Debts owed to the deceased can range from large (e.g. an insurance settlement from a car accident) to very small (e.g. a refund from the local newspaper once the subscription is cancelled).
The general rule is that the executor must collect all legally enforceable debts. Most debts owed to a person continue to be owed after that person passes away. This is why the executor, who represents the deceased, is the one who has to collect them.
There are a couple of ways in which the Will itself can help the executor:
One of the most common debts on an estate is a loan to one of the children that the deceased parent made during his or her lifetime. Ideally, the deceased parent has given the executor some direction in the Will about whether to collect the debt. If nothing has been said, then the executor is obligated to collect that loan. The executor doesn't have the legal authority to forgive that loan if the Will doesn't allow for that. This is a really difficult thing for the executor to deal with, especially if the executor and the beneficiary who owes the money are siblings.
One of the most common debts on an estate is a loan to one of the children that the deceased parent made during his or her lifetime. Ideally, the deceased parent has given the executor some direction in the Will about whether to collect the debt. If nothing has been said, then the executor is obligated to collect that loan. The executor doesn't have the legal authority to forgive that loan if the Will doesn't allow for that. This is a really difficult thing for the executor to deal with, especially if the executor and the beneficiary who owes the money are siblings.
A way of dealing with that debt, rather than actually collecting money from the beneficiary, is to reduce the amount of money the beneficiary is going to inherit.
If you are a parent who has lent money to a child, or a child whose parent has lent money, make sure the repayment (or not) of the loan is mentioned in the parent's Will. This may certainly help to cut down on disputes.
Another place where the Will itself can be very helpful to the executor is the section of the Will that contains powers or authorities for the executor. In some Wills, there is a power to settle this kind of matter as the executor sees fit.
This clause could be helpful where the amount of the debt owed to the deceased is so small that it will actually cost more time and money to collect it than it is worth. The existence of a small debt puts the executor between a rock and a hard place, because he or she is obligated to collect all debts owing, including the small ones. However, if the power referred to is included in the Will, this will allow the executor to decide that a given debt is just not worth it to collect.
All debts that are owed to the deceased, once collected, should be put into the executor's estate bank account that every executor opens up once he or she starts working on the estate. This keeps the estate's money separate from the executor's money and keeps the records straight.
this is a tough job, dealing with this cases might take some more time...
ReplyDeleteYes, being an executor certainly is a tough job, probably more so than most people realize.
ReplyDeleteMy husband was named on his grandmothers but than we got a letter from probate that since they signed an agreement on a loan back in 2003 he was not getting his inheritance!This does not seem like his grandmother AT ALL!My husband said that he took care of that with his grandmother years and years ago!This really cleared it up for me....His aunt is executor and while emptying out the house she must of came across letter(His grandmother was a hoarder and saved everything even had a calendar still up on wall from the 1970s!I knew she would not take him out of will!This explains why he is named first on will....Why be named at all than!Cannot believe his aunt would go this low!What I dont understand is how probate did not ask if debt was settled..Now sadly we cannot confirm with his grandmother as she has passed!My husband has been so sick over this but I just knew she wouldnt have done this!If his grandmother did in fact ask him to be removed for the "debt" shouldnt there be a legal paper that she signed taking him off?
ReplyDeleteI purchased your BC Probate Kit and found it to be incredibly helpful. I am struggling with a debt owed to the deceased by a beneficiary (her daughter, my sister). The beneficiary sent me a notarized letter stating that she acknowledges the debt and rather than pay the estate, she requests that her portion of the inheritance be decreased.
ReplyDeleteI can't figure out if I should noted this in the Statement of Assets and Liabilities and the distribution plan I submit to the courts or simply do the math and reduce the payment to the one sibling and increase it for the other four.
You would do both of those things. The distribution plan that you submit should describe exactly what you will pay out to each person.
DeleteThere is nothing wrong with reducing an inheritance rather than actually requiring repayment. In fact, this would be the usual way of dealing with it.
When doing the math, remember to add the entire debt back into the estate, then divide it by five, not four, if there are five beneficiaries.
Lynne
Thanks Lynne, You are really on top of your blog and it is greatly appreciated....
ReplyDeleteThe Will directs me to liquidate everything and divide the residual 5 ways, so the distribution plan simply says "one fifth of estate residue" to each beneficiary.
Should I add the debt under the personal property section or should I state One fifth of estate residue minus $12,000 in the distribution section?
It isn't personal property, in fact it's really only a notional amount. So keep it in the distribution section.
DeleteLynne
Me again with the sister owing money issue - I figure out that she should receive 1/5 of the residual minus $9000 (4/5 of what she owes)
ReplyDeleteHow much time after death does executor have, to go after collecting money from debtors to the estate? Is there a time limit? like 1 yr after death??
ReplyDeleteIf the debtor is named as a beneficiary rather than being named in the will how does this affect the collection process? Would the debtor still be able to provide an affidavit stating they want their debt to be deducted from their inheritance?
ReplyDeleteWhen you say "named as a beneficiary" but not in the will, I assume you must mean named in something like an RRSP or a life insurance policy. If so, this money will get paid out directly by the bank or insurance company to the beneficiary and have nothing to do with the estate.
DeleteIf the person is not named in the will, how could anything be deducted from their inheritance? There is no inheritance.
The beneficiary is going to have to pay directly to the estate the money they owed the deceased.
I would find it extremely unlikely that someone receiving an RRSP would have any luck asking a bank to pay out a portion to someone else. These are registered products and have pretty strict rules. However, I don't know that for sure so I'm going to check with one of my bank manager buddies on that.
Lynne
My question is when a person passes away and they owned a business, would any/all outstanding invoices be subject to a time limit? Say these invoices were not collected within 2 years and now the person passed away? Speaking from Ontario, have you come across this and a timeline or maybe a reference number and book?
ReplyDelete