Estate Distribution - Hull on Estates #219
Listen to: Estate Distribution
This week on Hull on Estates, Suzana Popovic-Montag and Ian Hull discuss how estates are distributed and what the priorities in estate distribution are.
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Suzana Popovic-Montag – Click here for more information on Suzana Popvic-Montag.
Ian M. Hull – Click here for more information on Ian Hull.
Suzana Popovic-Montag: Hi and welcome to Hull on Estates. You’re listening to episode 219 of our podcast on Tuesday, August 24, 2010.
Welcome to Hull on Estates, a series of podcasts for the Canadian legal community dealing with issues and insights surrounding estate planning in Canada. Hosted by the lawyers of
Suzana Popovic-Montag: Hi. It’s Suzana Popovic-Montag and I’m very pleased to have with me Ian Hull. And we are back on Hull on Estates to do this week’s podcast. How are you today, Ian?
Ian Hull: Great, Suzana. Good to be on Hull on Estates. And we always welcome our listeners to come and watch or listen to Hull on Estate and Succession Planning, our companion podcast.
Suzana Popovic-Montag: And in preparation for our podcast today, I just took a quick peek at the last podcast and both Paul Trudelle and Rick Bickhram of our firm did a great job talking about a recent British Columbia Court of Appeal case. And to those of you who may have missed that podcast, I highly recommend it to you.
Ian Hull: So today, Suzana, we wanted to talk a little bit about the negative in the sense of what do we do…how do we distribute estates and how do we consider some priority issues. For example, an estate that may not have enough money in it to fund all of what is put in the Will. What are the priorities in an estate distribution.
Suzana Popovic-Montag: And that’s kind of a neat topic and particularly timely, I think, in light of the fact that certainly recently I’ve had many inquiries about these kinds of situations. And so it’s always good to do a little bit of a refresher to figure out how we deal with these situations that aren’t in the many millions of dollars as some estates can be.
Ian Hull: Absolutely and where we start with and the starting point with any bankrupt estate or estate that is light in funds is, of course, looking at the Bankruptcy Act itself. And that’s sort of the historical beginning point where we have an insolvent estate and what context do we distribute the assets in. Well, we can go to the Bankruptcy Act itself.
Suzana Popovic-Montag: And there’s a little bit of a distinction, Ian, I think, between an estate that’s already in a bankrupt situation. So the testator, himself or herself, has already started some proceedings for bankruptcy in a situation where it just turns out that on death, the estate debts and liabilities are more than its assets.
Ian Hull: And that’s a really good point. And in our questionnaire, we always ask, is there a bankruptcy proceeding or was there a bankrupt proceeding? Was the deceased ever bankrupt when we’re going to administer an estate? It sounds like sort of a silly question in some scenarios but it’s one of those basic questions you want to make sure. What are you dealing with here? Is this an estate that is already in bankruptcy? And then there are different guide posts you have to work from. Or is it an estate that you need to consider putting into bankruptcy, given the liabilities?
Suzana Popovic-Montag: And that’s a particularly important issue for a trustee who’s considering taking on the job of estate trustee. Whether or not they want to take the job in the first place and if so, what kinds of steps are going to be necessary.
Ian Hull: And that’s always a tough call when you’re looking at an estate where you don’t really know if you’re under water or not at the outset. One of the comforting things, though, is that there’s a priority scheme that is established through the case law and through the Bankruptcy Act itself that protects certain expenses so that if you step into the fray as an executor, you have some protections.
Suzana Popovic-Montag: And those expenses, just to sort of recap, are the executorship expenses, the testamentary expenses and administration expenses that are necessary for the proper performance of a duty of an estate trustee.
Ian Hull: So if you’re gonna step into it, you are gonna get paid typically as an executor. And that’s comforting because in some ways, if you just throw your hands up and do nothing then it’s not an answer in most estate administrations.
Suzana Popovic-Montag: And also some expenses that we do talk about and are thinking about here include the costs that are incurred in obtaining the advice of a lawyer or other representative to help you ascertain the debts and liabilities of the estate to determine the payments and how those payments are going to be made and the proper legal distribution of the estate that’s ultimately going to be left.
Ian Hull: One of the important doctrines to consider at the administration at the outset of administering an estate that may or may not be under water is the concept of plene administravit. No one likes to use the Latin terms unless they have to but that’s one of these terms of ours that creates a doctrine that is really, I think, an important consideration at the outset when you step into the fray of a potential administration of an estate that is under water.
Suzana Popovic-Montag: So now that you’ve said that so well, Ian, can you explain what that means in laymen’s terms?
Ian Hull: Basically, you’re compelled as an executor to tell the creditors or any claimant of the estate that you are under water at the outset. And you need to plead it in any proceedings. You need to identify that…essentially you have to ensure there is transparency as to the nature and extent of the assets of the estate to potential creditors.
Suzana Popovic-Montag: Well, that’s great. Thank you.
Ian Hull: And if you don’t, the consequence is that you don’t the protections of the Bankruptcy Act and the case law supports that proposition. So now let’s talk about the duty to pay debts and to compromise claims.
Suzana Popovic-Montag: Well I think in that situation we’re looking to the Trustee Act, certainly here in Ontario, Section 48, for guidance, that tells us that executors are to pay all the debts of the estate. And it specifically gives authority to the personal representative to do that and to deal with claims against the estate and to, as you say, either pay or compromise them.
Ian Hull: And unfortunately Section 48 of the Act, while not unreadable and easy enough to understand, it’s vague in its own form and so it has been sort of considered in the context of the case law because it doesn’t really provide what guidance, much guidance to the executor with respect to the nature and the extent of the duty to pay debts and to compromise claims.
Suzana Popovic-Montag: And so that’s a situation where normally the estate trustee is going to seek some advice from a lawyer to help them figure out how they prioritize and pay out certain claims.
Ian Hull: And that comes down to looking at some of the case law in the context of Section 48. But for the purposes of this podcast, I think the starting point is when someone says well, why do I have to pay the Visa bill? And what authority do I have to pay it? Well, the obvious answer comes from the Section 48 of the Trustee Act. And it gives you your core statutory authority.
Suzana Popovic-Montag: There’s also another provision of the Estates Act itself that talks about ways that you can go about paying or dealing with money claims or demands against the estate.
Ian Hull: And that is in respect of…it’s tied to the rules itself as well, but it’s in respect of Section 44 and 45 of the Estates Act which is the summary disposition of potential claims against assets of the estate.
Suzana Popovic-Montag: And how do those normally work, Ian?
Ian Hull: Well, the key here really is that if you have notice of a claim, there are specific steps that you need to follow. And the Act is very rigid. The limitation period on it is specifically rigid and the case law has supported the inflexibility of using this Act. But if you follow it step by step by filing the Notice of Contestation when you receive a potential claim and you make your application for an Order promptly and you follow what is actually fairly clear steps under the Act, you are….you have available to you not summary judgment…I don’t like to use that term…but a summary process to address and adjudicate a potential claim against the assets of the estate.
Suzana Popovic-Montag: And that’s really helpful in the situations where you’re sort of fearing that there might be a claim out there and it’s sort of lying in the weeds and you want to get on with the administration of the estate and you just don’t have the means to flush that out. And here’s a mechanism by which you can do exactly that.
Ian Hull: So we talked about earlier on in the podcast the concept of the priority of claims in an insolvent estate. And we were comforted by the fact that we have some protection, both in the case law and in the statutes, to make sure the executor gets paid. What other issues arise in the context of priorities that you can talk about, Suzana?
Suzana Popovic-Montag: Well there’s a couple of legal concepts that we hear floating around a lot and the concepts of abatement and ademption. And I thought, perhaps, we could just spend a few minutes on each of those.
Ian Hull: Alright, and that’s great because as we’re winding up this podcast, these two topics are hot topics of discussion when you get into these almost under water or under water estates. The definition of “abatement” is fairly straightforward.
Suzana Popovic-Montag: And that is that if there are insufficient assets in an estate, then some or all of the gifts are going to abate or be reduced.
Ian Hull: So the key with abatement, of course, is the reduction of the gift itself. It gets a little complicated in terms of what the priority within the abatement scheme is and that’s developed more and more through the case law itself and through the Act. But the other concept we want to just touch on is the difference between abatement and ademption.
Suzana Popovic-Montag: An ademption is when a specific gift that is given in a Will is not there on the death of the individual, so that there’s nothing that can actually be given. And very different than, of course, from abatement, but a really interesting concept. And many people we’ve seen in practice will certainly get those two concepts mixed up.
Ian Hull: Alright, well I think we’ve covered sort of the core issues in relation to questions relating to priorities in estates distribution. So thanks very much for joining us today and listening to the podcast.
Suzana Popovic-Montag: And if anyone has any comments or feedback, please feel free to email us. We’re always looking forward to hearing from you. Thanks very much, Ian.
Ian Hull: Thanks, Suzana.
This has been Hull on Estates with the lawyers of Hull & Hull. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.
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