Attwood Marshall Lawyers Wills and Estates Senior Associate and Accredited Aged Care Professional, Debbie Sage, discusses some of the obstacles people face when stepping into the role of the executor of someone’s estate and dealing with the estate debts and liabilities during the administration process.
What happens to someone’s debts after they die?
When someone passes away, any existing debts and accounts they have will need to be dealt with as part of the estate administration. With the exception of the funeral account, which can be paid directly from a bank account of the deceased, all debts owing as at the date of death should not be paid until a grant of probate or letters of administration have been obtained by the Executor or Administrator. All estates are different, and it depends on the circumstances of the person who dies as to what debts are owed and how pressing payment is for those debts. Those debts may begin to accrue fairly quickly at first, while the estate begins the administration process because it can take up to 6-8 weeks just for the official Death Certificate to arrive. Usually, you cannot do anything ‘official’ as an Executor or personal representative of the estate until you have the death certificate from Births Deaths & Marriages. Most government institutions, banks, insurance companies and service providers (internet, phone, electricity, rates etc) won’t deal with you as Executor without a certified copy of the Will and the death certificate.
During that time, the loved ones of the deceased, or preferably the personal representative of the estate can begin to notify organisations of the deceased’s passing so they are aware they are now dealing with a deceased estate. If the estate is solvent, they may need to wait a few months before payment can be made whilst the personal representative gains an understanding of the assets and liabilities of the estate and works out whether they need to obtain a grant from the Court before funds can be released.
We find that many people give a lot of thought into their assets when writing a Will and deciding to who they want to leave their assets to after they are gone. But what is often overlooked if their Will has not been prepared by an experienced estate planning lawyer, is how debt is to be handled upon their death.
Almost everyone has some level of debt to their name, whether it be a mortgage or a car loan, personal loan, credit cards, utility bills, etc., and these debts need to be considered in addition to the expenses that relate to the administration of an estate after someone dies, such as funeral expenses and legal costs to finalise the estate.
What is an executor’s role in paying the debts of a deceased person?
The executor has a duty to ensure that all debts are paid (if they can be) in a timely manner. An executor must be careful to ensure the estate has sufficient assets or cash to attend to the payment of such debts and must also be very careful to ensure that the debts are paid correctly.
Sometimes a debt may be attached to a particular asset in the estate. The executor will need to consider the terms of the Will when attending to the payment of any debts to make sure the debt does not carry with the asset to the named beneficiary in the Will.
For example – if a property is being specifically gifted to a particular beneficiary in the Will, and that property has a mortgage over it, then the executor must check the terms of the Will to see if that property is meant to be given to the beneficiary free of any encumbrances, such as a mortgage. If the terms of the Will do not specifically state that the property is to be given to them free of any encumbrances, then the beneficiary will need to decide whether they want to take over the existing mortgage in order to retain the property, or if they (or the executor) may need to sell the property in order to pay off the mortgage.
Executors must also be careful when attending to payment of debts for the estate to ensure the estate has sufficient assets to attend to payment of all existing and future liabilities for the estate.
Unfortunately, we have encountered many instances where executors have been very quick to pay some of the debts, not realising that the estate is in fact, insolvent. This puts the executor at risk of assuming personal liability for the payment in circumstances where debts have not been paid in the correct order of priority.
The executor should ensure they are confident of what is in the estate first before attending to payment of debts on behalf of the estate. They should also ensure they obtain advice from a professional who is experienced in estate administration, such as an estate administration lawyer and accountant (sometimes the lawyer who drafted the Will may not be experienced in this area and/or the deceased person’s accountant may not be familiar with estates). Getting the right advice can save you a lot of money and grief!
What happens if someone has less money in the estate than what is owed to debtors?
This means the estate is insolvent (i.e.bankrupt).
If an estate does not have enough assets to cover the total liabilities, then the executor or administrator of the estate should not pay any debts until they can gain a better understanding of the degree of insolvency.
The executor should inform any companies or organisations that are owed money about the deceased’s passing and notify them that they suspect the estate is insolvent.
The executor may be able to come to an agreement with creditors to waive the debt or reduce the debt.
An estate can be declared a bankrupt estate, just a like a person can be during their lifetime
It is important to note that an executor or administrator can be held personally liable for debts that have been paid before other debts. If debts are paid in the wrong order, there may not be enough funds left to cover the debts that you were meant to have paid as a priority over the others.
For this reason, among many others, it is important that executors get legal advice as soon as possible to protect themselves as well as the estate. They should not feel pressured to pay for anything until they are aware of the full extent of the assets and liabilities in the estate.
In Queensland, the payment of debts in the case of insolvent estates should result in the funeral, testamentary and administration expenses being paid first as a priority, followed by secured and unsecured debts in that order.
Organisations (e.g. banks, finance companies, Councils, service providers, insurance companies, doctors, hospitals etc) are used to waiting to be paid in a deceased estate and understand that the administration process can take time. If an executor remains in contact with them and provides them with regular updates or a realistic timeframe for when they expect the debt will be paid, then in most cases organisations will accept this and cooperate with the executor until the matter is settled.
How are jointly held debts handled in a deceased estate?
Just like a joint bank account, any debts which are held jointly with another person or people do not usually form part of the estate.
If an executor is unsure if the estate is liable to pay a debt that may have been held by the deceased with another person, or co-signed or guaranteed by another party, then they should seek legal advice immediately to determine who is liable for that debt.
Superannuation and life insurance: can these assets be used to pay for a deceased person’s debts?
Thankfully for beneficiaries, there is legislation that protects life insurance policies and superannuation funds from being used to pay debts in a deceased estate.
The Life Insurance Act 1995 protects life insurance policies from being used to pay debts of a deceased estate. However, this protection does not extend to funeral expenses and testamentary expenses, which can be paid out of life insurance proceeds in certain circumstances.
Careful consideration needs to be made when drafting your Will because the only way life insurance policies can be used to pay estate debts is if the policyholder expressly directs for this to occur. For example, the policyholder can enter into a contract that expressly provides for the money to be applied in the payment of the debts, or by making a direction in their Will that the policy money is to be applied for the payment of debts.
There are some advantages to using proceeds from a life insurance policy to pay debts, such as the fact that life insurance does not incur any Capital Gains Tax and making the life insurance policy available to pay debts means it may protect other estate assets from being sold which would otherwise incur Capital Gains Tax.
Making the decision to use a life insurance policy to pay estate debts requires a holistic view and consideration of the estate assets and liabilities when doing your estate planning. Special care needs to be taken when drafting any directions because inaccurate or ambiguous wording may have unintended effects on your estate and may incur unwanted tax implications.
When it comes to superannuation, the proceeds of the policy or fund are usually carried out in accordance with a nomination under the policy, or as directed by the superannuation fund’s trustees if there is no nomination. Section 143 of the Superannuation Act 1922 protects superannuation entitlements from being applied or made available for payment of estate debts. This protection cannot be removed or changed like you can with a life insurance policy.
When it comes to an estate that is insolvent, section 116 of the Bankruptcy Act 1966 protects life insurance policies and superannuation funds from being available to creditors.
Steps an executor or administrator should take when determining what debts need to be paid and how they should be paid
- An executor must review the estate assets and liabilities to determine if the estate is solvent or insolvent.
- They need to get a clear understanding of what liabilities form part of the estate, and whether they are attached to a particular asset in the estate (such as a mortgage or car loan) and how it must be dealt with (look at the terms of the Will).
- The executor should contact the deceased’s bank as soon as possible to inform them of their passing and a request can be made for the funeral expenses to be paid from the deceased’s bank account (provided there is no prepaid funeral or funeral policy in place).
- If there are insufficient assets in the estate to attend to payment of the burial or cremation, then keep in mind that there is government assistance available in certain circumstances such a bereavement allowance or a bereavement payment and each state has a Funeral Assistance Scheme available for families in need.
- The executor should contact any organisations with outstanding bills and let them know the debt forms part of a deceased estate.
- If the estate is solvent and the executor or another party decides to pay debts first for the estate and seek reimbursement later, they should keep a strict record of the payments made, including a copy of all invoices and receipts so there is a clear paper trail for accounting to the beneficiaries prior to distribution.
- Finally, if an executor is unfamiliar with the process or needs assistance to administer a deceased estate, especially given the process can be extremely complex, time-consuming and put you at risk of personal liability, then they should obtain legal advice as soon as possible to ensure that they are able to fulfil their duties properly and complete the administration process as quickly as possible.
Attwood Marshall Lawyers – helping executors administer estates efficiently
Attwood Marshall Lawyers is a leading estate administration and estate planning law firm, with one of the largest and most experienced Wills and Estates teams in Australia. We can help ensure your loved one’s wishes are preserved and protected.
Having a Will and estate plan in place can alleviate some of the burden and stress on your loved ones after you are gone. By having a Will, your loved ones will know exactly what they need to do and can arrange the funeral, payment of debts, and the distribution of your assets in accordance with your wishes.
If you are an executor or administrator of an estate and need assistance with the administration process, obtaining probate or letters of administration, or require advice about disputes that have arisen between beneficiaries, our Wills and Estates team can help you. Contact Wills and Estates Department Manager, Donna Tolley, on direct line 07 5506 8241, mobile 0423 772 555 or email firstname.lastname@example.org
Choosing the right executor for your Will is a crucial decision and one that requires careful thought and consideration