What Is an Insolvent Estate and What Happens in BC?

If you are an executor and the bills seem to add up to more than the estate holds, you may be facing an insolvent estate. It is a stressful position, but the law gives a path, and some early mistakes can be avoided.

This article explains what insolvent means, what an executor should and should not do, how a shortfall is shared and what beneficiaries can expect in British Columbia. Because the details turn on the facts, speak with a lawyer before making major decisions.

This article covers the law of British Columbia.

What insolvent means

The Bankruptcy and Insolvency Act defines an insolvent person as someone who is not bankrupt, who resides, carries on business or has property in Canada, and whose provable liabilities amount to one thousand dollars. They must also meet one of three tests: unable to meet obligations as they generally become due, has ceased paying current obligations in the ordinary course, or property that is not, at a fair valuation, enough to pay all obligations due and accruing due.

For an estate, this means asking whether the estate can meet its obligations as they come due, and whether its property, at a fair valuation, is enough to pay them. The estate is the property of the person who died, so the question is whether that property can cover what is owed.

What an executor should do

An applicant for an estate grant must make a diligent search for the deceased's property and liabilities and make the required disclosures. A personal representative must administer the estate and account to beneficiaries and creditors, and must settle debts, including taxes owed to the CRA, before distributing to beneficiaries.

If the estate is insolvent, an executor or administrator may, with the leave of the court, make an assignment of all the insolvent person's property for the general benefit of creditors, which takes effect when filed with the official receiver. If a bankruptcy application has already been filed against a debtor who then dies, the proceedings continue as if the debtor were alive, unless the court orders otherwise. What a creditor can do about an estate beyond that depends on the facts, so it is worth confirming with a lawyer.

• Gather statements for every account, loan, credit card and tax filing.
• List assets and debts separately and note which debts are secured.
• Consider publishing a notice to creditors in the Gazette, with a claim period of at least 30 days from publication.
• Ask a lawyer or accountant whether you need a CRA clearance certificate before distributing; the request is made on Form TX19, and distributing without one while tax is owing can make a representative personally liable up to the value of the assets distributed.
• Get legal advice before paying any one creditor in full.

What an executor should avoid

• Distributing to beneficiaries early. Distribution within 210 days after the grant needs a court order, or the consent of all beneficiaries and all persons who may bring a wills variation claim.
• Distributing without a CRA clearance certificate while tax is owing, which makes the representative personally liable up to the value of the assets distributed.
• Ignoring claims. A notice to creditors protects the representative from claims not presented in time, but does not stop a creditor pursuing those who received estate assets.

A representative is liable only to the extent of the assets belonging to the estate, subject to the exceptions in the Act. Personal liability mostly arises from the representative's own acts, such as distributing improperly, rather than from the debts themselves. A representative who renounces and has not intermeddled is not liable under that provision.

How a shortfall is shared and what beneficiaries receive

In a bankruptcy, creditors are paid in the order set by the Bankruptcy and Insolvency Act, subject to the rights of secured creditors. Reasonable funeral and testamentary expenses come first, then costs of administration, including the trustee's fees and legal costs, then the levy and unpaid wages. Later paragraphs cover municipal taxes, landlord arrears and certain Crown claims.

Where the estate is short, WESA s. 50 sets the order in which gifts are reduced, subject to a contrary intention in the will.

If land was charged with payment of debts or pecuniary gifts, that land is primarily liable for them. Land and personal property are reduced together. In many insolvent estates, beneficiaries may receive little or nothing.

Some assets sit outside the estate. A benefit paid to a valid designated beneficiary under a WESA Part 5 benefit plan, such as an RRSP, does not form part of the estate and is not subject to creditors' claims. If the estate itself is the beneficiary, or no designation takes effect, the benefit is part of the estate and available to creditors.

What to do next

• Pause any distributions and any large payments to individual creditors.
• Collect the documents that show assets, debts and any beneficiary designations.
• Speak with a lawyer, and possibly an accountant, about whether to make an assignment and how the ranking applies.
• Keep a clear written record of every decision you make as executor.
• Tell beneficiaries honestly that the estate may not cover everything.

Frequently asked questions