Making sure you know the rules on how Estate Debts should be paid

If you are an executor of an estate, you may need to deal with debts that have been left behind. Any estate may have debts to be considered, even if the deceased was wealthy – it is reported that Michael Jackson died with around $500 million worth of debt.

‘Personal debts do not expire on death, they are carried over into the estate,’ says Sian Foster, Head of Wills & Probate with Ware & Kay in York. ‘It becomes the responsibility of the executors to make sure those debts are repaid.’

Impact of debts on beneficiaries

Naturally, 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.

Even 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 worse still, 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.

As an executor you have a duty to the beneficiaries, and you must manage their expectations by being upfront with them throughout the administration of the estate, which may mean having difficult conversations.

For a solvent estate

If you are dealing with a solvent estate, you should ensure that debts are repaid as early as possible to reduce the interest the estate will need to pay. If additional interest is paid as a result of unnecessary delays, you will need to account to the beneficiaries as it will diminish the shares which they receive.

In order to deal with debts efficiently, you must ensure that you contact creditors as soon as possible. Often by the time an executor is in a position to make payment, creditors have been chasing the money they are owed for many months and may even have instructed debt collectors. Companies are more likely to respond leniently with regular and upfront communication from executors.

Once estate debts have been paid, you will 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 instructing a solicitor can help an executor to facilitate negotiations.

An insolvent estate

If an estate is insolvent, you will be in a situation where the available assets are insufficient to pay all the debts of the deceased. As executor, you still have duties in respect of the creditors. You will need to liaise with creditors and debt collection agencies to negotiate the terms of repayment. You will also need to notify the beneficiaries that there are no funds to be paid to them.

When dealing with an insolvent estate, you need to follow a strict order for paying debts. This order is set out in law and it is important that you understand the difference between the types of debt as well as the order itself. If money is paid to a creditor with lower priority, whether purposefully or accidentally, you will be personally liable. Instructing a solicitor to help with the process ensures that debts are paid in the correct order and that you are protected.

Suspicious debts

Some estate debts may appear suspicious. For example, if a deceased person, who was known for being good with money, suddenly took out several credit cards towards the end of their life. If you have concerns about the nature of any of the estate debts, you should consider whether the deceased may have been the victim of fraud or financial abuse prior to their death. If your concerns are proven, as executor you should consider seeking reimbursement to the estate from the fraudster, abuser, or via an available insurance policy or compensation scheme.

The appropriateness of making a claim will always depend on the circumstances of the estate, the beneficiaries and the fraud or abuse. It is ultimately a decision for the executor as to whether a claim is appropriate, but a solicitor can help to assess and evaluate this.

The benefit of consulting a solicitor

Though it may seem beneficial to minimise costs by dealing with the administration yourself, instructing a professional ensures that debts are dealt with correctly, including the proper consideration of all avenues for recourse against fraud or abuse. Instructing a solicitor to deal with the estate and the debts on your behalf offers reassurance that you will not be held personally liable if mistakes are made.  For particularly complex insolvency cases we can also point you in the right direction of an insolvency practitioner.

For further information, please contact Sian Foster in the Wills and Probate team on York 01904 716000 or email sian.foster@warekay.co.uk