assets of the deceased on death – not leased, and with no specific lien against them. There is likely no lien on clothes, but vehicles, furniture and equipment may well be leased or subject to security.
Subject to payment of reasonable funeral and burial expenses, these exempt assets can usually be distributed to beneficiaries (not creditors) according to the will, or if there is no will, the rules of intestacy.
It is often possible to transfer ownership of an inexpensive vehicle from the estate to a family member without probate, even if there is no will, especially if the family member is the sole beneficiary of the estate (such as the married spouse of an intestate estate with less than $350,000 in assets). See our handout and website for information on how to make these vehicle transfers without probate.
BEYOND EXEMPT ASSETS
Other than dealing with exempt assets, if the estate is bankrupt then your best bet is usually the following:
- do not meddle with the estate or start taking on the role of the estate trustee;
- if you are the executor named in the will, strongly consider renouncing any right to be appointed estate trustee; and
- consider assigning the estate into bankruptcy with a licensed insolvency professional (bankruptcy trustee). Insolvency trustees are licensed by the federal government and you should be able to find one in your area. They have the skills, immunity from liability, and access to the legal remedies necessary to impose a solution on all creditors. You can find one in your area online.
As a general rule, an executor who does not intermeddle does NOT have an obligation to do anything – no duty to notify creditors, no duty to file tax returns, no duty to assign the estate into bankruptcy.
If the estate is assigned into bankruptcy, the trustee in bankruptcy will administer the estate, collect the assets, and pay the creditors as much as possible in accordance with their rights.
Administering an insolvent estate beyond the exempt assets requires a firm knowledge of the laws of security and priority to determine ‘who gets what, and who can take what steps on their own’. When dealing with unsecured creditors, it is common to require a method to impose a solution on creditors that treats all equally. This is a unique feature of bankruptcy law.
