Obligations of an insurance beneficiary when the estate is insolvent

Small estates that don't have enough money to pay everyone can have unique issues. In particular, executors and beneficiaries alike wonder about the extent of their obligation to pay for estate expenses and bills. A reader recently wrote to me about an estate like that, which has the additional complication of life insurance policies being paid to the beneficiaries. I thought many of you would benefit from seeing this question and answer

"Five adult children are beneficiaries of their mother's small estate. However, two of the three insurance payouts were divided and paid out by the insurance company directly to the beneficiaries rather than to the estate. Of course funeral and other expenses would have required them to pony up the money they received to help pay costs and expenses in closing up the estate, however, three of the children have not given their insurance cheques to the estate and by the looks of things don't plan to. Do they have any legal obligation to give that money back to the estate until all bills are paid? In the end, if two of the children have put back all their money and the estate is left in arrears, what happens then?"

If the insurance company has paid the funds directly to individuals, it's because the policy owner (their mother) named them as beneficiaries of the policy. You refer to "giving the money back" as if you believe the money belongs to the estate, but legally it does not. The insurance beneficiaries have every legal right to keep that money, and in fact may not want to give it to the estate because they are honouring their mother's wish to give them the insurance.

You also say that "of course they would be required to pony up" the insurance money for their share of expenses, but again, this is not the case. Those expenses are the responsibility of the estate, not of the people who would inherit any surplus in the estate. I would certainly hope that these people would help to pay for their own mother's funeral simply on moral grounds, but it's not legally required of them just because they received insurance money.

And as for the bills - beneficiaries of an estate are not required to chip in to cover the deceased's expenses or bills. If there are unpaid bills when the estate has been depleted, that's unfortunate for those who remain unpaid. But the law doesn't make the beneficiaries pay.

Insurance money paid to individual beneficiaries is simply not part of the estate. Having said that, check the will to see whether it specifically changes the insurance beneficiary from the individuals to the estate. This is rare, but not unheard of.