Who gets their inheritance when debts eat up part of the estate?

Many times in this blog I've talked about how debts and expenses of an estate are to be paid before the beneficiaries receive their inheritances. Now a reader has asked a really good question about the next step in that process, particularly where there might not be enough money in the estate to pay debts and expenses as well as all of the gifts set out in the will.

Here's the question:

"Cash gifts are distributed after the estate has paid expenses. If there are insufficient funds to pay the gifts are the prorated according to the funds available?"

The answer is a bit complicated but I'll do my best to keep it brief. By the way, I addressed this issue in a paper I wrote a couple of years ago for the Legal Education Society of Alberta called "Taxation of the Average Estate", which is available online by clicking here.

The first thing you have to do is read the will carefully to see whether it gives any specific instructions about paying taxes. Most don't, beyond giving a direction to the executor simply to pay debts. If there are specific instructions, then obviously you must follow them. The answer I'm giving below applies when there are no specific instructions in the will.

Let's say that John's will gives $5,000 to his friend Lucy, and divides the rest of the estate among his nephews, Frank, Lloyd and Joe. The gift to Lucy is called a specific gift. The gifts to Frank, Lloyd and Joe are residuary gifts because these three people share the residue, or rest, of the estate. The type of gift matters because debts are paid first from the residue. So if there were only $5,001 in John's estate after payment of debts, Lucy would get the $5,000 and the other three would split the last dollar.

Within the residue itself, personalty would be used up before realty. So if there were cash or vehicles in the residue, they would have to be sold and used to pay debts before real estate in the residue was sold for debts.

I believe this reader's question asks about what to do when there are several specific gifts to be paid and there isn't enough to pay all of them. If some of the gifts were cash and some were realty, cash gifts would have to be completely consumed by debts before realty gifts were used. So it could work out that one person (getting the lake lot for example) might still get that gift even though the next person didn't get their gift because it was cash.

If there were several gifts to be paid - all cash - and none were treated any differently than the others in the will, I would agree with the reader's suggestion to pro-rate them after payment of debts. It would be difficult for any one beneficiary to argue that he or she had been treated unfairly if this approach to division was used.

Keep in mind that if the recipient of any of those gifts is a dependent of the deceased (spouse, minor child, handicapped adult child), he or she might decide to contest the will to get a greater share. They have only a limited time to do this.

When can the executor be reimbursed for expenses?

When an executor is compensated for his or her work on an estate, the amount he or she receives is separate from the reimbursement of expenses. Unless a will specifically says otherwise, the fee is over and above being paid back for expenses. In this post I'd like to look at the expenses rather than the fee.

It's always a good idea for an executor to try to limit his or her personal involvement with estate expenses by submitting bills directly to the bank where the deceased had an account. Many know that they can submit the funeral bill to the bank so that the bank pays that bill directly without the funds passing through the executor's hands. However, this arrangement also works for other bills that are clearly the deceased's bills, such as property tax for the deceased's home, or the final heat and electricity bills. It's worth a chat with a banking officer to see what can be done.

Of course, this idea only works when there is cash available in the deceased's account. Realistically there might not be enough funds. There are plenty of estates which consist of a house and a RRIF and not much more. In those cases, submitting bills isn't going to be helpful and the executor just might end up paying for things (funeral, lawyer, accountant, bills, tax) out of his or her own money.

When hiring a lawyer to obtain a Grant of Probate, you will likely find that lawyers who do a lot of estate work won't even bill you until they get the Probate. This is because they know their bill should be paid by the estate and that you likely won't be able to liquidate estate assets unless you have the probate.

I always advise executors not to take their fee until the estate is finished and the fee has been approved either by the residuary beneficiaries or the court (except for very unusual circumstances). However, that's not the case with expenses which the executor pays directly out of pocket. When the executor is out of pocket, of course he or she needs to be reimbursed as quickly as possible. The executor doesn't have to wait for any specific time or event.

Being reimbursed from the estate means that money has become available, either because an asset has been sold or an investment has been collected in by the executor. These funds would have been deposited into the estate bank account set up by the executor around the time he or she applied for probate. This is where any reimbursement should be taken from. Keep the arrangements simple and transparent. Don't take money directly out of accounts or investments owned by the deceased.

I would suggest that the executor reimburse himself or herself once a month out of the estate account. This way ALL money taken by the executor can easily be accounted for in one statement, and the executor never amasses unmanageable debts on behalf of the estate.

The executor should keep a receipt for every expense and know which cheque out of the estate account paid for which expenses. Don't keep track in your head; keep track on paper or computer. If he or she is claiming for mileage, it should be calculated on paper, which would then be used like a receipt (in my Alberta Probate book I provided a form for this that you can either print or download, as well as forms for all of the executor's record-keeping and accounting).

Now let me add the inevitable caveat. Be careful about what kind of thing you're claiming as an expense and don't make the mistake of thinking that everything even remotely connected to the estate is a legitimate expense. For example, flying your family members to the funeral is an individual's expense, not an estate expense. Getting that massage or that expensive champagne to manage your stress is your own expense. Remember that the residuary beneficiaries are going to examine your accounting at the end of the estate and if you have reimbursed yourself for inappropriate items, you will probably have to repay them to the estate.

Here's the second caveat. Don't be a spendthrift with estate money. The courts won't like it at all should you end up there, and that won't go well for you. Also, there might not even be enough estate funds to pay you back if the estate is small and there are debts and taxes to be paid.

You want me to pay for you to attend my funeral? I'd rather you stayed home

Executors don't have an easy job. One of the tricky issues they have to deal with is deciding which expenses should be paid from the estate and which should not.

Possibly the most common question about estate expenses is whether the estate should pay for the airfare, busfare, mileage, hotels etc for out-of-town family members to attend the deceased's funeral. Somehow, the prevailing idea is that the estate has to pay for everyone to come to the funeral. This is completely wrong and an executor who allows those expenses could find himself or herself personally repaying those amounts to the estate.

Remember that money paid out of the estate is money that is being taken directly out of the pockets of the beneficiaries.  For each person who is pleased that you've covered their airfare and hotel, you're going to have an upset beneficiary.

And why should the person who passed away have to pay for people to attend the funeral? If it were my funeral, I'd prefer you stay at home rather than charge me to attend. It's pretty insulting to make the deceased pay for the attendees, don't you think? The law supports me on this. Family members have to pay their own way. If they can't afford it, either they miss the funeral or the other family members get together and pool their funds to help out.

So what can an executor do when faced with a family member who insists that the trip to the funeral must be covered by the estate, since that is what happened when their friend's brother's hairdresser's mom's neighbour died?

If the family member is also a beneficiary of the estate, the executor has some room to work things out. The executor can advance a sum of money to the beneficiary on the understanding that the amount will later be deducted from the beneficiary's inheritance (get it in writing). Even this is risky for the executor; debts of the estate must be paid before beneficiaries get anything, so if the estate turns out to be insolvent, there might not even be an inheritance for this particular person.

Realistically, the executor might not even have seen the will, or had any chance at all to deal with it, by the time the funeral is held. It's very unlikely that the executor will have a good understanding yet about what's in the estate and who is going to inherit what. So when family members discreetly ask the executor where to send their receipts to be reimbursed, he or she might just have to say that everyone is just going to have to pay his or her own way, and that if it's possible to reimburse beneficiaries later on, the executor will let them know.

Yes, I realize that this is going to make the executor pretty darn unpopular. But what's worse, being unpopular, or being popular but personally responsible for a couple thousand dollars of other people's expenses that you wrongly paid out of the estate?

One thing that the executor can do for those travelling to the funeral is provide them with a copy of the Funeral Director's Statement of Death so that they can claim a bereavement discount from the airline.

Welcome to executorship. This is just the first of many minefields.

Believe it, an online funeral service

Buying a funeral online? It's new for the funeral industry, and it started in Ontario. Today's Globe and Mail carries this story about how the public is responding to this new idea.

Cost of dying

A reader recently asked me by way of email about keeping the cost of a funeral low. Based on the phrasing of the question I believe that he is asking about planning for his own funeral, and not that of someone else. It seems like something many of you would be interested in, so I'm answering it here.

These days, a typical funeral costs up to $10,000, but you have to remember that the final cost is a result of several individual choices. There's no law that says you have to have a memorial service or a nice reception afterwards; those are usually chosen by the loved ones left behind as a way of getting together to share grief and memories and show their respect for the person who passed away.

There are choices you can make that drastically reduce the cost. For example, cremation is cheaper than burial, since burial involves a casket, viewing, notices in the paper, flowers etc.

When you are calculating the cost of a funeral, be sure to take into account that the executor or family may apply for the CPP death benefit to help pay for it. This is available to everyone in Canada who has contributed to the plan through mandatory deductions from paycheques. Right now the maximum amount available is $2,500.

I've found some good information on line - click here - about how to apply for government assistance for an inexpensive funeral when no other funds are available. This is not for people too cheap to use their own money; it's for people who truly have no other way to pay for even a minimal funeral.

Many people like to include their funeral wishes in their Wills to let people know what they would like to have done. I see plenty of Wills where the testator requests that his family keep the costs as low as possible. Keep in mind though that the final decisions about funeral, burial or cremation are up to the executor, not the person who dies. The executor may legally override the funeral wishes of the testator in the Will. So talk to your executor about it.

You can choose to pre-arrange and pre-pay your own funeral. This might hold down the costs, as many family members feel somehow disrespectful or greedy if they insist on the absolute cheapest disposal method for a loved one. Also, shop around to different funeral homes.

Disbursements before probate

Can a person in charge of an estate pay expenses or bills before receiving the Grant of Probate from the court?

The answer to this question depends in large part on whether that person in charge is an executor or an administrator. If he or she is an executor named in a Will, then yes, it is alright to pay expenses and bills before receiving probate. In fact, in many situations it's the smart thing to do in order to avoid penalties and interest on amounts owing.

If the person is, on the other hand, applying to be an administrator of the estate, then he or she doesn't have the legal authority to do anything on behalf of the estate. Whereas an executor appointed in the Will derives his or her authority from the Will document itself, an administrator has no authority whatsoever until the court says that he or she does. An administrator-in-waiting is just going to have to wait, and the creditors or beneficiaries will simply have to be patient. It's not the fault of the administrator if the deceased didn't make a Will.

As I've often said on this blog, the question in law is generally not "can I do this?" but "should I do this?" Even where there is a Will naming an executor, it might not be a good idea for the executor to start paying bills for the deceased if he or she plans to renounce the executor appointment and let someone else handle the estate. It may have an effect on whether the executor is allowed by the court to renounce. While paying one or two bills is probably not enough to cause a court to refuse a renunciation, things get trickier if the executor is calling himself the executor and making decisions about the deceased's bank accounts while paying those bills.

Sometimes an executor uses his or her own money to pay expenses before probate. This can happen when estate assets are frozen while waiting for probate. If this should happen, the executor is entitled to reimburse himself from estate funds once he or she has access the funds. If the executor makes those payments assuming that there are funds, and it turns out that there are none, the executor is going to be out of pocket with no way of reclaiming the loss.

Why do residuary beneficiaries sign a release?

When the executor of an estate has finished cashing in assets and paying bills, has filed the tax returns and is ready to pay the beneficiaries, he or she will send the residuary beneficiaries a set of financial statements. Along with the statements will be a Release. If the executor is doing things properly, no residuary beneficiaries get their money until all of them have signed and returned the Release to the executor.

So what is the legal effect of that Release? What is the beneficiary really doing by signing it?

The financial statements that come with the Release are intended to give a full, accurate picture of all of the financial transactions the executor has done on behalf of the estate. The beneficiary should be able to tell from the statements what happened with every asset of the estate (e.g. the deceased's home was sold for $x and the money was put into the executor's account). The statements should show what was spent on the funeral, legal fees, accounting fees and other expenses. The beneficiary is entitled to ask for more detail if he or she believes that to be necessary.

By signing the Release, the beneficiary is approving of the financial statements and all that they contain. Releases will often refer to a time period, usually beginning on the date of death and continuing up until the day the Release was sent to the beneficiary. In those cases, the beneficiary is approving of everything the executor did during that time period. Sometimes in more complicated estates there will be more than one set of financials, perhaps with the second set a year or so after the first, but in most estates there is only one.

By signing the Release, the beneficiary is saying that he or she is satisfied with everything the executor has done. He or she is agreeing in writing that everything is fine. The beneficiary can not later come back and find fault with the accounting, for example by saying that money is missing or that the house was sold for too little. The beneficiary is signing off on it and can't later change his or her mind.

This protects the executor from anyone coming back later and beginning a legal battle over something in the estate. Beneficiaries also benefit from it because the executor, who wants the Release to be signed, will usually provide a thorough accounting that answers all of the beneficiaries' questions.

A beneficiary does have the right to have the accounting looked at by an accountant or a lawyer before signing the Release, though most do not. Every case is different and the beneficiary should take his or her time to read the accounting thoroughly before signing the Release and returning it to the executor.

It's a buyer's market for burial spots

Here's a different perspective on whether you should pre-plan and/or pre-pay your burial plot, from American lawyer, Ronald C. Morton. Click here to read the article.

Can I open an estate account if there is no Will?

If a person passes away without a valid Will, and there are assets and debts to be dealt with, someone must apply to the Court to be appointed as Adminstrator of the Estate. As you can imagine, it takes a while for the family to search for a Will, conclude there isn't one, see a lawyer and bring an application to court.

The weeks or months that pass between the deceased's death and the appointment of an Administrator can be frustrating for the person waiting for the Court Order. There will be pressure from creditors for bills to be paid. There will be a funeral that must be paid for. There may be money arriving from pensions or investments or employment. And of course there will be beneficiaries wanting the estate to move along more quickly.

This set of circumstances may lead the person waiting to be appointed as Administrator in a really difficult position. He or she may be willing and ready to work on the estate, but cannot do anything without the Court authority. If there was no Will and there has been no Grant of Administration, then the would-be Administrator has absolutely no legal authority to spend, deposit, invest or do anything else with the deceased's money.

This means that the Administrator could not open an estate account before being appointed by the Court by a Grant of Administration.

If there were a Will in place naming someone as executor, that would be a completely different story.

While waiting for a Grant of Administration to be issued by the Court, the deceased's next of kin who arranged the funeral may submit the funeral bill (and some other bills) directly to the bank where the deceased had an account. Assuming there is enough money in the deceased's account, the bank will pay the funeral bill directly, without the money ever passing through the hands of the would-be Administrator.

Once the Court has issued the Grant of Adminstration, the administrator can do everything an executor could do, including opening an estate account to deal with the deceased's money.

Is there a limit on what an executor spends on a funeral?

When someone passes away, the decisions having to do with the disposition of the remains are made by the executor named in the Will. The arrangements may or may not be what the person expressed in the Will, and may or may not be what the family members want. This makes sense to me, because the executor has an obligation to deal with the remains and pay the bill. If there is an obligation, then the executor has to have control over how that obligation is to be met.

These days, a lot of people pre-arrange and pre-pay their own funeral arrangements. I have yet to see a case where an executor ignores pre-paid arrangements.

Funeral expenses are paid first before any other debts, and before any beneficiaries receive their inheritances. Because of that, the amount of funeral expenses incurred has a direct impact on how much money is left in an estate for other people. This is especially true of a modest estate.

It is possible for an executor to spend too much or too little on a funeral. The common-law rule is that a suitable amount to spend depends on the deceased's station in life and circumstances.

The word "circumstances" here refers at least in part to financial situation. If a person dies leaving $50,000 for his or her family, it probably doesn't make sense to spend $20,000 on a funeral. That would leave the family in dire straits. If, however, a person dies leaving several million dollars for his or her family, $20,000 for a funeral doesn't seem outrageous.

An executor has to decide what is reasonable in the circumstances, and should keep in mind that if he or she goes beyond what is reasonable, he or she may be held personally liable to repay the excess amount to the estate. For example, if an excessive amount is spent on a funeral, leaving insufficient estate funds to pay a creditor, the executor should expect that the creditor might wish to sue him or her.

Most people don't realize that a headstone is not generally considered to be a funeral expense. The best way to proceed there is to get permission from all of the beneficiaries to pay for a headstone out of the estate. Expenses that are considered funeral expenses are:

• purchase of the plot


• funeral home services


• purchase of casket or urn


• clothing for the deceased


• flowers


• obituaries in the newspaper


• lunch or reception


• honorarium for person conducting the service

You'll notice that airfare, mileage, hotels, meals and clothing for extended family members to attend the funeral are not on the list of funeral expenses. This is a very common error made by executors. Those expenses should not be reimbursed from the estate, unless those individuals happen to be beneficiaries of the estate and are prepared to consider payment of these expenses an advance on what they'll get from the estate.

Even though an executor is not legally bound to follow a deceased's wishes for dealing with remains, it's a good idea for the executor to check the Will for any specific instructions. My experience with Wills is that many people who have not made their own pre-arrangements will request a simple or minimal funeral. I think of this as the "pine box mentality". Others like to specify that there should be an enormous party celebration with liquor flowing and lots of food (with my Newfie roots, I tend to agree with this approach). Usually if an executor follows the deceased's instructions as best he or she can, there is less likely to be a challenge from family members about the costs.