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Thursday, April 8, 2010

Does an executor have to pay the deceased's unpaid debts out of his own money?


This isn't going to be a quick yes or no answer because, as with everything in law, much depends on the circumstances of each case. Here are some general rules you can work with.

The debts of an estate (including income tax) must be paid before any beneficiaries receive their money. If an executor ignores the debts and pays the beneficiaries, the executor may be held personally liable for those debts.

If paying the debts first means that the beneficiaries get little or nothing out of the estate, this is not the executor's fault.

Often an executor asks about debts because there are more debts than there are assets in an estate. An executor should a) honestly try to figure out what legally enforceable debts exist, b) be very careful to put appropriate values on estate assets, and c) use the estate assets to pay the debts. Where there is a lot of debt, this usually means selling assets to realize a cash value that can be divided among creditors. If there is not enough money to pay everyone 100% of what is owed to them, the executor may have to try to negotiate a settlement whereby each creditor gets a certain amount on the dollar.

If the estate is fully used up to pay the legally enforceable debts and expenses, and there are still debts of the deceased unpaid, the executor does not have to use his own money to pay them. That's assuming, of course, that the executor has not done anything fraudulent or negligent with the estate's money.

When listing the debts of an estate, the executor should remember to include debts that are not payable immediately but that will become payable in the future, such as income tax at the end of the year.

To protect himself or herself against personal liability, an executor should advertise in the newspaper for creditors and claimants against the estate. Doing so won't overcome any negligence on behalf of the executor, but assuming there is no negligence, advertising for creditors certainly helps.

5 comments:

  1. Hi Lynne,
    My dad recently passed away and I came across your website (very well done by the way) when I was doing research. My dad owes a lot of debt and I've also been paying his condo fees, electricity bills, etc. since he had left no will and I cannot sell his property. When I go to repay the debts once I become the executor, can I make it a priority to get my money back first, then pay off the creditors (e.g. credit card companies). Thanks for your help!

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  2. Hi Lynne,
    My sister and I are equally joint beneficiaries and executrices of my father's will. His entire estate consisted of one R.R.I.F and two small life insurances policies both of which we are equal beneficiaries. There is also a joint bank account (me and my father) with documented survivorship.

    If money is paid directly to the beneficiaries of the R.R.I.F and insurance policies and if I can prove ownership of the bank account, what is used to pay his Income Tax owing and any remaining bills. I have been using the joint account for this purpose, but I am now questioning doing this. There is not enough funds in this bank account (and never was enough funds) to pay his taxes owing.



    Thanks,

    Lena

    ReplyDelete
  3. Dear Lynne:
    My sister and I were executives of my father's estate and to our knowledge, all debts were paid, and we received the final clearance certificate from Revenue Canada nearly three years ago, and so the estate was disbursed and the estate account was closed out.
    Now nearly three years later, I got a letter from my dad's pension fund claiming that a bill for an an overpayment against his pension fund was not paid.
    It's been three years since the estate account was closed off so I am not sure ... I thought I sent them a cheque at the time, but it's been so long that I am not certain. We did do an advertisement at the time to make sure there were outstanding debts and had no response. So I thought it was over and done with, long ago.
    Now I am getting this letter. Are my sister and I responsible even though the estate was long ago wrapped up and we got the clearance certificate?

    ReplyDelete
    Replies
    1. You and your sister are executors for life, so you do legally have to deal with anything that comes up on the estate.

      If you paid out the beneficiaries when there was an outstanding debt, you may be responsible for the payment of the debt yourselves.

      You raise a good point about advertising for creditors. If you had never heard of this pension plan and they missed out on the deadline you imposed in your notice to creditors, you would have a good case for refusing to pay them. However, you suggest that you did know about them because you said you thought you sent them a cheque. .

      An executor really should still have estate records three years later, since it's not that unusual for things to pop up, but if you don't have any, then you'll have to reconstruct what you did. If you paid estate debts using cheques, do you still have the cancelled cheques? Or can you find them online using the account number?

      The Clearance Certificate only means that the estate does not owe any more taxes. It doesn't mean that you can't be held responsible for other things.

      Lynne

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  4. I am one of two Executors on my parents' Wills. When calculating the Value of the Estate, there were only 2 assets at death; bank account and condo. Now in the Debt of the Estate, funeral expenses have been indicated by the other Personal Representative (Executor). Both funerals were pre-arranged and pre-paid, so I consider only the supplementary/additional expenses to be a Debts of the Estate, but the other PR has indicated the entire cost of the funeral. Is this correct?

    ReplyDelete

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