When advising clients who have been named as the executor of an estate, I am often asked, “am I liable for the deceased’s debts?” The answer to that question depends entirely on the actions of the executor.
Under Ontario law, an executor must ascertain the debts of the deceased and pay those debts before distributing the assets from the estate. However, if an executor distributes assets before identifying and settling all debts, he or she can become personally liable for the deceased debts to the extent of the payment advanced from the estate.
If the executor is not keenly aware of all of the deceased’s financial dealings and possible creditors, the task of identifying all potential creditors and satisfying those debts may prove difficult, and the potential liability faced by the executor could paralyze the distribution of the estate’s assets.
This is where s. 53(1) of the Trustee Act comes into play. Section 53(1) immunizes an executor against liability for a deceased’s debts where the executor advertises for creditors. Traditionally, to obtain the protection of s. 53(1), the executor would place an advertisement in a local newspaper for three consecutive weeks, and the newspaper would provide the executor with an affidavit attesting to the proof of publication. If no creditors notified the executor of any debts within a month after the first notice was published, the executor could distribute assets from the estate with the protection of s. 53(1).
What Happens if the Estate Cannot Pay its Debts?
Not everyone has sufficient assets to satisfy their debts when they die, and an estate that initially appears to have sufficient assets to cover its debts may turn out to be insolvent only after the executor has had a chance to file the deceased tax returns and review the deceased’s financial affairs.
In cases where the estate is insolvent, the common law, supplemented in part by the Trustee Act, has established a priority for the payment of a deceased’s debts. First and foremost, the estate assets must be applied to satisfy the deceased’s reasonable and necessary funeral and burial expenses. The operative word being “reasonable,” as courts have denied the full costs of extravagant funerals where the executor knew the estate was potentially insolvent when organizing funeral and burial services.
The second debts to be paid from the estate are the testamentary expenses and the costs of administration, which include professional fees, such as those incurred by the executor to obtain legal or accounting advice, as well as the executor’s compensation for his or her care, pains, trouble, and time spent dealing with the estate. Like funeral costs, these are a charge on the estate that will be paid before the other debts of the deceased.
According to s. 50(1) of the Trustee Act, all remaining debts, including debts owed to the Crown, rank equally and are paid on a pro rata basis. There are, however, two exceptions to this general rule of equality amongst creditors.
The first exception to the general rule of equality amongst debtors is that a secured creditor may realize upon his or her secured interest.
The second exception is that debts to the Federal Crown, such as tax debts owed to the Canada Revenue Agency, are likely not subject to the priority scheme established under s. 50(1). While the Provincial Crown is most certainly captured by s. 50(1), it is less likely, for constitutional reasons, that s. 50(1) would limit or prevent the CRA from relying on its own enforcement powers to realize on any unpaid taxes. This is especially important given that an executor will be liable for as much as the total value of any distributions made to creditors or beneficiaries where the estate owes income tax, and a clearance certificate under s. 159 of the Income Tax Act has not been obtained. As such, federal income tax debts will generally need to be paid in priority to other unsecured debts.
To answer the question posed at the beginning of this blog, an executor will not be personally liable for the debts of a deceased person provided that he or she properly advertises for creditors, fully satisfies the estate’s income tax liability, and either pays all known debts in the case of a solvent estate, or pays any remaining funds to the estate’s creditors on a pro rata basis where the estate is insolvent.
If you have been named as executor in a will and are unsure how to deal with the estate’s debts or claims made by a deceased’s creditors, please do not hesitate to contact our Wills and Estates Group for a consultation today.