Estate Too Small to Pay Every Gift? How British Columbia Reduces Gifts

You have read the will, and it leaves money and property to several people. Then the debts come in, and it becomes clear the estate cannot cover everything. Some beneficiaries may receive less than the will promised, and some may receive nothing.

British Columbia has a set of rules for this situation. They decide which gifts are reduced first, how secured property is treated, and what executors should watch for before they hand anything out. This article explains those rules in plain language so you know what questions to ask.

This article covers the law of British Columbia.

What "abatement" means and when it applies

Abatement is the legal word for reducing gifts in a will because the estate is short. In British Columbia, the "estate" is the property of the person who died. The executor, formally called a personal representative, uses the authority of the deceased to administer and distribute that estate and to account to beneficiaries and creditors.

Before gifts are paid, unpaid debts and overpayments, including taxes owed to the CRA, are to be settled. Section 50 of the Wills, Estates and Succession Act (WESA), headed "Rules if assets are not sufficient", applies when the estate cannot satisfy all the debts and gifts. Land and personal property are reduced together, not one kind before the other.

This article does not set out a ranking of creditors for an estate that can pay its debts. It looks at what happens to the gifts once the money runs short.

The order in which gifts are reduced

Under WESA s. 50(5), when the estate is short, assets are reduced in the following order.

In practice, that means a specific gift, such as "my watch to my niece", is generally reduced later than the residue or a gift of a sum of money. The person who receives whatever is left over after the other gifts is usually the first to feel the shortfall.

When the will changes the order

The s. 50 order is a default. It is subject to a contrary intention in the will, so a will that clearly sets out a different order of reduction can override it.

There is also a rule about land. If the will-maker charged land with payment of debts or pecuniary gifts, that land is primarily liable for them. This is why the order in s. 50(5) is stated to be subject to s. 50(3).

Whether wording in a will amounts to a contrary intention can be a close question. If the language is unclear, it is worth having a lawyer read the will before the executor decides how to reduce any gift.

Gifts of property that carry a mortgage or loan

Sometimes a will leaves a specific item, such as a house or vehicle, that is subject to a loan used to buy it. Gifts of property subject to a purchase money security interest generally pass with the debt. Between people claiming through the will-maker, the beneficiary's interest is primarily liable to pay the secured debt.

This rule yields to a contrary intention in the will. However, a general direction in the will to pay debts does not by itself show that contrary intention. So a beneficiary who inherits a mortgaged property should not assume the estate will clear the mortgage.

How a particular mortgage or car loan behaves after a death depends on the lender and the loan terms. A secured lender keeps its security, so check the loan documents and speak to the lender early.

Benefits that sit outside the estate

Some assets never become part of the shortfall problem. A benefit payable to a designated beneficiary under a WESA Part 5 benefit plan, such as an RRSP or similar plan, does not form part of the participant's estate and is not subject to the claims of the participant's creditors.

That protection depends on a valid designation. If the estate itself is the beneficiary, or no designation takes effect, the benefit is part of the estate and is available to creditors. Insurance paid to the estate rather than to a named beneficiary is generally available to creditors as well.

Timing, creditors and what to do next

A personal representative must not distribute the estate within 210 days after the grant, except by court order. Earlier distribution is allowed with the consent of all beneficiaries and all persons who may bring a wills variation claim. A wills variation claim must be commenced within 180 days from the date the grant is issued in British Columbia.

An executor may publish a notice to creditors in the Gazette. The period for presenting claims must not be less than 30 days from the date of publication. After that period ends, the executor is not liable for claims that were not presented in time. But the notice does not take away a creditor's right to recover estate assets from whoever received them, so a beneficiary who was paid may still be pursued.

An executor who distributes property without a CRA clearance certificate while tax is owing is personally liable for the unpaid amounts, up to the value of what was distributed. The request is made on Form TX19.

• Get a full list of the estate's debts and assets before paying any gift.
• Read the will for any charge on land, any trust to pay debts, and any direction about the order of payment.
• Identify gifts that carry a mortgage or other secured debt.
• Confirm which RRSP or plan benefits have a valid designated beneficiary.
• Consider a Gazette notice to creditors and the CRA clearance certificate before distributing.
• Talk to a lawyer before reducing or paying any gift if the numbers are close.

Frequently asked questions