Is your client dealing with an insolvent estate?

There may be circumstances where your client is “inheriting” an insolvent estate. Insolvency, which is different from bankruptcy, is where a person, living or dead - is unable to meet his or her liabilities or has an excess of liabilities over assets.

Before any distribution is made to beneficiaries, the executor must determine and then pay all outstanding debts of the estate. This duty flows independently from the terms of the will. If the executor distributes the estate without first taking appropriate steps to identify and settle the debts of the estate, he or she will be personally liable for payment. Of course, there are exceptions, so long as the executor can show he or she acted “honestly and reasonably”. That said, there have been many instances where an unpaid creditor seeks to “collect” from beneficiaries who receive the proceeds of distribution.

One way to avoid such a circumstance is to advertise for creditors. In addition to advertising, it is your client’s responsibility should they decide to become the estate trustee, to make reasonable and careful investigation through the deceased’s records to determine whether there are any existing debts and liabilities. Part of this process will include contacting banks, credit card companies or utilities to obtain any outstanding balances.

The executor will have a period of one year (“Executor’s Year”) to ascertain, settle and pay the debts. Where the executor had significant debts, the Estates Act sets out a procedure that may be used to settle the quantum of debts. Typically, creditors use a more direct method of enforcement such as bringing an action by way of a statement of claim. There are some assets that are exempt from creditors.

Priority of payment is critical to an insolvent estate as there is not enough funds to pay everyone. First, the estate assets are applied to the deceased’s reasonable funeral expenses, which form a first charge on the estate. Typically after this, testamentary expenses are the cost of administration, which include, executors’ fees and legal fees.

Where the executor discovers, or is concerned that the estate may be insolvent, the Trustee Act provides for the calling of a creditors meeting and the appointment of inspectors to guide or asset the executors in realizing upon the assets and administering the estate. One thing of note is that a claim for dependent’s relief under the Succession Law Reform Act cannot be made against an insolvent estate, there needs to be assets in the estate in order to make a claim.

If your client is aware from the start of the estate administration process that the estate is in fact insolvent, they may choose to renounce being appointed as an executor and instead leave creditors to their own devices. Regardless, it would be prudent for you to set out their duties and responsibilities including any repercussions for the estate should they decide not to act in a reporting letter.