THREE RULES OF EXECUTOR LIABILITY FOR DEBTS OF AN ESTATE
An executor is not automatically liable for the debts of the deceased just because they are the executor. When you step into the role of the executor of an estate you do not automatically become personally liable for all of the debts of the deceased. Therefore, do not get hounded into believing that you are liable for the debts of the deceased – you are not. But see Rule 3 for how you can become personally liable if you do not handle the deceased’s debts properly.
The executor is personally liable for all debts that the executor incurs after the death of the deceased. For instance, if the executor hires movers, accountants, or lawyers to assist with the estate, then the executor is responsible for ensuring that those debts are paid.
An executor is liable for is ensuring that the debts of the deceased are handled properly; in other words, it is the duty of the executor to ensure that all of the creditors of the estate are treated equitably, and if possible, are all paid in full from the estate. An executor will be liable if one creditor receives more (as a % of their debt) than another creditor. Also, an executor will be held personally liable if the executor distributes any of the estate to beneficiaries and without first ensuring that all creditors are paid in full.
WHEN AN ESTATE HAS DEBT.
There is nothing wrong with the deceased leaving a few unpaid bills at death. However, too much debt can spell trouble for a prospective executor.
It is very important for a prospective executor to get a clear picture of the debts and assets of the deceased as quickly as possible and before going any further with the estate. Some estate debts are easily handled, and some are a potential nightmare for the executor so you must be careful.
WHAT TO DO FIRST
First, determine how much the debts are and who they are owed to. Sort them into 3 groups – taxes, secured debt (eg. Mortgages) and unsecured debt (for instance, credit cards)
Second, determine what the assets are and how difficult they will be to convert to cash.
Third, determine if it will be possible to pay all of the debts in full (eventually) or not.
If it will be possible to pay all of the debts in full, you may have ‘liquidity’ problems for a while (ie. not enough cash on hand to pay the debts) but ultimately, you should be able to pay everyone in full after you liquidate the assets.
Estates with liquidity problems can be handled, but it requires a strong hand and good professional advice ideally from a lawyer with knowledge of bankruptcy law and creditors’ rights. You may, for instance, want to hand off executorship to someone else with more experience handling unhappy creditors.
We have a lot of experience with these difficult situations, both as advisor and executor and welcome inquiries.
The debts are greater than the assets, it will never be possible to pay all of debts in full. The estate is bankrupt. As a potential executor you must be very careful. In particular, do not pay some creditors and not others. Do not get hounded into paying the creditor who is screaming the loudest. To avoid personal liability you absolutely must not pay non-tax creditors of an insolvent estate before paying taxes.
Ultimately if the estate is bankrupt (assets less than liabilities) then your best bet is usually the following:
a) do not meddle with the estate or start taking on the role of the executor,
b) renounce any right to be appointed executor, and
c) assign the estate into bankruptcy.
Once the estate is assigned into bankruptcy, a trustee in bankruptcy will administer the estate and pay the creditors as much as possible in accordance with their rights (by definition, there is nothing for the beneficiaries of a bankrupt estate). Bankruptcy trustees are licensed professionals, and they have the skills and immunity from liability required to administer a bankrupt estate properly.