It is very important for an executor of your estate to make sure that debts are handled with prudence to avoid being liable for any neglect relating to performing an executor’s duties.
Where there are more assets than liabilities in the estate, the process of who is paid first, is a practical application. Of course, the executor can pay off credit cards to avoid interest and keep the mortgage paid on time.
There can be other creditors one is unaware of. Executors can avoid a liability coming to light and causing a legal issue by having a lawyer publish a notice for any creditors to come forward within a given period—typically thirty days. Otherwise, creditors generally have two years to collect by claiming monies owed from an estate.
Protect beneficiary wealth distribution Money is paid to creditors from the estate assets first. If debts are high, this can deplete an estate’s assets leaving little for family heirs. Heirs get paid without the scrutiny of the creditors if a life insurance policy has been designed to pay outside of the estate directly. The cash benefit is privately paid to heirs as named beneficiaries.
Consider talking to us to review your life insurance beneficiary status in view of estate planning.
Where the estate is insolvent (no money to pay bills), the legal process is in favour of the creditors getting paid first before beneficiaries assigned in the estate. Payments to creditors would proceed generally in this order:
1. Secured creditors, where loans are secured by assets (e.g., mortgages, car loans).
2. Funeral expenses which must be within reason.
3. Estate Admin expenses: Executor fees, legal costs, and accountancy fees associated with estate administration. Related probate/provincial estate admin fees may or may not apply if an estate is insolvent.
4. Debts of legislative priority such as child maintenance, employee wages, municipal taxes etc.
5. Income and capital gains taxes; HST etc. It would be wise to get an accountant’s and/or lawyer’s advice with regard to provincial and federal taxes due.
6. Unsecured creditors are to be treated equally prorating payments for all remaining debts.