Who Pays the Debts of Someone Who Died Without a Will in Ontario?

When someone dies without a will, families often worry that they will have to pay the person's bills out of their own pockets. Credit cards, a line of credit, taxes and funeral costs may all be outstanding, and the heirs are not sure who answers for what.

This article explains the general order of payment, how an insolvent estate is handled, and how an estate trustee deals with creditors. Whether any one person could be personally responsible depends on the facts, so it is worth confirming with a lawyer.

Debts come before inheritances

Funeral and burial expenses and debts are paid before the estate is distributed, and the estate trustee is responsible for paying taxes, bills and other debts. In other words, heirs inherit what is left after the estate's obligations are met.

This matters for the spouse's entitlement as well. The preferential share is measured against the estate's net value, which is the value of the property after paying the charges on it and the debts, funeral expenses and administration expenses. The preferential share is $350,000 for deaths on or after March 1, 2021, and $200,000 for deaths before that date. A large debt load can therefore reduce what remains for everyone.

The estate's property passes to the personal representative, who holds it as trustee for those entitled. The person managing those assets is the person who pays the debts from them.

How the debts are paid from the estate

The deceased's residuary real and personal property is applied rateably, according to value, to pay their debts. If the estate is solvent, the debts are paid and the remainder is distributed under the intestacy rules.

If assets cannot cover all debts, the estate is insolvent. In that case the debts are paid proportionately, with no debt ranking ahead of another. A personal representative who expects a shortfall in assets may call a meeting of creditors, and a meeting is required if creditors holding 10% of filed claims request one in writing.

Are heirs personally liable?

The law places the duty to pay on the estate trustee and the estate's assets. Generally, debts of the deceased are owed by the estate, not automatically by relatives. That said, personal responsibility can arise in some situations, such as a co-signed loan, a joint account, or a trustee who distributes too early. Those situations depend on the documents and facts.

The most practical protection for a trustee is to follow the notice process. A personal representative who gives the required notices to creditors and then distributes is not liable to a person whose claim they had no notice of at the time of distribution. The reverse is a warning: handing out inheritances before you know what the estate owes can create real problems.

• Do not pay heirs before debts are identified.
• Do not pay one creditor in a hurry if the estate may be insolvent, since no debt ranks ahead of another.
• Keep records of every payment from estate funds.

Taxes and RRSPs

Taxes are among the bills the estate trustee must pay. For an unmatured RRSP, CRA treats the deceased as having received the plan's fair market value immediately before death, and that amount is included in the deceased's income on the final return. If no beneficiary is named, the plan is paid to the estate and divided under the intestacy rules.

There are exceptions that may reduce the tax. Where a spouse, common-law partner, or financially dependent child or grandchild inherits, the legal representative and the survivor can elect to treat some or all of the RRSP as paid to the survivor as a refund of premiums, which reduces the amount taxed on the final return. If the RRSP value falls after death, the legal representative can ask to deduct the difference, but only if the final distribution is made by the end of the year after the year of death. A RRIF or a matured plan may work differently, so confirm with an accountant.

Estate Administration Tax is a separate cost. Nothing is payable on estates of $50,000 or less, and above that the tax is $15 per $1,000, or part, of the value over $50,000, for certificates requested on or after January 1, 2020.

What to do next

• Do not distribute anything until the debts are known and an estate trustee is appointed.
• Collect the deceased's mail, statements and bills to build a list of debts.
• Keep funeral receipts, since those expenses are paid before distribution.
• Give the required notices to creditors before distributing.
• If assets look short, get advice before paying anyone, because debts are then paid proportionately.
• Speak with an accountant about the final return and any RRSP.

Frequently asked questions