Can an Estate Deduct What a Beneficiary Owes From Their Share in Ontario?

You borrowed money from a parent, relative or friend, and now they have died. You may be named in the will, and you are wondering whether the debt disappears, is taken off your inheritance, or must be paid back separately.

The answer depends on what the will says, what evidence of the loan exists, and the choices of the estate trustee. This article explains how to think about it and what to gather.

Why the answer varies

A loan to a beneficiary raises several questions once the lender has died: whether the money is still owed, whether it affects the size of your share, and how any repayment would be handled. How this applies depends on your situation, so it is worth confirming with a lawyer. If the deceased owned real property or assets held by a financial institution, the estate normally has to be probated through a Certificate of Appointment of Estate Trustee.

The answer depends on the wording of the will, whether there is a written loan agreement or other proof, and whether the money was really a loan rather than a gift. A lawyer can confirm how those points apply to you.

What the estate trustee does

An estate trustee collects the estate assets, pays taxes and debts, and distributes the residue to those entitled. How a loan owed to the deceased fits into that work depends on the will, the paperwork and the facts, so it is worth confirming with a lawyer.

Trustees also have personal risk. Someone who distributes estate property without a CRA clearance certificate is personally liable for unpaid amounts, up to the value of the assets distributed. A court may relieve a trustee from personal liability for a breach of trust if the trustee acted honestly and reasonably and ought fairly to be excused.

That means a trustee is likely to want a clear record of what each beneficiary owes and what each beneficiary is paid.

Evidence that matters

Disagreements over family loans often turn on proof. Useful items include:

• A signed note, loan agreement or email setting out the terms.
• Bank records or e-transfers showing the money moved.
• Any repayments you made, with dates.
• Messages or letters in which the deceased described the money as a loan or as a gift.
• Any statement in the will or a later document about debts owed by beneficiaries.

If you cannot find documents, say so clearly and explain what you remember. Do not guess at figures.

Assets that may not pass through the estate

Some assets go directly to a named person and do not form part of the estate. When a life insurance beneficiary is designated, the insurance money does not form part of the insured's estate and is not subject to the claims of the insured's creditors. Assets with a beneficiary designation, jointly owned assets that pass automatically to the other owner, and registered plans with a beneficiary designation are excluded from the value used for Estate Administration Tax.

By contrast, a designation in favour of the insured's heirs, next of kin or estate is treated as a designation of the personal representative, so the money goes through the estate. Whether an estate can reach a direct payment to you to cover a debt is a question for a lawyer.

What to do next

• Gather every document and message about the loan before you speak with the trustee.
• Ask the trustee in writing what the estate believes you owe and how it was calculated.
• Do not agree to a deduction or sign a release until you understand the effect.
• If the trustee holds back part of your share, ask what is being held and why.
• Speak with a lawyer if you disagree about whether it was a loan or a gift, or about the amount.

If a share cannot be paid because a beneficiary cannot be found, trust money held by trustees may be paid into court by order of the court, and it is then subject to the court's order. That is a separate situation, but it shows the court can become involved when things are not straightforward.

Frequently asked questions