The short answer is that an Executor is not liable for the Deceased’s debts. However, an Executor is liable for any errors or omissions made in the course of administering an Estate. This includes failing to pay debts or liabilities of the Estate.
Common Debts of an Estate
Amongst the duties of an Executor are determination and payment of debts legally owing by the Deceased. Common examples of these are:
- past or current income taxes;
- credit card debt, mortgages and secured or unsecured lines of credit;
- retroactive and prospective child or spousal support.
The costs of administering an Estate (Probate fee, Executor’s fee and out-of-pocket costs, and professional fees) are paid in priority to unsecured debts. If there are insufficient funds to cover these items, the unsecured debts are paid pro rata. Usually there are sufficient assets within the Deceased’s Estate to pay debts. Once paid, the residue is distributed in accordance with the Will. In the case of intestacy, the residue is distributed in accordance with Part 3 of the Wills and Succession Act (Alberta).
Prudent Administration of an Estate
A prudent Executor will take steps to determine the validity of any debts claimed by the Deceased’s creditors. Minimally, this will include advertising for any Creditors or Claimants. If a claim against the Estate is uncertain, the Surrogate Rules (Alberta) set out the process for the Executor to apply to the Surrogate Court to determine whether or not the claim is proper. An Executor must ensure all proven debts and costs of administration are paid before making a distribution to residuary beneficiaries of the Estate.
In the case of taxes owing to Canada Revenue Agency, it is critically important that the Executor apply for and receive a Clearance Certificate. Doing so confirms that the Deceased’s tax liability has been satisfied. It also ensures the Executor is not liable for a reassessment of the Deceased’s taxes to the date of the Clearance Certificate. Depending on the complexity of the Estate, it will likely be months and sometimes years before a Clearance Certificate is issued. In some cases, it will be necessary to obtain a Clearance Certificate for the year of death as well as Clearance Certificates for subsequent years.
Interim Distribution from the Estate
An Executor may choose, upon the advice of a qualified professional (usually an accountant), to make an interim distribution to the residuary beneficiaries. In this case the Executor should maintain a generous holdback sufficient to deal with any anticipated taxes or claims.
Executor Liable for premature distribution of residue
What happens if an Executor disburses the entire residue of the Estate prior to receiving a Clearance Certificate or final determination of debts? In theory, the Executor can request repayment from the beneficiaries. As a practical matter, this is rarely effective. Most beneficiaries will immediately direct the bequest toward their own debt (mortgages, credit cards). Others will simply refuse to repay their bequest. While the Executor has the option of suing the beneficiaries to recover overpayment, this is a poor remedy. The costs of litigation significant. Executor also faces a dim prospect of enforcing a judgment against a beneficiary who no longer has the funds or resides in another jurisdiction. At the end of the day, Canada Revenue Agency and other creditors hold the Executor liable and pursue the Executor for payment.
Avoid Executor liability by hiring appropriate Advisors
Acting as Executor is a tough job and there is no need to make it more difficult than necessary. Some tips for future Executors to minimize personal liability for acting as Executor: 1. Retain the appropriate legal and accounting professionals; 2. Consider hiring a trust company to provide Estate administration services as your agent; 3. Always get that Clearance Certificate!
Written by Gary Kirk