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.
Many creditors (and collection agencies) will attempt to hound an executor into paying their debt by claiming that the executor is liable for the debt. This is false.
However, see Rule 3 for how an estate trustee can become personally liable if they 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. 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 make administering the estate very difficult 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 they require a strong hand and good professional advice ideally from a lawyer with knowledge of bankruptcy law and creditors’ rights. Executors without experience or the temperament for debtor/creditor disputes may want to renounce the right to be estate trustee, in favour of 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.
If the debts are greater than the assets, it will never be possible to pay all of debts in full. This is the definition of an insolvent or bankrupt estate.
As a potential executor you of a bankrupt estate 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 all income taxes.
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 with a licensed insolvency professional (bankruptcy trustee). Insolvency trustees are licensed by the federal government and you should be able to find one in your area. They have the skills, immunity from liability, and access to the legal remedies necessary to impose a solution on all creditors.
By definition, there will be nothing for the beneficiaries (either by will or under intestacy legislation) of a bankrupt estate.
Once the estate is assigned into bankruptcy, the trustee in bankruptcy will administer the estate, collect the assets, and pay the creditors as much as possible in accordance with their rights.