Estate administration carries with it many unexpected challenges and situations that may be beyond the scope or knowledge of the average estate trustee. As estate trustees have an ongoing fiduciary obligation to pay all estate debts in full, estate trustees who are handling insolvent or bankrupt estates must be extra cautious when administering the estate. It is wise to consult a professional before taking any steps in this regard.
An insolvent estate lacks sufficient assets to pay all of its debts in full whereas; a bankrupt estate has gone through the formal process of declaring bankruptcy under the Bankruptcy and Insolvency Act (the “BIA”).
The estate trustee must pay the creditors of the estate before the beneficiaries. To do otherwise opens the estate trustee to liability for paying the estate debts up to the amount paid out to the beneficiaries.
If the estate has declared bankruptcy, the estate trustee would be wise to consider section 136 of the BIA, which dictates the order in which the debts of the estate is paid. Regardless of whether the estate is insolvent or bankrupt, they are required to pay the reasonable funeral and testamentary expenses first.
Tax payments are typically given priority over unsecured creditors of an insolvent estate. Where there are any outstanding tax payments, it would be prudent for the estate trustee to contact the estate’s unsecured creditors and inform them that the estate has no money to pay all the debts in full and that they are planning on paying the estate taxes before paying other debts. This allows for the creditors of the estate to be aware of the state of affairs and raise any disagreements they may have with the estate trustee, if any.