What Happens If a British Columbia Estate Cannot Pay All Debts?

Many executors expect an inheritance to flow to beneficiaries. Then the statements arrive and it looks as if the debts are larger than the assets.

This article explains what generally happens in British Columbia when an estate cannot pay everything, who is paid ahead of whom, and what an executor can do to avoid taking on personal risk.

This article covers the law of British Columbia.

Start by confirming the full picture

Someone applying for an estate grant must make a diligent search for the deceased's property and liabilities and make the required disclosures. The executor must also settle unpaid debts, including taxes owed to the CRA, before distributing the remaining assets to beneficiaries.

A representative is liable for the deceased's wrongful acts or breaches only to the extent of the estate's assets, subject to the exceptions in WESA s. 149. That is why an accurate list of assets and debts matters. Some assets may not be in the estate at all. A benefit under a Part 5 plan, such as an RRSP, with a valid designated beneficiary does not form part of the estate and is not subject to the creditors' claims. If the estate is the beneficiary, or no designation takes effect, it is part of the estate.

How gifts are reduced when assets fall short

WESA s. 50 applies when an estate cannot satisfy all debts and gifts. It is subject to a contrary intention in the will, and land and personal property are reduced together. Unless the will says otherwise, assets are reduced in this order:

• First, property specifically charged with a debt or left on trust to pay a debt.
• Second, property distributed as an intestate estate and residue.
• Third, general, demonstrative and pecuniary legacies.
• Fourth, specific legacies.
• Fifth, property over which the will-maker had a general power of appointment.

In practice, the residue of the estate is usually reduced before a gift of a specific item. There is one exception: if the will-maker charged land with payment of debts or pecuniary gifts, that land is primarily liable for them. The order is also subject to s. 50(3).

Gifts of property with a loan secured on it that financed it generally pass with the debt, and the beneficiary's interest is primarily liable for that secured debt. A general direction in the will to pay debts does not by itself override this. Loan terms vary by lender, so confirm the details of any mortgage or car loan.

Formal insolvency options

The Bankruptcy and Insolvency Act (BIA) describes an insolvent person as one whose provable liabilities amount to one thousand dollars and who meets one of three tests, such as being unable to meet obligations as they generally become due. An insolvent person or, if deceased, the executor or administrator of their estate, with the leave of the court, may make an assignment of all the insolvent person's property for the general benefit of creditors. The assignment takes effect when filed with the official receiver.

If a bankruptcy application had already been filed against a debtor who then dies, the proceedings continue as if the debtor were alive, unless the court otherwise orders. Whether a creditor can start a bankruptcy after the death is a question for a lawyer.

In a bankruptcy, payment is made subject to the rights of secured creditors in a set order. Reasonable funeral and testamentary expenses of a deceased bankrupt come first, then costs of administration including the trustee's fees and legal costs, the levy under s. 147 and unpaid wages. Later paragraphs cover municipal taxes, landlord arrears and certain Crown claims. The Crown rules have changed over time, so confirm the current ranking with a lawyer.

Protecting yourself as executor

• Do not distribute the estate within 210 days after the grant, except by court order or with the consent of all beneficiaries and all persons who may bring a wills variation claim.
• Consider a notice to creditors in the Gazette, with a claim period of at least 30 days. After it ends, you are not liable for claims not presented in time. Creditors may still pursue those who received assets.
• Dispute a claim in writing if it is doubtful. If the claim is already due, the claimant must then start a proceeding within 180 days after notice is given, or the claim is forever barred. That bar does not apply to beneficial-interest claims or wills variation claims. How this applies to a claim that is not yet due depends on the facts, so confirm it with a lawyer.
• Ask about a CRA clearance certificate, which is requested on Form TX19, before distributing. A legal representative who distributes property without a certificate while tax is owing is personally liable for the unpaid amounts, up to the value of the assets distributed. Once a certificate is issued, liability for unpaid tax shifts to the estate or the people who received the assets.

A wills variation claim must be commenced within 180 days from the date the grant is issued in British Columbia. It sits outside the creditor timeline, so it can affect how much is left even when creditors are dealt with.

What to do next

• Make a complete list of assets and debts, with dates and amounts.
• Hold off on paying beneficiaries and on large payments to any one creditor.
• Keep funeral and administration receipts and records of every payment.
• Check which assets pass outside the estate, such as plans with a designated beneficiary.
• Speak with a lawyer about s. 50 reductions, a notice to creditors and an assignment before you pay anyone.

Frequently asked questions