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Dealing With The Debts Of An Estate

5 February 2021

Dealing With The Debts Of An Estate

If you are an executor of an estate, you may need to deal with debts that have been left behind. Any estate may have debts to be considered, even if the deceased was wealthy – it is said that Michael Jackson died with around $500 million worth of debt. Personal debts do not expire on death, they are carried over into the estate. It is the responsibility of the executors to make sure those debts are paid.

Impact Of Debts On Beneficiaries

If an estate has debts it will mean that there is less to be distributed to the beneficiaries. However, the extent of a beneficiary’s disappointment will depend on the nature of the gift they are expecting as well as the size of the debts involved.

If the estate is solvent, meaning that there are sufficient funds to clear all of the debts, certain beneficiaries could receive less than they were expecting or even nothing at all.
If the estate is insolvent and the debts outweigh the assets, none of the beneficiaries will be able to receive any share of the estate.

As an executor you have a duty to the beneficiaries, and you must manage their expectations by being upfront with them throughout the administration of the estate, which may mean having difficult conversations.

The Solvent Estate

If you are dealing with a solvent estate, you should ensure that debts are repaid as early as possible to reduce the interest the estate will need to pay. If additional interest is paid as a result of unnecessary delays, you will need to account to the beneficiaries as it will diminish the shares which they receive.

In order to deal with debts efficiently, you must ensure that you contact creditors as soon as possible. Often by the time an executor is in a position to make payment, creditors have been chasing the money they are owed for many months and may even have instructed debt collectors. Companies are more likely to respond leniently if they have regular and upfront communication from executors.

Once estate debts have been paid, you will need to think about how the sums remaining in the estate should be distributed. A complex legal procedure called abatement applies wherever assets are insufficient to pay all of the legacies in full.

If there is a will which specifies the order in which legacies should be paid, this must be strictly followed. Otherwise, debts are considered to be paid first from the residue, then from pecuniary legacies (cash gifts) and finally from specific legacies. If the estate has significant debts, this means that the residuary beneficiaries could end up receiving very little, or even nothing at all. It is unlikely that this would have been the intention of the testator and this can make for a difficult conversation. It is open to beneficiaries to vary the terms of a will in such circumstances and instructing a solicitor can help an executor to facilitate negotiations.

If The Estate Is Insolvent

If an estate is insolvent, you will be in a situation where the available assets are insufficient to pay all the debts of the deceased. As executor, you still have duties in respect of the creditors. You will need to liaise with creditors and debt collection agencies to negotiate the terms of repayment. You will also need to notify the beneficiaries that there are no funds to be paid to them.

When dealing with an insolvent estate, you need to follow a strict order for paying debts. This order is set out in law and it is important to understand the difference between the types of debt as well as the order itself. If money is paid to a creditor with lower priority, whether by intention or accident, you will be personally liable. Instructing a solicitor to help with the process ensures that debts are paid in the correct order and that you are protected.

Suspicious Debts

Some estate debts may appear suspicious. For example, if the deceased was known to be good with money, but took out several credit cards towards the end of their life, it might appear suspicious. If you have concerns about the nature of any of the estate debts, you should consider whether the deceased may have been the victim of fraud or financial abuse prior to their death. If your concerns are proven, as executor you should consider seeking reimbursement to the estate from the fraudster, abuser, or via an available insurance policy or compensation scheme.

Whether it is appropriate to make a claim will always depend on the circumstances of the estate, the beneficiaries and the fraud or abuse. It is ultimately a decision for the executor as to whether a claim is appropriate, but a solicitor can help to assess and evaluate this.

Notes

For more information on probate, click here.

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