Institute for Divorce Financial Analysts™ (IDFA)
Estates & Wills & Trusts, Family, Legal Suppliers, Tax

The position of executor: from cradle to grave – Part IV

By Avi Dahary

The determination and discharging of debts and liabilities

In part three of this series, I discussed identifying the assets that become part of the estate immediately after death and compiling a list of them in order for the executor to bring them under their control to safeguard them.

This part of the series will cover the executor’s duty to ascertain and discharge the debt obligations of the deceased.

It’s not uncommon for those who are newly introduced to the role of executor to be under the impression that when the deceased died so did all their debts and liabilities. In many cases, executors are shocked to learn they may be “on the hook” in some cases where these liabilities remain unpaid, such as the deceased’s owed personal income tax, as well as any outstanding estate taxes.

There is a long list of potential debt obligations of a deceased person and those that become debts of the estate, and while it isn’t practical for me to address every type in this short commentary, I will highlight a few.  

The first step is to read the deceased’s will to become informed about any specific debt obligations that may exist, as well as the powers granted to the executor in discharging them. If the executor is not intimately familiar with the deceased’s financial affairs, it would be advisable to advertise in the local newspaper for creditors. This would also be suggested if the executor was closely familiar with the deceased’s financial affairs but the estate is a complicated and sizeable one. 

The next step for the executor is to contact the bank where the deceased kept accounts and inquire about any debts they had. It’s also advisable to contact the deceased’s accountant and lawyer, both of whom may be familiar with debts they held personally or through a corporation. 

The most common areas of debt and liabilities that executors will encounter are:

  1. Household expenses: If the deceased owned a home, these liabilities would include charges relating to its upkeep. In this case, the executor would need to ensure all outstanding amounts owing regarding utilities, telephone, cable, property tax, etc. are paid. Some of these expenses may apply if the deceased rented their residence but the executor should read the lease agreement to determine whether further amounts are owed and/or whether other obligations exist. In cases where the deceased lived in a retirement residence or nursing home, the executor would need to contact the facility's management to determine if there are any amounts owing or refunds due back to the estate.
  2. Mortgage and credit card debt: If the deceased owned a home, the executor would likely determine if there’s a mortgage on it by checking the bank account transactions obtained from the bank. Where there are mortgage payments being withdrawn from the account on a regular basis, the executor should followup with the bank to determine the mortgage amount that remains outstanding, as well as inquire about any other mortgages or loans the deceased may have been obligated under. When communicating with the bank, the executor should also ask whether the deceased held any credit cards and if so, whether there are owed balances.
  3. Personal and estate income tax liability: The executor will need to file a final personal tax return for the deceased as of the date of death. A final tax return is different than the usual personal tax return filing in that specific tax rules come into play at death, which, in many cases, result in the deceased having a personal tax liability at death. In addition, for as long as the deceased’s estate is ongoing, the executor will need to file tax returns for the estate, which may result in the estate owing tax. 

Stay tuned for part five of this series in which I will discuss various personal income tax issues that arise on death as well as, tax issues for the estate.

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