Written by Munera Lawyers
When a deceased person’s debts exceed the value of their assets, the estate is considered insolvent. Dealing with an insolvent estate can be challenging for an Estate Trustee, particularly when determining which debts must be paid and in what order. This creates an increased risk for the Estate Trustee when it comes to mishandling assets.
Priority of Payment
Under the Trustee Act, funeral and testamentary expenses are generally given first priority. These include the reasonable costs of the funeral, burial, or cremation, as well as expenses related to carrying out the deceased’s will. Costs associated with administration of the estate such as obtaining a Certificate of Appointment of Estate Trustee or estate administration taxes are also given priority. While the person who paid for funeral expenses can be reimbursed from the estate, reimbursement is limited to reasonable expenses, taking into account the deceased’s financial circumstances and the fact that the estate is insolvent.
After funeral and testamentary expenses have been paid, priority is given to secured creditors. Secured creditors are entitled to recover payment from the specific asset used as collateral for their debt. Any remaining assets are then distributed to unsecured/general creditors. These creditors are paid proportionally, meaning each receives a share of the remaining estate funds relative to the amount owed.
Beneficiaries Do Not Inherit Debt
It is important to remember that Beneficiaries do not inherit debt. Beneficiaries are not personally responsible for paying the deceased’s debt. Debts are paid only from the assets of the estate. If the estate does not have enough assets to cover all debts, the remaining unpaid debts generally go unpaid.
Similarly, the Estate Trustee is not personally liable for the deceased’s debts. However, an Estate Trustee can become personally liable if they distribute assets to beneficiaries before properly paying creditors, or if they fail to follow the legally required order of priority.
Trustee Can Refuse to Take on Estate
In some situations, it may be in the best interest of an Estate Trustee to not act on an insolvent estate. Being named Estate Trustee in a will does not obligate someone to accept the role. A person may renounce their appointment without explanation or formal action, if they do not wish to take on the responsibility. However, renunciation must occur before any involvement in the administration of the estate. If a person has intermeddled with the estate, (meaning you have taken steps beyond arrangement of funeral expenses or safeguarding assets) you cannot renounce and must instead seek formal resignation through the Court.
What to Do If you identify an Insolvent Estate
If an Estate Trustee determined that an estate is likely insolvent, it is important to proceed cautiously. The Estate Trustee should consider the following steps:
- Identify and document all assets and liabilities.
- Avoid distributing assets to beneficiaries.
- Determine whether the estate has sufficient assets to satisfy all debts.
- If debts are determined to be more than assets, determine whether to renounce the role of Estate Trustee or proceed with administering the estate strictly in accordance with legal priority.
- Seek legal advice before making any payments to creditors.
Bankruptcy Proceedings
An Estate Trustee may also place an insolvent estate into formal bankruptcy proceedings, typically with leave of the court. When this occurs, The Bankruptcy and Insolvency Act governs the distribution of assets and establishes a specific priority of payment. Control is given to a Licensed Insolvency Trustee who handles the distribution of the assets in accordance with the act and the Estate Trustee loses authority over the estate assets.
Handling an insolvent estate can be significantly more complex than administering a solvent estate. As there are not enough assets to satisfy all debts, Estate Trustees must carefully follow the legally established priority of payments and exercise caution when dealing with creditors and estate assets. Mistakes in the administration process can expose an Estate Trustee to potential personal liability. For this reason, where an estate appears to be insolvent or where there is uncertainty about the estate’s financial position, it is advisable for the Estate Trustee to seek legal advice to ensure that the estate is administered properly and in accordance with the applicable legislation.