Even if someone is wealthy their estate may have debts to be dealt with after their passing – it is reported that Michael Jackson died with around $500 million worth of debt. Find out how to manage expectations if there are debts following the passing of a loved one here.
Dealing with estate debts
If you are an executor of an estate, you may need to deal with debts that have been left behind. ‘Personal debts do not expire on death, they are carried over into the estate,’ says Cathal Murray a solicitor with James McNulty & Co in Omagh. ‘It becomes the responsibility of the executors to make sure those debts are repaid.’
Impact of debts on beneficiaries
If an estate includes any debts this will mean that there is less to be distributed to the beneficiaries. However, the extent of a beneficiary’s disappointment will depend on the nature of the gift they are expecting as well as the amount of debts involved.
If the estate is solvent, meaning that there are sufficient funds to clear all of the debts, certain beneficiaries could receive less than they were expecting or even nothing at all.
If the estate is insolvent and the debts outweigh the assets, none of the beneficiaries will be able to receive any share of the estate.
When we administer an estate we work closely with the Executors and on occasions, must manage the expectations of beneficiaries by being upfront with them, which may mean having difficult conversations.
For a solvent estate
If we are dealing with a solvent estate, we ensure that debts are repaid as early as possible to reduce the interest the estate will need to pay. We contact creditors as soon as possible as otherwise by the time an executor is in a position to make payment, creditors may have been chasing the money they are owed for many
months and could have instructed debt collectors. Companies are more likely to respond leniently with regular and upfront communication from executors.
Once estate debts have been paid, executors need to think about how the sums remaining in the estate should be distributed. A complex legal procedure called abatement applies wherever assets are insufficient to pay all of the legacies in full.
If there is a will which specifies the order in which legacies should be paid, this must be strictly followed. Otherwise, debts are considered to be paid first from the residue, then from pecuniary legacies and finally from specific legacies. If the estate has significant debts, this means that the residuary beneficiaries could end up receiving very little, or even nothing at all. It is unlikely that this would have been the intention of the testator and this can make for a difficult conversation. It is open to beneficiaries to vary the terms of a will in such circumstances and we can help an executor to facilitate negotiations.
An insolvent estate
If an estate is insolvent, executors will be in a situation were the available assets are insufficient to pay all the debts of the deceased. As executor, you still have duties in respect of the creditors. We will correspond on behalf of the executors with creditors and debt collection agencies to negotiate the terms of repayment. We will also notify the beneficiaries that there are no funds to be paid to them.
When dealing with an insolvent estate, executors need to follow a strict order for paying debts. This order is set out in law and it is important to understand the difference between the types of debt as well as the order itself. If money is paid to a creditor with lower priority, either purposefully or accidentally, executors will be personally liable. We will ensure that debts are paid in the correct order and that executors are protected.
The benefit of consulting a solicitor
Though it may seem beneficial to minimise costs by dealing with the administration yourself, instructing a solicitor skilled in this area of law ensures that debts are dealt with correctly and gives reassurance that executors will not be held personally liable.
For further information, please contact us on 028 82 242177 or firstname.lastname@example.org
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.