Insolvent Estates in Ontario: What an Executor Must Do

An estate is insolvent when the debts are larger than the assets. For an executor, that is stressful: beneficiaries may expect an inheritance, creditors want payment, and you may worry about being personally on the hook.

This article covers the general duties and protections that apply to an Ontario estate trustee. How debts are ranked and whether a formal insolvency process fits are questions for a lawyer or licensed insolvency professional.

Know your role before you act

A person named as estate trustee in a will does not have to act. If an executor renounces probate, their rights as executor wholly cease, and administration proceeds as if they had never been appointed. If you suspect the estate is insolvent, think carefully before taking steps that amount to acting.

An executor who has already started acting is in a different position. The Trustee Act's out-of-court retirement procedure does not apply to executors or administrators, and an estate trustee who wants to step down after acting generally needs a court order, for example under s. 5 or s. 37.

Core duties still apply

Your duties include finding the will, winding up the deceased's affairs, paying taxes, bills and other debts, and distributing what remains to those entitled. In an insolvent estate there may be nothing left to distribute, so beneficiaries should not be paid ahead of debts.

• Keep accurate records of the assets and transactions in the estate.
• Make sure the deceased's tax returns are filed and any balance owing is paid before distributing.
• Apply for a clearance certificate, as needed, before distributing any assets.
• Use the care, skill, diligence and judgment of a prudent investor when investing estate property.

A legal representative who distributes property without a clearance certificate is personally liable for unpaid tax, up to the value of the assets distributed.

Paying expenses and your own compensation

A trustee who believes an expense is properly incurred in carrying out the trust may pay it directly from trust property, or pay it personally and recover the same amount from trust property. The Superior Court of Justice may later disallow a payment or reimbursement if it finds the expense was not properly incurred. Keep receipts and a clear reason for each cost.

An estate trustee is entitled to a fair and reasonable allowance for the care, pains, trouble and time spent on the estate, as allowed by a judge of the Superior Court of Justice. Compensation may be taken before passing accounts only with the agreement of all interested persons who are sui juris, with court approval, or where the will provides for it. In an insolvent estate, taking compensation early without approval is risky, because the court can order the difference repaid if it later approves less.

Using the court to protect yourself

You do not have to guess. Any person who appears to have a financial interest in an estate may apply to court for directions, and the court may set the issues to be decided. Co-executors who disagree can also apply for the court's opinion, advice or direction, and a trustee who follows it is treated as having discharged their duty, unless there was fraud, wilful concealment or misrepresentation.

Passing your accounts gives a formal record of what you did. The estate trustee files the accounts verified by affidavit (Form 74.43), a copy of the certificate of appointment, and any latest judgment on a passing of accounts. Even if you are acting honestly, the court may relieve you from personal liability for a breach of trust only if you acted honestly and reasonably and ought fairly to be excused.

What to do next

• Stop distributions and list all assets and debts.
• Keep careful records and receipts for every payment.
• Deal with tax returns and consider a clearance certificate before any distribution.
• Speak with a lawyer about how debts are ranked and whether a formal insolvency process suits the estate.
• Ask the court for directions if there is real doubt about what to do.
• If you do not want to continue, get advice on stepping down before you act further.

Frequently asked questions