- A person's debts are generally settled from what they left behind before beneficiaries receive anything.
- Some assets, such as insurance with a named beneficiary and jointly owned property, pass outside the estate.
- Debts you co-signed or guaranteed yourself are a different question from your parent's own debts, so check the paperwork.
- A collection agency cannot contact you if it knows or should know you are not responsible for the debt.
After a parent dies, many adult children worry that credit cards, lines of credit or a car loan will land on them. The fear is understandable, especially when a collector phones before the funeral is even over.
Debts are generally settled from what a parent left behind before beneficiaries receive anything. This article explains how that works in Ontario, which assets are and are not available to creditors, the situations where you could be personally on the hook, and how to deal with collection calls.
The basic rule: debts come out of the estate first
The executor has the job of settling unpaid debts and overpayments, including taxes owed to the CRA, before distributing what is left to the beneficiaries under the will. Debts are paid from what your parent left, and beneficiaries receive whatever remains.
So if the debts are larger than the assets, the usual result is that beneficiaries receive little or nothing. Inheriting nothing is not the same as owing something.
It also helps to know how debts are treated for estate administration tax. Funeral costs, lawyer fees, loans, credit card debt, lines of credit and real estate commissions cannot be deducted when calculating estate value for that tax, although mortgages and liens on included real property can be. That is one more reason to get advice early if the estate is tight.
Which assets creditors can reach, and which they cannot
Not everything your parent owned forms part of the estate. Assets that generally pass outside the estate include insurance paid to a named beneficiary, jointly owned assets passing to the surviving owner, and RRSPs, RRIFs, TFSAs and registered pension plans with a beneficiary designation. Where a beneficiary is designated, the Insurance Act provides that the insurance money is not part of the insured's estate and is not subject to the claims of the insured's creditors from the time it becomes payable.
| Asset | How it is generally treated |
|---|---|
| Life insurance with a named beneficiary | Passes outside the estate and is not subject to the insured's creditors |
| Life insurance naming the estate, or no beneficiary | Becomes part of the estate and creditors may claim it |
| Jointly owned assets passing to the survivor | Generally pass outside the estate |
| RRSP, RRIF, TFSA or pension with a beneficiary designation | Generally pass outside the estate |
| Bank accounts, vehicles, investments and Ontario real estate in your parent's name alone | Part of the estate |
The details matter. Whether an account was truly joint, or whether a designation was valid, can depend on the documents and the facts, so a lawyer can confirm how a particular asset is treated.
When you could be personally responsible
The situations worth checking are ones where your own signature or conduct is involved.
- You signed a loan, line of credit, lease or credit account together with or for your parent. Whether that makes you responsible depends on what you signed, so check the paperwork and confirm with a lawyer. Collection rules recognize guarantors, since an agency may contact a person who guaranteed the debt.
- You are the estate trustee and distribute assets to beneficiaries before debts are dealt with. The role carries duties, and settling debts comes before distribution. Get advice before paying out.
If you are unsure which category you fall into, find the original agreement and have a lawyer read it. Do not assume either way.
What if the estate cannot pay everyone?
An estate with more debts than assets is often called insolvent. If it goes through bankruptcy, the Bankruptcy and Insolvency Act sets an order of payment. For a deceased bankrupt, the reasonable funeral and testamentary expenses incurred by the legal representative are paid first, ahead of administration costs, the Superintendent's levy and unpaid wages. The legal personal representative or heirs are entitled to any surplus only after creditors are paid in full.
An estate does not have to be formally bankrupt to be short of money, and priority among debts outside bankruptcy depends on the facts. Estate trustees should not guess about who gets paid first. This is a good moment for legal advice.
If a collector calls you: what to do next
A collection agency cannot contact someone if it knows or reasonably should know that the person is not responsible for the debt. Agencies also cannot harass, use threatening, profane, intimidating or coercive language, or use excessive or unreasonable pressure. If you did not co-sign or guarantee, you can say so plainly.
- Stay calm and do not agree to pay, or promise to pay, anything on the call.
- Ask for the agency's name, the creditor, and the account name or number, and keep a record of every contact.
- Tell them your parent has died and give the name of the estate trustee, if there is one.
- Do not give out the estate's account details or your own banking information.
- If you are the estate trustee, collect the debts into a list with balances before paying anything.
- Speak to a lawyer before distributing any estate money to beneficiaries or paying any debt you are unsure about.
If you believe an agency broke the rules, you can file a complaint through Consumer Protection Ontario, and a complaint does not cancel the debt. A related article in this library covers collection calls in more detail.
Frequently asked questions
Do I inherit my parent's credit card debt?
Generally, no. Debts are settled from the estate before the remaining assets go to beneficiaries. Whether you are personally responsible for a particular debt depends on the paperwork, such as whether you co-signed or guaranteed it, so it is worth confirming with a lawyer.
Can creditors take my inheritance if my parent owed money?
Creditors are paid from the estate before beneficiaries receive their shares. An asset that passes outside the estate, such as insurance to a named beneficiary, is generally not subject to the deceased's creditors. Insurance naming the estate is different, because creditors may claim it.
Does a joint bank account protect the money from my parent's creditors?
Jointly owned assets passing to the surviving owner generally pass outside the estate. Whether an account is truly joint, and what a creditor can do about it, depends on the facts, so ask a lawyer about your specific account.
Should I pay a collector to make the calls stop?
Not without checking first. A complaint or a payment decision should follow proper advice, because filing a complaint does not cancel a debt, and paying a debt you are not responsible for may be a mistake. Ask the collector for details in writing and speak to a lawyer.
Sources
- Ontario.ca – Estate administration tax — ontario.ca
- Canada.ca – Represent someone who died — canada.ca
- Ontario.ca – A guide for collection agencies: Prohibited practices and conduct — ontario.ca
- Ontario.ca – Stop collection agency calls — ontario.ca
- Justice Laws – Bankruptcy and Insolvency Act, s. 136 — Justice Laws (federal)
- Canada.ca (FCAC) – Life insurance — canada.ca
- CanLII – Moore v. Sweet, 2018 SCC 52 — canlii.org
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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