Which Gifts Are Used First to Pay Estate Debts in Alberta?

If you are a beneficiary, a common worry is whether paying the estate's debts will shrink your gift, or someone else's. The answer depends on which assets the debts are paid from, and Alberta law has a default order for that.

This article explains that order, how a will can change it, and how mortgages are treated separately. It deals with estates that can pay their debts. It does not cover what happens when an estate cannot pay everything, which is a different question worth taking to a lawyer.

This article covers the law of Alberta.

Why debts come out of the estate first

A personal representative has a duty under Alberta's Estate Administration Act to satisfy the debts and obligations of the estate. Government guidance says the same thing: a representative who administers an estate must satisfy its debts if the estate has funds to do so. The estate also pays burial and funeral expenses.

The representative must distribute the estate as soon as practicable and with the care, diligence and skill of a person of ordinary prudence. A representative is also subject to the liabilities and duties of a trustee, which is the source of personal liability for improper distribution. Once the notice-to-claimants steps have been followed, the representative may distribute having regard only to the claims they know about at that time. Even then, a claimant who was not notified can still pursue the person who received the property, so beneficiaries can lose what they received, up to its value, if a valid claim surfaces later.

Balances owing to the CRA are paid out of the estate's assets, and the CRA recommends paying them before the estate is distributed. These are among the debts that reduce what is left for beneficiaries.

The order in which estate assets are used

Section 28 of the Estate Administration Act sets the order for applying estate assets to funeral and administration expenses and unsecured debts. The order is:

Assets within the same class contribute proportionately. So if two people receive general gifts, both generally bear a share of the debt rather than one bearing it all.

In plain terms, the residue (what is left after the specific and general gifts) is generally used before a general gift, and a general gift before a specific gift. A specific gift, such as a named item, is generally reached later in the order.

When a will changes the order

The section 28 order applies unless a contrary intention is signified in the will. A will that clearly sets out which assets should bear the debts may change the result.

A general direction in the will to pay debts is not a contrary intention. Wording such as "my executor shall pay my just debts" therefore does not, on its own, rearrange the order. Whether other wording amounts to a contrary intention depends on the will, and a lawyer can read it and tell you.

Mortgaged property is treated separately

Section 29 deals with mortgages. Unless the will or another document shows otherwise, a mortgaged property interest is primarily liable for its own mortgage debt as between the people claiming through the deceased, and each part of the property bears its proportionate share. A general direction to pay debts does not shift the mortgage to other assets.

An express reference to the mortgage in a will or other document is a contrary intention, so a will can direct that the mortgage be paid from other assets. Section 29 also does not stop the mortgagee from pursuing other estate property.

• Someone who inherits a mortgaged house generally takes it along with its mortgage, unless the will expressly says otherwise.
• The section 29 rule deals with who bears the mortgage between beneficiaries and does not stop a lender from pursuing other estate property.
• A reverse mortgage is different: the death of the last borrower triggers repayment, and the time needed to settle an estate may be longer than the lender's repayment window.

What to do next

If you are a beneficiary, you cannot usually tell how debts will affect your gift without seeing the will and the estate's assets and debts. If you are the representative, you have personal exposure if you distribute improperly, so it is worth getting advice before you pay out gifts.

• Get a copy of the will and read how each gift is described: specific, general or residue.
• Ask the representative for a list of the estate's assets, debts and any mortgages.
• Check whether the will expressly mentions any mortgage.
• Ask whether CRA balances are outstanding, since they are paid from estate assets.
• Ask a lawyer before any gift is paid out if the numbers look tight.

Frequently asked questions