Put another way by the beneficiaries, the question goes like this: If a parent dies and leaves a substantial amount of debt, and the amount of the estate is not enough to cover the debt, will I be saddled with it?
Many parents in their senior years feel morally obligated to leave something to their children or grandchildren. However, adult children might see it differently, watching from the sidelines as a parent goes on another vacation, spends another night at the casino, and purchases another new vehicle. What if they leave me with nothing? Worse, what if they leave me in debt?
There are a number of questions that I think are implied in the worry about what will remain in the estate if a loved one leaves significant debts to repay.
First, do parents have a legal obligation to leave any part of their estates to their adult children in their Wills? In Alberta, the answer is “NO”, unless the adult child is dependent and the testator did not make adequate provisions for that dependent adult child. Thus, the first step in getting over mom’s or dad’s extravagant spending habits is to realize that in Alberta and in regard to Alberta property, an adult child has no legal right to receive an inheritance. (This varies from province to province, so if an estate contains real property in another Province, the real property will be subject to succession laws in that Province.)
What if a parent’s estate is not big enough to cover a debt, will the beneficiaries have to pay for it personally? Again, the answer is “NO”. The debt of the parents is not borne by the beneficiaries unless the beneficiaries were co-debtors of the obligation. The debts, however, do belong to the estate of the parent, and debts are paid out first in an estate, prior to beneficiaries receiving anything. Thus, if an estate cannot cover all of the debts, the creditors cannot come after the beneficiaries to collect on the debt if the beneficiaries have received nothing from the estate.
Of course, in law, there are exceptions in almost every situation. This is the third question I want to answer: What if the estate is mishandled and the debts are not paid before the beneficiaries are in receipt of their inheritance money?
This is where the potential for liability arises. One of the core tasks of the personal representative (also known as the executor(Trix) or the administrator) is to determine the assets and liabilities of the estate and to satisfy the debts and obligations of the estate from the estate property. There is an obligation upon the personal representative to know which creditors must be prioritized over others and to know which creditors must receive proportionately from the estate, without preference given. There is also an obligation for the personal representative to know from which funds or assets to pay out the funeral and estate administration debts and the unsecured debts, as there is a priority list for payment from assets. (For example, should a debt be paid from the residue or out of a specific legacy?) The obligation to pay debts is also the duty of an administrator of an intestate estate as well, even if there was no Will and therefore no direction given to pay debts.
Should the personal representative fail in his or her obligation to creditors or claimants, he or she may be liable for the debt and mismanagement of the estate.
Also, if a beneficiary is preferred over a debtor and is paid out his or her share of the estate in priority over a debtor, the debtor could bring an action against the beneficiary in respect of the property that was distributed.
Why are lawyers important in the administration of an estate? We help you navigate through the potential problems and liabilities that could arise in the management of creditors and payment of debts.
Therefore, even if your loved one left too many debts and not enough assets to provide you with any gift at all, it is still of critical importance that the estate be administered according to law, with careful consideration in regard to debt repayment.
NOTICE TO READER: The summaries of legal rights and remedies described above are general references to the Alberta laws existing at the date of the publication and may not apply to the reader’s individual circumstances. Also, the laws may change. These legal summaries are not to be relied upon as applicable to your individual circumstances and are subject to a complete review of the facts and applicable laws in every case.
- s. 7 of the Estate Administration Act, SA 2014, c E-12.5.
- ss. 27 & 29 of the Estate Administration Act, SA 2014, c E-12.5.
- s. 28 of the Estate Administration Act, SA 2014, c E-12.5
- ss. 30(2) and 31(3) of the Estate Administration Act, SA 2014, c E-12.5