Stepping into the role of an executor often comes with many uncertainties. Navigating grief alongside estate administration can be a lot for one person to handle. Whether it is figuring out how to apply for probate or managing beneficiaries’ expectations, executors can face several challenges throughout an estate’s administration.

In most cases, executors do not have full knowledge of the debts and liabilities of an estate before the testator’s death. An executor may face a difficult situation if an estate has incurred more debt than it has funds to settle, which can be frustrating for everyone involved.

Can Debt be Inherited?

In Ontario, a testator’s next-of-kin will not inherit, or be responsible for, the debts of their loved one. Unless, however, they are a personal guarantee or co-signer. Further, it is not the beneficiary’s responsibility to ensure the deceased’s debts are paid up unless they act as the estate trustee.

An appointed executor will also not automatically inherit a testator’s debts unless they are a named party to the debt or liability. However, an executor or next-of-kin may be sought out by creditors of the deceased in an attempt to recover outstanding debt.

How are Estate Liabilities Handled?

The estate trustee is responsible for ensuring proper estate administration, including ensuring that the testator’s debts are appropriately managed. The estate trustee is responsible for ensuring that the existing debts of the deceased are paid to creditors. All debts should be paid from the estate before distribution proceeds. If a trustee distributes the estate to beneficiaries without ensuring all creditors have been paid in full, the trustee may be held personally liable for payment of the outstanding debts.

Initial Executor Duties

At the outset of the administration, the trustee must review the deceased’s will and complete the legally prescribed duties such as arranging a funeral, securing the deceased’s assets, applying for probate, paying taxes and debts of the deceased, distributing assets to beneficiaries and providing a final accounting. In most cases, the estate pays reasonable funeral-related expenses before paying other creditors.

One of the first substantial undertakings a trustee must perform is to obtain a clear idea of the assets and debts of the deceased as quickly as possible. It is important to collect and total any debts which may exist as of the testator’s date of death. Generally, there are three types of debt categories: taxes, unsecured debts, such as credit cards and lines of credit, and secured debts, which are registered against something, such as a mortgage.

Once the debts have been prioritized, the estate assets must be reviewed.

Does a Trustee Have Options When Administering an Insolvent Estates?

An estate may be considered insolvent if its debts exceed its assets. In some cases, the trustee must decide whether the estate should pay its debts or file for bankruptcy.

Pursuant to the Bankruptcy and Insolvency Act, a trustee must administer an estate and file for bankruptcy. Either the estate trustee or creditors of the estate may file for a declaration of bankruptcy. If an estate is declared bankrupt, the court will proceed with bankruptcy proceedings per the Bankruptcy and Insolvency Act.

If an Estate is Declared Bankrupt, is the Trustee Relieved of Their Duties?

The next step in bankruptcy proceedings is to appoint an official receiver for the estate. After a trustee has renounced their role as trustee and a receiver has been appointed, a trustee is generally relieved of their duties and obligations with respect to estate administration.

Bankruptcy proceedings can help ensure that an estate trustee is not held personally liable for issues that may arise throughout the administration, as the trustee is no longer involved in, or responsible for, the matter. The receiver will be responsible for collecting assets, administering the estate and repaying the creditors as much as possible in accordance with the law.

In general, beneficiaries do not receive anything from an estate that has been deemed bankrupt unless there are exempt assets.

What are Exempt Assets?

Under the Execution Act, there are limited assets which may be exempt from seizure for debt repayment, including:

  • clothing;
  • personal items such as furniture, tools, food, and furniture up to a maximum value of $13,150;
  • a maximum of $10,000 equity in a property;
  • one motor vehicle worth up to $6,000;
  • pension plans and retirement savings plans; and
  • certain life insurance policies.

However, it is important to ensure that any potentially exempt asset is owned outright by the testator, free of a lease, loan or lien. If an exempt asset is truly exempt, it can be distributed following the instructions in the will or the rules of intestacy.

Delayed Payment and Liquidation Issues

In some instances, a trustee may choose not to file for bankruptcy. However, bankruptcy proceedings may be the best option in situations where an estate has large debts, since the possibility of additional claims may occur and creditors are prioritized in an intricate manner.

If a trustee knows that the estate will eventually have the funds to pay all debts in full, things may be tied up while assets are liquidated. However, issues with liquid assets can be significant and complicated; therefore it is recommended that a trustee seek legal advice to gain a better understanding of the legal obligations under The Trustee Act and Estate Administration Act,

Contact the Estate Litigation Lawyers at Derfel Estate Law in Toronto for Guidance on Administering Insolvent Estates

At Derfel Estate Law, our estate litigation lawyers have substantial experience helping clients manage probate and estate administration in Ontario. Often, executors do not have a complete picture of a testator’s debts until after their passing. Dealing with an estate that has significant debts can be confusing and frustrating. If you are an executor of an insolvent estate, contact our lawyers at 416-847-3850 or reach out to us online to find out how we can help.