Can a wife turn down an inheritance from her husband if he owed more than he owned?

Recently a reader told me that her husband had passed away, and asked whether she could turn down her inheritance from him if he owed more than he owned. Is it possible for a beneficiary to turn down an inheritance? Sure. But in this situation, more questions than answers come to mind for me, so I thought I'd take this opportunity to explore what a person in this situation might want to take into consideration.

A general rule of estate law and procedure is that debts are paid first and beneficiaries only inherit if there is enough left in the estate after debts are paid. Therefore it wouldn't really help if the wife turned down her inheritance, since there wouldn't even be an inheritance if there were unsatisfied debts."Inheritance" only refers to assets that pass under the will, or on the laws of intestacy if there is no will.

This made me think that perhaps the wife wasn't really talking about inheritance. Perhaps she was actually referring to assets that passed to her because of her husband's death, but not through his estate. This would be assets that passed to her because she and her husband owned them jointly (such as a bank account or their home), or because she was the named beneficiary (such as on a life insurance policy, pension, or RRSP).

This is where the wife might want to make sure that she has personalized legal advice tailored to her situation. She needs to understand how debt, titles and taxes work in her specific situation. Let's look at a few possible scenarios. One is a joint bank account between the husband and the wife. When the husband died, the account automatically belonged to the wife. It doesn't form part of his estate and is not available to creditors.If he owed money on a credit card, she would not have to use the joint account to pay it. Similarly, a life insurance policy that named the wife would be paid straight to her no matter how much debt was owed by the husband's estate, as the policy doesn't form part of the estate.

The question asked by this reader also makes me wonder whether the wife is worried that by accepting assets, she is also assuming responsibility for his debts. Unfortunately it's commonly - and wrongly - believed that a wife takes on a husband's debts when he dies, and vice versa. That simply isn't true.

This is not to say that some assets don't come with debts attached, because they do. Some debts are secured, meaning that if the debt isn't repaid, the asset can be repossessed or other legal action can be taken. If this were the case, say for the husband's car loan, the wife could allow the creditor to repossess the car and she would owe nothing herself.

Life insured debts also factor in. Many mortgages, for example, are insured so that when either the husband or wife dies, the insurance money covers the mortgage and the surviving spouse then owns the house outright.

I would strongly urge anyone who is faced with a situation like this to sit down with a lawyer for an hour and talk it all through. This is a complicated web of several laws and rules, and nobody should expect to figure it out on their own. Under absolutely no circumstances should you listen to friends who tell you what happened to them or someone they know. The facts are different. Their case doesn't apply even if you think it's similar.

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.

Even death can't erase debts

I missed this article when it came out in the Financial Post soon after Christmas but fortunately someone brought it to my attention. It contains some really useful advice for executors on how to handle the debts of the estate so that the executor doesn't end up paying them personally. Click here to read the article.

Which debts should be listed on the estate inventory?

Executors and estate administrators are required to complete an inventory of the estate which includes a detailed listing of assets and debts. I'm frequently asked by executors for help or information about which debts should be included. In this post I'm going to provide some general rules about what should be included and what should not. While forms and details will vary from province to province, the information given here is general.

The first rule of including debts is to include all debts that existed at the date the person died. All assets and debts must reflect the date of death value. A mistake that many executors make is to leave out debts that were paid shortly after death. For example, when the deceased died, he may have owed $300 on his Visa credit card. If his executor paid the bill a month later, the Visa bill still needs to be included in the inventory. Yes it was paid later, but that is irrelevant to the inventory, which is a snapshot of the financial picture on the date of death.

Funeral expenses are always included. If they total more than a few thousand dollars, it would be a good idea to list the components of the funeral bill (services, casket, plot, flowers etc) separately. In some jurisdictions, there is a dollar limit over which you must break down the components individually.

You must include any outstanding tax liability, including income tax and capital gains tax. This might apply to the last year of the deceased's life, or previous years in which a return wasn't filed, or to the estate itself. Tax debts should be identified by the calendar year to which they apply. If you don't know exactly how much tax is owing, you should include an estimate, preferably an estimate supplied by an accountant.

When it comes to general debts, you are required to include all legally enforceable debts. These frequently include (this isn't an exhaustive list - there are many more possible debts):
- mortgage (when it's not life insured)
- condo fees that were payable but unpaid at the time of death
- rent that was payable but unpaid at the time of death
- unpaid property tax on real estate owned by the deceased
- credit card balances
- the last phone, utilities and other bills for the deceased
- loans and lines of credit, both secured and unsecured
- amounts owing under personal contracts (such as caregivers or those providing household or garden help)
- child support payable under court order, and usually payable under separation agreement though this can be altered by the wording of the agreement

Don't forget to include accrued interest, if applicable.

Generally you would not include debts that were owed by the deceased jointly with another person, when that other person survives. Having said that, make sure you check the contract or other document that created the debt.

Don't include debts that are life insured, as the life insurance cancels the debt at the moment of death.

Remember that any debts having to do with real estate (land or mineral titles) must be documented in writing to be valid.

Depending on the situation, an executor might not be sure that he has accounted for all of the debts. One way of protecting himself from legal liability in this situation is to publish a notice in the newspaper advertising for creditors of the deceased. There are detailed rules about how and where to publish these notices if the executor chooses to go this route.

One final general rule - document everything you can. Don't guess or estimate if there is any way to establish the exact value of a debt. Executors are often called upon to show where they got certain numbers, so keep all items pertaining to debts.

Credit card debt that outlives Mom

If you're an executor trying to handle an estate that has debts, you must read this new article from The New York Times. It talks about who is responsible for debts and what has to be paid before beneficiaries receive their inheritances. Although this article is American, the legal situation is the same here in Canada. Click here to read the article.

I'd like to draw your attention to the part of the article that talks about collection agencies trying to convince you that you're personally responsible for debts, even when you're not. I know of many cases where collection agencies have tried this. If it's happening to you, find out your legal rights and stand your ground.

Dying with debt: a dirty little retirement secret

This article from USA Today discusses how many Americans are not able to pay off their debts before they die, and how many don't seem to be too worried about it. The article has some really interesting statistics and even some helpful tips for seniors to help them avoid the situation. Click here to read it.

One of the points made in the article is that if the senior dies with debt, it eventually becomes the children's burden. The article is careful to point out that this does not mean that the children pay the debts; it means that the debts are paid from the senior's estate, leaving less for the children to inherit.

If a person paying child support dies, does his estate have to pay the support?

Child support is usually paid monthly over a period of years, until a child reaches a certain age. Sometimes the parent who is paying the support dies before the child has reached that age. Then the question arises as to whether the parent's estate should continue to pay the child support. Whether any money is paid out of the estate for this depends on the facts.

First of all, the arrears of child support are treated differently from the ongoing monthly obligation. If there were arrears owing by the parent at the date of his or her death, that is clearly a debt that will be paid by the estate (assuming there is enough money in the estate).

The question of whether the present and future ongoing child support payments will be paid from the estate depends on whether the parent paying the support expressed any intentions about it. Look first to the Will. Does the parent say anything in the Will about paying child support? Often the paying parent will have a clause in his or her Will that allows the executor to calculate how much the present and future obligations would be, and to pay that in a lump sum amount. By doing that, the child who depends on the payments doesn't get shortchanged, and the estate can still be wound up quickly.

If there is nothing in the Will about child support payments, look at the court order or signed agreement that set up the payments in the first place. Does it say anywhere that the order or agreement would "bind the estate", or bind the payor's "executors, heirs, assigns" etc? If those words, or others very similar in nature, are in the document, then the estate will have to pay the ongoing and future child support. Again, it can be calculated and paid out as a lump sum.

If there is nothing in the Will, and nothing in the agreement or court order, then the estate does not have to pay the ongoing and future child support.

The executor will have to settle this question quite early on in the estate because unpaid child support would have to be listed on the inventory of the estate as a debt.

Tips for an executor on completing an estate inventory

An executor or administrator almost always has to prepare an inventory of assets and debts of the estate, whether he or she is applying for Letters Probate or Letters of Administration. There are other good reasons for preparing an inventory too, such as accounting to the beneficiaries, filing tax returns, and calculating the probate fee, lawyer's fee and executor's compensation.

Though the forms themselves vary from province to province, the principles behind the inventory are the same everywhere. The following are 16 tips to keep in mind as you gather information and fill in the paperwork:

1. All values should be as of the date the deceased died.

2. Use fair market value as a general rule.

3. "Real" property includes land, buildings of all kinds, life estates and mines and minerals titles. All other property is considered "personal" property.

4. When listing real property, include both the civic (street) address and the legal description. The legal description can be found on the title or on the tax notice for the property.

5. Use appraisers to set values on large assets.

6. When listing debts, include a breakdown of funeral expenses.

7. Under debts, include not just current debts but also future tax liability and other future debts.

8. Do not include any real or personal property that the deceased owned jointly with another person.

9. Do not include life insurance that names a beneficiary unless the beneficiary has already passed away, or the policy names the estate as the beneficiary.

10. Do not include financial assets that name a beneficiary, such as RRSP, RRIF, or pension.

11. Do not include anything that comes to an end with the death of the deceased, such as an annuity.

12. List and apply for all government and private death benefits.

13. Household items such as clothing and furniture may be grouped together and described on the inventory as "household and personal items" and given a nominal value such as $200. Assets of higher resale value such as artwork or antiques may be listed and valued separately.

14. Include the deceased's business interests, whether that interest takes the form of shares in a private corporation or a share in a partnership.

15. If your inventory is all ready to be filed except for one value that seems to be taking forever to get, you may give your best guess as to the value SO LONG AS you describe it on the inventory as an estimate, and later file a supplementary document to give the court the missing value.

16. Remember that the inventory is part of sworn evidence, so you will have to swear it in front of a commissioner for oaths. Swearing a false document is perjury.

Hopefully these tips help answer some of your questions.

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.

Why won't the executor give me an advance on my inheritance?

When I've acted on behalf of estates, I've occasionally been asked by beneficiaries for an advance on their shares of the estate. It's the executor's decision, not the lawyer's, but generally the executor will talk it over with the lawyer to find out his or her obligations to the beneficiaries.

When a beneficiary is refused an advance for any reason, the response is usually along the lines of "but that's MY money - I'm entitled to it!" A beneficiary is, of course, entitled to receive the share of the estate left to him or her in the Will, but not necessarily on demand. There are plenty of other things going on in an estate at any given time.

On one estate, the executor was asked to advance money to a beneficiary a day or two after the deceased's house was listed for sale. The beneficiary called numerous times, insisting that we give her her share of the proceeds. But the house hadn't sold yet. There were no proceeds to give her. This is very common. The beneficiaries don't always realize that the estate doesn't have any money until assets are sold or cashed in, and transferred to the executor's estate account.

The other thing to take into account is that on every estate, the debts must always be paid in full before the beneficiaries get their shares. It takes time to contact everyone (banks, insurers, suppliers) to find out what was owing, calculate interest, collect in or sell an asset, and pay the bill. Sometimes determining a debt means a long wait, particularly if it's for something like income tax where the amount is not always immediately known.

The executor is under no obligation to give any money to beneficiaries until debts have been ascertained and paid, and assets have been cashed in. That might take a year. It might take much longer if the estate is complicated, such as having a business to wind down or sell, or real estate in another country to sell.

If an executor is willing to advance funds before the estate is fully wound up, there is a procedure for that. The executor can hold back enough money for taxes and expenses and advance the rest to beneficiaries. Even if only one beneficiary is asking for an advance, the executor would likely give every beneficiary the same amount to keep the books simple and the beneficiaries happy. Beneficiaries should be prepared to sign a Release (not the same as a receipt) giving approval of the executor's work to the date of the advance.

Debt and seniors don't mix

Story in the National Post that discusses good and bad usage of debt for seniors. To read the story, click here.

Executors collecting debts of the deceased

One of the many jobs that executors must do on the estate of someone who is deceased, is figure out what debts are owed to the deceaased, and then collect them. I would rank this among the least enjoyable of executor's tasks (not that most of them are a barrel of monkeys, mind you).

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.

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.

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.

What happens with a bankrupt estate?

First of all, it's important to realize that there is a difference between an insolvent estate and a bankrupt estate. An insolvent estate, which is much more likely, simply does not have enough assets to pay all of the debts. A bankrupt estate has actually declared bankruptcy.

When talking about either insolvent or bankrupt estates, I often hear people comment that nobody needs to do anything about it because obviously there are no assets. But that's not necessarily true. A deceased person could have a half-million dollar home and another half-million in investments, but if he or she has more than a million dollars in debts and liabilities, there isn't going to be enough money to pay all the creditors. So even though there are assets, the estate is still insolvent. And someone still has to sell that house and cash in those investments on behalf of the deceased person and pay out the proceeds.

That person is the executor named in the Will. If there is no Will, there should be an administrator appointed by the court in the usual way.

Usually in an insolvent estate, the executor will negotiate with the creditors to come to an agreement as to how much each will get. Often everyone agrees to a certain amount "on the dollar" so that they'll each recover at least part of the debt. It's to everyone's advantage not to turn it into a lawsuit, because fighting it out in court means the resources of the estate, which are already not enough, will end up being spent on legal fees and court fees.

If after an executor starts working on the insolvent estate, it is petitioned into bankruptcy by the creditors or the executor declares that the estate is bankrupt, the executor will have to step out of the picture. The control of the assets and debts will be handed over to the Trustee in Bankruptcy to deal with. The executor's claim for compensation can be added to the other claims against the estate.

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.