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Saturday, January 18, 2014

The residue of the estate is used to pay debts before specific gifts

It's hard to accept that someone would leave a bequest to a beloved family member, only to have that bequest eaten up by the deceased's debts. However, it's very common that inheritances are cancelled out or reduced by debts. Whether or not the asset left to the beneficiary specifically or as part of the residue can affect what happens to that bequest. A reader recently asked me about this:

"If someone passed away and leaves their house (say to a grand-daughter who is not the executor) but has a huge amount of credit card debt, is the house sold to pay the debt? Leaving the grand-daughter with nothing?"

As a general rule, all debts of an estate must be paid before beneficiaries receive an inheritance. In this case, it is quite possible that the house would be sold to pay the debts even if the beneficiary gets nothing.

However, there is more to it than that. Once we get beyond the general rule, there are other guidelines to help an executor determine what is to be sold for debts. A more specific answer would depend on two things: a) whether the will specifically leaves the house to the grand-daughter or whether it leaves her the entire estate, and b) what else is in the estate to pay off debts.

The residue of the estate is used first when there are debts. And within the residue, personal property, as opposed to real property, is to be used first. This means that other assets such as bank accounts, vehicle, household goods, and investments must be used for debts first. You mentioned a huge amount of credit card debt, and of course there are funeral expenses and taxes as well, so it may be impossible to pay off that much debt using other assets. So if the house is in the residue of the estate, as it would be if the entire estate were left to the granddaughter, once any personal property was liquidated, the house most likely would be sold.

If the will specifically leaves the house to the granddaughter, it cannot be sold until all of the residue is used up first. This wording in the will may provide more protection for the granddaughter if there are other assets. However, in an estate where the house is the only asset, it likely will make no difference to the outcome. 

As disappointing as it may be, you may end up with nothing. It's possible that if the full sale proceeds of the house are not needed for debts, you may end up with the cash left over, depending on the wording of the will.

3 comments:

  1. Hi Lynne,
    My mother left specific pieces of jewelry to family members in her will. None of these people live near me. How do I send them what they have been left but also protect myself? If they lived in close proximity, I could see them in person and have them sign some sort of release form but in this case, I live in Ontario and they live in Newfoundland. If I simply send it in the mail, even if by registered mail, I feel as if I will be left vulnerable to someone claiming that they did not receive what they were supposed to receive. O have also searched high and low for a sample 'release form' and have come up empty handed- is there such a document?
    Any help or advice you can give me would be greatly appreciated.

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    Replies
    1. Perhaps a better method of sending it would be to use a courier and give precise instructions that the package cannot be left without a signature. Make sure you insure it. Take detailed photos of what is in each package before you send it.

      I also suggest that you send each beneficiary a photocopy of the part of the will that leaves them their gift. Not the whole will, and not necessarily even the whole page, but just their bit so they can see for themselves what the will says. That step alone will save you a hundred headaches.

      As for the release, the reason you cannot find one is that there is no one standard release for everyone. In some provinces the form is legislated and in others it's not so the lawyers make up their own. While this may seem like bad news in the sense that finding a form is difficult, it's also good news because it means that whatever form you end up using won't be rejected for being the "wrong" one.

      If you search "ontario estate release form", you'll find something you can adapt to your circumstances.

      Lynne

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  2. hi lynne i am from quebec and have never received my share of my mother's estate. my brother who is the executor(liquidator in quebec) has not contacted me, what legal obligation does he have to inform me and what right do i have to obtain that share. thanks

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