If you are an executor or administrator of a deceased estate, then it is your responsibility to identify all the estate assets and estate debts. Estate assets are what are used to pay estate debts. That is, the estate is solely responsible for the payment of estate debts which can usually only be paid once estate assets are liquidated and estate funds available.
Personal Payment of Estate Debts by Executors or Family Members
In some cases, depending on the value and/or nature of the estate debt, the executor or administrator or a family member might arrange to pay estate debts personally on the expectation that they will be reimbursed the cost they have paid when estate funds are available – which is fine where the executor or administrator is certain there will be sufficient estate assets to reimburse the payee, but can be risky in cases where the value and/or nature of estate assets is unknown and where there is a risk that the estate is insolvent because there are insufficient estate funds to pay estate debts.
Priority of Payment When an Estate Is Insolvent (ACT)
In the ACT if an estate is insolvent then funeral, testamentary and administration expenses have priority for payment. Testamentary and administration expenses are generally those incurred by the deceased estate from date of death until the deceased estate is fully administered, such as legal costs, accounting costs, and tax. Other estate debts include secured debts (such as mortgages or other loans secured against the deceased person’s assets such as a car or house), or unsecured debts (such as credit cards, personal loans, medical accounts or utility accounts that are not secured by an asset). If an estate is insolvent but all funeral, testamentary and administration expenses have been paid, then secured debts take priority for payment over unsecured debts.
Responsibility for Estate Debts
No other person or entity (such as a private company or family trust) can be forced or held liable to pay estate debts for a deceased estate. The party liable for deceased estate debts is the deceased estate.
Public Notices and Accountability of Executors or Administrators
Particularly in the case of an insolvent deceased estate, it is prudent that the executor or administrator publish a public notice notifying the public of their intention to distribute the deceased estate before paying estate debts to ensure that all estate debts are properly identified and prioritised for payment. The executor or administrator must keep proper accounts of their handling of estate assets and estate debts.
If the executor or administrator is called to account by a creditor or beneficiary for their handling of estate assets and estate debts, then they may be required to ‘verify and file’ or ‘verify, file and pass’ accounts in court. If you are required to verify and file accounts in court this will mean showing the court all the relevant financial records you have kept in regard to the accounting of the deceased estate which might also include producing evidence of a realised estate debt (such as letters from financial institutions and invoices), and payments of those realised debts (such as receipts and paid tax invoices). It is important from the outset of stepping into the role that the executor or administrator keep a clear working sheet and properly categorise estate debts to confirm priority of payment. If an executor or administrator fails to file and pass accounts or if the court determines that the accounts filed by the executor or administrator are insufficient or lacking, then a beneficiary or creditor may apply to have the executor or administrator removed and an independent administrator appointed to finalise the estate.
Distribution of Surplus Estate Funds
Estate assets and estate debts should be realised and redeemed or paid before surplus estate funds are distributed to beneficiaries. A partial distribution to beneficiaries can sometimes take place where all estate debts have been ascertained and the executor or administrator holds back enough estate funds in the deceased estate to pay those estate debts. In some cases, tax debts might not be realised for some time and a partial distribution of estate funds might be necessary or desirable and so it is a good idea for the executor or administrator to seek tax advice in those circumstances for an estimate of the tax debt and retain sufficient estate funds, and perhaps a reasonable buffer, to pay the tax debt when it’s realised.
Bankrupt Estate Administration and Non-Estate Assets
If a deceased estate is insolvent, an executor or administrator may need to administer the estate as a bankrupt estate. It is important to be aware that some assets of the deceased may be able to pass directly to beneficiaries and not be applied in payment of estate debts (for example, superannuation death benefits and life insurance policies). If you are responsible for a deceased estate, you do not need to manage the process alone. MV Law assists executors and administrators with assessing estate debts, communicating with creditors, preparing financial records, and ensuring the estate is administered correctly and in accordance with the law. Contact our Wills and Estate team on (02) 6279 4444 for guidance.
Frequently Asked Questions
Do debts have to be paid from a deceased estate?
Yes. Debts must be paid from the deceased estate before beneficiaries receive any inheritance. Estate assets are used to pay estate debts.
Am I personally responsible for the deceased person’s debts?
No. Executors, beneficiaries, family members, companies or trusts cannot be forced to pay the deceased’s debts. The estate is responsible.
What happens if the estate does not have enough money to pay debts?
If the estate is insolvent, debts are paid in a legislated order of priority. In the ACT, funeral, testamentary and administration expenses are paid first, followed by secured debts, then unsecured debts.
What is the priority order for paying estate debts?
- Funeral, testamentary and administration expenses
- Secured debts (for example, mortgages, car loans)
- Unsecured debts (for example, credit cards, personal loans, medical bills)
Can an executor pay estate debts using their own money?
Yes, but only if they are confident the estate has enough assets to reimburse them. There is risk if the estate is insolvent.
Do all assets of the deceased have to be sold to pay debts?
Not always. Some assets, such as superannuation death benefits or life insurance proceeds, may pass directly to beneficiaries and not form part of the estate for debt repayment.
Can an executor distribute funds before all debts are paid?
Executors should not distribute the estate until debts are identified and funds retained to cover them. Partial distribution is possible if enough funds are held back.
Should an executor publish a notice before paying debts?
Yes. Publishing a notice of intention to distribute helps ensure all creditors come forward, reducing the risk of liability later.
Can an executor be removed for mishandling estate debts?
Yes. If accounts are not filed correctly or debts are mishandled, a creditor or beneficiary may apply to the court to have the executor removed and replaced with an independent administrator.
Do executors need to keep records of debts and payments?
Yes. Executors must keep clear financial records. Courts can require executors to verify, file or pass accounts showing how debts were paid.
Debt Claim Against a Deceased Estate?
If you are owed money by a deceased person, we can help you recover the debt from the estate and protect your rights as a creditor. Contact MV Law on (02) 6279 4444.
MV Law Canberra
Ph: (02) 6279 4444
Email: info@mvlaw.com.au