Order of Paying Debts in an Insolvent Estate in Manitoba

An estate is insolvent when the debts are more than the assets. It is a stressful position for an executor, because paying one creditor in full can mean another gets little or nothing.

This article covers the points that generally matter in Manitoba: what comes before beneficiaries, how funeral costs are treated, the role of tax and secured creditors, and when to bring in a bankruptcy trustee. The exact ranking of creditors is a legal question, so confirm it with a lawyer before you pay.

This article covers the law of Manitoba.

What an insolvent estate means for you

Add up what the deceased owned and what they owed. If the debts are larger, beneficiaries may receive little or nothing, because estate assets must cover debts before will beneficiaries inherit. Paying debts is one of the administrator's tasks.

You are not expected to pay debts from your own pocket, but you can create personal risk if you pay out in the wrong order or distribute too early. That is why a careful list of assets and debts comes first.

What can and cannot be said about the order

The full ranking among different kinds of creditors turns on the type of debt, whether it is secured, and the estate's circumstances, so it should be confirmed with a lawyer. A few points are clear:

• Beneficiaries under a will come after debts.
• A surviving spouse's or common-law partner's equalization payment under The Family Property Act is a debt of the deceased, payable after other liabilities, and ranks ahead of gifts under the will.
• Mortgagees and unpaid vendors keep their remedies against the land.
• Creditors can follow estate proceeds into the hands of recipients, and the creditor notice protection does not apply to heirs, next of kin or legatees claiming as such.

Because the equalization payment is paid from the interests of beneficiaries other than the survivor in proportion to value unless the will says otherwise, a family property claim can reduce what others receive. Only the survivor can apply for it, within six months of the grant, though the court may extend that time in some cases.

Funeral and administration costs

Funeral and burial can be arranged by the executor, next of kin or a friend, and the estate pays. If the estate lacks money for a basic funeral, Employment and Income Assistance may be asked to pay, and as a last resort the sub-inspector of anatomy at the Medical Examiner's Office arranges burial when no one else is available.

How funeral and administration costs rank against other creditors in a shortfall is a point to confirm with a lawyer before you pay. Do not commit your own money to arrangements without checking whether the estate can repay you. Funeral and testamentary expenses are excluded from the family property equalization calculation, which can affect the numbers.

Tax debts and personal liability

The final return is due by April 30 of the following year for a death between January 1 and October 31, or within six months of the date of death for a death between November 1 and December 31. Filing is due June 15 where the deceased or their spouse or common-law partner ran a business and the death was between January 1 and December 15, though payment is not extended.

The CRA says the legal representative should obtain a clearance certificate before distributing, because distributing while tax is owing can make the representative personally liable up to the value of the assets distributed. Publishing the creditor notice under The Trustee Act helps with unknown claims, but it does not remove your duty to deal with debts you already know about.

When to involve a bankruptcy trustee, and next steps

Consider getting advice from a lawyer or a bankruptcy trustee when the debts clearly exceed the assets, when creditors are pressing for payment, or when you cannot tell which claims come first. A formal insolvency process can give structure to who is paid, and whether it suits your estate depends on the facts.

• List every asset with a realistic value, and every debt with the creditor's name and whether it is secured.
• Do not distribute anything to beneficiaries yet.
• Keep funeral and administration receipts.
• Check for a surviving spouse or common-law partner who may have a family property claim.
• Confirm the final return position with the CRA and the accountant.
• Speak with a lawyer about ranking, the creditor notice and whether to involve a bankruptcy trustee.

If no one is willing or able to act, the Public Guardian and Trustee describes itself as an administrator of last resort. It is not required to accept an appointment just because it has the power to.

Frequently asked questions