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Saturday, November 30, 2019

You're handling an estate: what's your exposure to personal liability?

From time to time, I meet family members who come into my office as a group because someone has passed away. They tell me about their brother, sister, aunt, uncle, or parent who died without a will, and about the deceased person's assets and debts. Information flows easily from them and sometimes I can barely keep up with my note-taking because everyone is eager to contribute to the conversation. Then I ask which one of them is going to handle the estate, and the room goes silent.

Nobody wants to do it. 

It's not always easy to get people to verbalize their objection to handling an estate, but I ask questions until I find out. Is it the amount of work involved? Are they concerned about family disputes? Are they unable to agree on who should be the one to be appointed? Generally, these are not the issues. The issue is that everyone is afraid of liability.

In particular, everyone is wary of accidentally signing up to pay another person's debts.

Nobody wants to take on a job that may cost them money they can't spare, or that might damage their credit rating, or put them in the direct line of sight of collection agencies or, worse, Canada Revenue Agency. I can certainly sympathize with not wanting to invite trouble in through the door. 

But let's look at the reality of the situation. If a family member takes on the duty of being appointed by the court as an administrator of the estate, what is his or her exposure to personal liability? The first job of the administrator is to arrange for the burial or cremation of the deceased. If the deceased had enough money to cover those expenses, that money is used. If there isn't enough money, family members usually pool together to cover basic expenses, but that is not required by law. They do that so that their loved one won't have to be buried at government expense in a so-called "pauper's grave".

Assuming that burial or cremation is satisfactorily dealt with, the administrator will then turn to the collection of the deceased's assets and the payment of debts. This process may well be put on hold if it is necessary for someone to be appointed by the court, then picked back up once the court process has been completed.

The administrator's responsibility is to pay all of the deceased's legally-enforceable debts and estate expenses using the deceased's money. They must pay the funeral, and any outstanding income tax. They must also pay mortgages, vehicle loans, and bills that the deceased didn't get a chance to pay, such as the last internet or phone bill. This can be tough if there is not much money in the estate. At this point, administrators are often told by creditors that they must pay the bills themselves. This simply is not true. Of course the creditors will say so, because in many cases it works and they are paid. 

If there is not enough money in the estate to pay all the bills, an administrator must be careful about how he or she deals with the assets. For example, it's not unusual for an administrator to give away all of the deceased's personal items, from tools to jewelry to appliances to vehicles. This is because family members feel entitled to have things, and the assets feel more like "just mementos" than assets. But if the total of the items given away by the administrator would have fetched, say, $5000 if they'd been sold, that's $5,000 the creditors won't receive. At this point, the administrator may be in trouble. The creditors would be legally entitled to demand $5,000 from the administrator personally.

As a rule, administrators don't take on the job with any illusions that it will be easy or fun. They do it out of family obligation and respect for their deceased family member. If they are careful, honest, transparent, and thorough, they are highly unlikely to run into any trouble. And unless they do something against the rules, they never become liable for another person's death.

If you want a thorough discussion of exactly what executors do wrong and what to do instead, check out my book called "How Executors Avoid Personal Liability".

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