Administering the Estate of a Deceased: Paying off Debts

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BY VALERIE DYE

One may obtain a Certificate of Appointment as Estate Trustee either with a will or without a will. The later appointment occurs when the deceased dies intestate. In either situation the Estate Trustee has certain responsibilities, both to the beneficiaries and to creditors of the Estate. It must first be noted that the Estate Trustee acts as a fiduciary. This means that he holds the assets of the Estate in trust for the beneficiaries and for the creditors. In this regard, the actions of the Estate Trustee should be in the interest and for the benefit of the beneficiaries and the creditors and not for himself.

Estate Trustees need to be aware of the likelihood of being held liable if the Estate is not properly administered. One of the instances where liability may arise is where the Estate Trustee fails to pay creditors. The deceased’s debts should be paid before any distribution is made to beneficiaries. If the Estate trustee distributes assets to beneficiaries before creditors are paid, he may become personally liable for those debts if all the assets are depleted. The Estate Trustee may then be faced with the task of trying to recover assets from the beneficiaries in order to pay debts. This may not be possible and the Estate Trustee may be forced to pay those creditors from his own pocket. To avoid this, it is highly recommended that the Estate Trustee should advertise for creditors before making any distribution from the Estate.

Generally, the Estate Trustee should first pay funeral expenses and all expenses associated with administering the estate. Other debts should then be paid before making distribution to the beneficiaries.

If the Estate is insolvent and there are not enough assets to pay creditors, the Estate Trustee must determine the priority in which creditors should be paid. Naturally, a secured creditor ranks higher than an unsecured creditor. This means that secured debts such as liens and mortgages should be paid before debts arising as a result of contracts, judgement or other means which are ranked equally.  This is outlined in section 50 of the Trustee Act which states that: …in the case of a deficiency of assets, debts due to the Crown and to the personal representative of the deceased person, and debts to others, including therein debts by judgment or order, and other debts of record, debts by specialty, simple contract debts and such claims for damages as are payable in like order of administration as simple contract debts shall be paid proportionately and without any preference…

The principle of equal treatment of unsecured debtors was highlighted in various Canadian cases such as Shoppers Trust Co. (Liquidator of) v. Shoppers Trust Co. (2005) CanLII 7878 (ON CA), where it is stated that all unsecured debtors should be treated ‘rateably and equally’. This means that each creditor will be paid the same percentage of the debt that is owed to them.

Finally, it should be noted that although the Estate Trustee is generally allowed one year after the death of the deceased to distribute legacies to beneficiaries, this one-year rule does not apply to creditors. Debts owed to creditors should be paid as soon as possible after the death of the deceased in order to avoid the likelihood of being sued.

The likelihood of being sued as an Estate Trustee is very real and in that regard various insurance companies provide liability insurance which offers protection for Estate Trustees in the event that they are sued.

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