We’ve all heard stories about people “spending it all before they die”, or “racking up the credit cards before they pass away”. While these anecdotes are often given by people whose tongues are firmly planted in their cheeks, there are situations where a deceased leaves an insolvent Estate. An insolvent Estate is an Estate whose debts and liabilities exceed its assets.
My Estate planning clients often ask me, “what if there’s nothing left when I die?” Or, “what if I compensate my Executor $25,000.00 for their services, but my Estate is only worth $20,000.00?” Others are hesitant to make specific gifts, in fear that a gift of, say, $50,000.00 to a particular charity will wipe out the bulk of the Estate’s value, leaving nothing for the residuary beneficiaries. Thankfully, the Wills & Estates laws in Alberta provide us with the answers to these types of questions.
What Does the Law Say?
If an Estate is insolvent, or if it is solvent, but the Estate assets are insufficient to satisfy the bequests made in the deceased’s Will, the law creates a priority sequence of how assets are to be distributed, as follows:
First Priority: Funeral Expenses
Even if an Estate is insolvent, funeral expenses are given first priority amongst competing claims against an Estate. The Estate Administration Act and the Bankruptcy and Insolvency Act both provide for the priority of reasonable funeral expenses.
In 2001, the Alberta Court of Queen’s Bench confirmed, in the leading case of Chernichan v. Chernichan (Estate), that reasonable funeral expenses take priority over other claims against an Estate. The case found that it is in the best interests of both public health and human dignity that a funeral proceeds expeditiously, and without any fear that the Estate’s Executor will experience financial hardship as a result. As such, there is a ‘super-priority’ for funeral expenses.
Second Priority: Estate Administration Expenses
Estate administration expenses include Executor compensation and reimbursement for out-of-pocket expenses that an Executor incurs in the administration of a deceased’s Estate.
Estate administration expenses are more like priority number 1A than priority number 2, as the law mentions them in the ‘same breath’ with funeral expenses, however, for the purposes of this article, and to avoid drilling down too far into the legal nuances of the matter, we’ll assume that an Alberta court would accord modest priority in favour of funeral expenses over other Estate administration expenses.
As with funeral expenses, the law recognizes the priority of Estate administration expenses over the claims of creditors. The rationale behind this is somewhat obvious—if the law didn’t accord this priority, there would be no incentive for an Estate’s Executor to expediently administer the Estate, which would ultimately prejudice other legitimate creditors and claimants.
Third Priority: Mortgage Lenders
In most cases, mortgage lenders have priority over other creditors to be paid back from the proceeds of the sale of the property against which the mortgage is registered. In other words, if a deceased dies leaving a house worth $200,000.00 with a mortgage owing of $190,000.00, and a credit card debt of $20,000.00, the mortgage lender would be entitled to be repaid their $190,000.00 from the sale proceeds of the home, and the remaining $10,000.00 would go to the credit card company, provided that all other funeral and Estate administration expenses had otherwise been satisfied.
Fourth Priority: Other Creditors
If all funeral expenses and Estate administration expenses have been paid, and any mortgage lender has been repaid from the proceeds of the deceased’s property against which said mortgage was registered, the remainder of the deceased’s assets must be divided proportionally amongst all other creditors, without preference or priority.
In other words, if a deceased had two debts, one for $200,000.00 owing to creditor A, and one for $100,000.00 owing to creditor B, and there was only $30,000.00 left in the Estate, creditor A would get $20,000.00 and creditor B would get $10,000.00.
Fifth Priority: Beneficiaries of Specific Bequests
If all funeral expenses, Estate administration expenses, mortgages, taxes, and other debts have been satisfied, beneficiaries of specific bequests are entitled to receive their share of the Estate. For example, if the Will leaves a 1958 Corvette to a particular individual, they are to receive that vehicle, provided that all Estate obligations have otherwise been satisfied.
Sixth Priority: Beneficiaries of General Bequests
Let’s imagine that the deceased owned 5 rental properties, and the Will has a clause stating that all of the deceased’s rental properties shall be given to Jane Doe. Let’s say 4 of the properties were sold to satisfy Estate obligations, and one property remains. Jane Doe has priority to receive the remaining rental property, ahead of any residuary beneficiaries of the Estate.
Seventh Priority: Residuary Beneficiaries
While residuary beneficiaries often receive the bulk of a deceased’s Estate, they actually have last priority to an Estate’s assets in most cases. Only once all funeral expenses, Estate administration expenses, mortgages, taxes, and debts have been paid, and only once all specific and general bequests have been made, are the residuary beneficiaries entitled to Estate assets.
If there’s only $1,000.00 left in the Estate after all other Estate obligations have been fulfilled, and after all specific and general bequests have been made, the residuary beneficiaries will receive that amount. While it’s a simple illustration, this type of situation does occur, and it’s just one reason why prudent Estate planning is important.
When devising an Estate plan, it’s important that you carefully consider any specific or general bequests that you intend to make in your Will, the extent of your debts, and the amount of compensation that your Executor is entitled to, in order to ensure that your residuary beneficiaries aren’t left ‘high and dry’ when it comes time to distribute your Estate.
Are You an Alberta Estate Executor Who’s Dealing with Competing Claims?
If you’re the Executor of an Estate with competing claims, the Wills & Estates lawyers at West Legal can help you effectively administer the deceased’s Estate while advising you of your legal obligations to competing Estate claimants. The above is not intended as legal advice, and is a general outline of priority to Estate assets amongst competing claimants that may not apply to every situation. Each Estate is different, and it’s important that you obtain legal advice from both a qualified Bankruptcy & Insolvency lawyer, and a qualified Wills & Estates lawyer in the event that you’re tasked with administering an insolvent Estate or an Estate with competing claimants.