Do Beneficiaries Have to Pay a Deceased's Debts in British Columbia?

If someone close to you has died and you expect to inherit, it is natural to worry that they owed money. Many beneficiaries fear a creditor will come to them directly for the debts.

This article explains how debts are generally handled in British Columbia, what happens when an estate cannot cover everything, and the situations where a beneficiary can be affected.

This article covers the law of British Columbia.

Debts are dealt with through the estate

A personal representative, such as an executor, has the same authority over the estate as the deceased would have had if living, subject to the will and to any enactment. They must use it to administer and distribute the estate. Part of that job is finding the deceased's property and liabilities, and disclosing them as the court rules require when applying for a grant.

The rules for shortfalls are written around the estate's property. They set the order in which gifts are reduced, or in which proceeds are applied, when there is not enough to go around. How this applies to your own finances depends on your situation, so it is worth confirming with a lawyer, and the exceptions below matter.

Notice to creditors and waiting before distribution

A personal representative may publish a notice in the Gazette asking creditors to present claims within a stated period of at least 30 days. After that, they may distribute taking into account only the claims they know of, and they are not liable for claims not presented in time.

Separately, a personal representative must not distribute the estate within 210 days after the grant is issued unless the court orders it. That period can be shortened if all beneficiaries with an interest and all persons who could bring a wills variation claim consent. If there is no will, all intestate successors entitled to a share must consent. Distributing early without the required consents exposes the representative to personal liability for resulting loss if shares of people who cannot be found were not set aside.

What happens if the estate cannot pay everything

If the estate cannot pay all debts and gifts, the abatement rules say property is reduced in this order:

• Property specifically charged with a debt or left on trust to pay a debt
• Property passing on intestacy and the residue
• General, demonstrative and pecuniary legacies
• Specific legacies
• Property over which the will-maker had a general power of appointment

If the estate is insolvent, then subject to secured creditors, proceeds are applied in a set order. It starts with reasonable funeral and administration expenses, the personal representative's compensation and legal expenses of administration. Later come limited wage claims, support arrears, certain taxes, landlord arrears and government debts, and finally all other accepted claims share rateably. In practice, that means ordinary creditors may be paid only part of what they are owed.

Where a beneficiary can be affected

• Gifts already received: the creditor-notice protection does not affect a creditor's right to recover estate assets from whoever received them, so a beneficiary who received property may have to give it up to an unpaid creditor.
• Mortgaged or financed property: the interest of a beneficiary who is left property encumbered by a purchase money security interest is primarily liable for that secured debt.
• Tax: a legal representative who distributes assets without a CRA clearance certificate is personally liable for unpaid amounts, up to the value of the assets distributed.

Two points may reassure you. Probate fees are paid by the estate and are not a tax on the beneficiary. And most gifts and inheritances are amounts individuals do not have to report as income on their tax return. The deceased's own final tax return is a separate matter, due April 30 of the year after death if death was between January 1 and October 31, or six months after death if it was between November 1 and December 31.

What to do next

The CRA says the clearance certificate, requested on Form TX19, should be requested only after all required returns are filed, assessments are received and amounts owing are paid or secured. If new property is found after a certificate is issued, another is needed before distributing it.

• Ask the personal representative for a list of known debts and the plan for paying them
• Ask whether a creditor notice has been published and when the period ends
• Do not spend an expected inheritance until distribution is confirmed
• Keep records of anything you receive from the estate
• Speak with a lawyer or accountant if the estate looks insolvent or you have already received property

Frequently asked questions