Estates & Wills & Trusts

Navigating the complexities of insolvent estates

By Staff

Increasing personal debt means more families will have to deal with insolvent estates following the deaths of loved ones, Windsor trusts and estates lawyer Laura Stairs tells

Stairs, an associate with Shibley Righton LLP, says she has noticed a significant number of cases in which the testator’s liabilities exceed the value of their assets at the time of death.

Frequently she says the deceased is a middle-aged person whose death was unexpected, leaving them with little or no time to get their affairs in order.

“Insolvent estates seem to come up quite a bit,” Stairs says. “People have a pretty large reliance on credit these days, so when they pass away suddenly, it can be a problem.”

Depending on the individual circumstances of a case, Stairs says it can take some time to determine whether an estate is insolvent.

“If you have an individual who was living with the deceased, such as a child living with a parent, it may be obvious to them from the outset if they had no assets and a large credit card debt or car payments owing,” she explains. “But in others, it may take longer for the estate trustee to identify creditors if they don’t have knowledge of the individual circumstances of the deceased.”

Stairs says executors have a duty to inquire about the existence of creditors, which may involve the placement of an ad in a local newspaper or other outlet.

She says the experience of administering an insolvent estate can be trying for potential beneficiaries, particularly those who may have been expecting a windfall on the death of the testator.

“There aren’t many options for them. At least one person has to step up and take on the role of communicating with creditors to advise them that there are insufficient assets to satisfy debts,” Stairs says. “They will have to work through the priority of claims, to make sure that the individuals who are most entitled to whatever estate assets are left receive priority over the others.”

Many lay executors will need professional advice from lawyers and accountants to help determine the proper priority of creditors, she says.

“It’s a very complicated process,” Stairs says. “Normally, the bills of the professionals would be paid out of the estate, but if there are insufficient funds to pay even those, then the estate trustee may have to pay them out of their own pocket.”

Stairs explains for individuals named as estate trustees in circumstances where insolvency is a possibility that they are able to renounce the position. However, she says many accept the role out of a sense of moral duty.

“It takes a great deal of time and effort, and could end up costing them money, but they feel responsible, based on the relationship they had to the person,” she says.

For testators who anticipate solvency issues with their own estate in advance, Stairs says they can relieve the burden on their executor by naming them as the beneficiary of any life insurance policy they hold, since these funds flow directly to the designated beneficiary on the policyholder’s death, without falling into the estate.

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