When most people think about what they might inherit from a loved one they likely think of inheriting a large sum of money, a big house, or perhaps even the family vacation home. We often hear in the news today of the upcoming trillion dollar wealth transfer between generations, and many of us would like to think that somehow we will be a part of it. But the fact is that not all of us will inherit large sums of money from those close to us. Many people will die owing more money to their creditors than they have in assets, and in the process leave an insolvent estate left to be administered. What happens when a person leaves an insolvent estate?
If an estate is insolvent, one could easily imagine that you would have a hard time finding an executor to administer the estate. With no funds available for compensation, what incentive is there for a person to put in the time and effort administering an estate only to not be financially compensated for it? In order to correct this problem, section 44(2) of the Bankruptcy and Insolvency Act allows the executor to pay for "the proper funeral and testamentary expenses" of the deceased prior to administering the deceased's estate to their creditors. The reasonable compensation of the executor has been recognized to be included within the definition of "testamentary expenses", as has been the reasonable accounting fees associated with administering the estate (see Re: Ladner Estate).
With an executor in place, the proper procedure to administer an insolvent estate in is set out by section 50 of the Trustee Act. The Trustee Act provides that when there are not enough assets to satisfy all of the deceased's creditors, the executor is to distribute to the deceased's creditors "proportionately and without any preference or priority of debts of one rank or nature over those of another". Put simply, whatever percentage of the deceased's debt a creditor is responsible for is the percentage they will receive from deceased's assets (subject to exceptions delineated by statute). If you are responsible for 60% of the deceased's debt, you will receive 60% of the deceased's assets.
Not everyone dies with a wealth of assets to leave to those closest to them. Many people die owing more to their creditors than they have in assets, leaving an insolvent estate. Through the provisions contained in statutes such as the Bankruptcy and Insolvency Act and the Trustee Act, there is a set procedure to follow in what to is to be done in administering an insolvent estate. Although you cannot leave your debt to those closest to you, by leaving an insolvent estate someone will have to step into an administrative role and ensure that all creditors are paid following an insolvent person's death.
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