Dealing with Debts as an Executor

Do your debts die with you?

It is a common misconception that a person’s debts die with them. After you die, your debts become the responsibility of your estate. If you are an executor of an estate, you may need to deal with debts that have been left behind. Any outstanding debts owed by the deceased at the time of death, such as credit card bills or loans, must be taken into account when valuing their estate. For debts owed jointly, including mortgages or joint loans, the deceased’s share of the outstanding amount must be taken into account.

Dying with significant debt is more common than people think. According to Age UK, one in 50 people in their 70s has problem debts. Any estate may have debts to be considered, even if the deceased was wealthy, for example, it is reported that Michael Jackson accumulated around $500 million worth of debt before he died due to his lavish spending on maintaining his Neverland estate as well as poor money management and legal expenses.

How to manage beneficiaries’ expectations

The executor’s role is to locate all assets, pay taxes and debts, and distribute the remaining money, possessions and property to beneficiaries per the will’s instructions.

Of course, if an estate has significant debts, there will be less to be distributed to the beneficiaries. This means beneficiaries could receive less than they expected or nothing at all.

If the estate is insolvent and the debts are greater than the assets, then beneficiaries won’t receive any share of the estate. As an executor, it is your duty to the beneficiaries to manage their expectations by being upfront with them throughout the administration of the estate, which may mean having difficult conversations.

Paying debts and outstanding expenses

When dealing with a solvent estate, debts should be repaid as soon as possible to reduce the interest the estate needs to pay. If interest has to be paid due to unnecessary delays, you may need to account for it, as the beneficiaries will receive less as a result.

In order to deal with debts efficiently, contact creditors as soon as possible. In many cases, by the time an executor is in a position to make payment, creditors could have been chasing the money they are owed for many months and possibly even instructed debt collectors. Creditors are more likely to respond leniently if they have received regular and upfront communication from executors. It may also be possible to request that creditors freeze any interest payments whilst the estate is being administered.

Once estate debts have been paid, you will need to work out how the remaining sums should be distributed. A complex legal procedure called abatement applies wherever assets are insufficient to pay all of the legacies fully. As a result, the gifts in the Will are reduced in a certain order depending on the nature of the estate.

This must be followed if the will specifies the order in which legacies should be paid. Otherwise, debts are considered to be paid first from the residue, then from pecuniary (monetary) legacies and finally from specific legacies. If the estate has significant debts, the residuary beneficiaries could end up receiving very little or even nothing. It is unlikely that this would have been the testator’s intention, which can make for a difficult conversation.

If the estate has debts that mean the beneficiaries may receive very little or nothing, it is open to beneficiaries to vary the terms of a will. A probate solicitor can help an executor to facilitate these negotiations.

Administering an insolvent estate

When a deceased person’s debts are greater than the total value of assets, and therefore the money is owed to their creditors, the rules of bankruptcy apply in that groups of creditors must be paid in a specific order of priority. As executor, you have duties in respect of the creditors. You will need to liaise with creditors and debt collection agencies to negotiate the terms of repayment. You will also need to notify the beneficiaries that they will not receive any funds. You will be personally liable if money is paid to a creditor in the wrong order, on purpose or by accident. Instructing a solicitor to help with the process ensures that debts are paid in the right order and will ensure that you are protected.

What to do if you suspect foul play

Some individuals see the death of a friend or relative as an opportunity to take advantage of the person and their beneficiaries by committing fraud and helping themselves to personal possessions and money.

If an estate appears suspicious, for example, if the person that died was known for being careful with money but suddenly started spending money on credit cards towards the end of their life, you should consider whether the deceased may have been the victim of fraud. If your concerns are proven, as executor, you should seek reimbursement to the estate from the fraudster or via an available insurance policy or compensation scheme.

As an executor, it is important to be on your guard when it comes to fraud, particularly as relatives may be trying to cope with their loss, so did not notice anything untoward happening since the death.

Should I speak to a solicitor?

While it may seem like dealing with the administration of an estate alone will save money and leave more to the beneficiaries, professional advisers can ensure that debts are properly dealt with and actually ensure that more money goes to the beneficiaries.