Managing estate debts and liabilities: a guide for executors and administrators

Everyone knows the old adage that goes, “You can’t take it with you when you go”, meaning that, when you die, you leave behind all your worldly wealth and goods. This is great for their descendants. However, the same is true for the debts owed by the person who has died – known as the deceased – which are not extinguished by the death.

Instead, the debts of a deceased person are considered as liabilities of the estate. The estate means the aggregate assets and wealth that the deceased possessed while they were alive.

The duties of the personal representatives

The responsibility for the estate of the deceased falls to the personal representatives. However, the personal representatives are not personally liable for these debts. The debts must be settled from the estate.

The deceased’s estate may consist of cash, bank accounts, real property – such as the deceased’s home—shares, savings and valuable assets such as jewellery, works of art or antiques. Additionally, any debts owed to the deceased are also counted as assets of the estate.

If the deceased left a valid Will, then the personal representatives are known as the executors and if the deceased died without a valid Will, then they are known as the administrators.

The job of the personal representatives is to collect together all of the deceased’s important documents, ascertain what assets the deceased held and assign values to all of them. For things like bank accounts, this is easy but for assets such as real property or works of art, it may be necessary for the personal representatives to engage the services of a professional valuer.

The deceased’s debts

In addition to all of the above, the personal representatives must also gather information about any debts that the deceased owed at their death. This information should include the identity of the creditors, the amount owed and any interest rate applicable.

The personal representatives must then aggregate all the debts and estate liabilities and deduct the final figure from the value of all the assets to arrive at a value for the net estate. The value of the net estate is used to calculate if any tax – known as Inheritance Tax – is due and, if it is, then it must be paid in advance of applying for any grant of probate or grant of letters of administration.

Once the tax – if any is due – has been paid the personal representatives must apply to the court for the grant. This is an order that authorises the personal representatives to deal with the estate and sell or collect any assets.

Settling the debts of the deceased takes precedence over the distribution of the estate. They must do this before they make any distributions to the beneficiaries.

Once all the debts have been paid in full, including any interest due, the remaining assets can be distributed to the beneficiaries. If it turns out that the total amount of the debts is greater than the total sum of all the assets, then the personal representatives must still pay all the debts, or a pro-rata proportion of them. However, neither the personal representatives nor the beneficiaries will be liable for any part of any debts or part of any debts which exceed assets.

Joint debts and secured debts

If the deceased had any joint debts, that is, for example, a loan which they took out together with another person, then these are generally not payable by the estate. Instead, the surviving joint debtor is bound to pay the whole debt themselves.

If there are any secured debts, i.e., a mortgage on a property, then the picture is a little more complicated. If the property was held by the deceased and another person as joint tenants, then the survivor inherits the whole of the property automatically and outside the operation of any will or intestacy but they also inherit all the liability to repay the mortgage.

If the deceased and the other co-owner held the property as tenants-in-common, then the deceased is deemed to have owned their own distinct share of the property which will devolve through the estate as an asset and any concomitant share of the mortgage will be considered as a debt of the estate.

Unknown creditors

It sometimes happens that the personal representatives suspect that there may be other debts of the estate but they don’t have details of the sum owed or to whom it is owed. In cases like this, the personal representatives will need to place an advertisement in a newspaper which is circulated in the area in which the deceased lived prior to death. If nobody responds, then the personal representatives have fulfilled their legal duty and they are free to distribute the estate. However, if they do not take this step, they risk being deemed personally liable for the unknown debt if any creditor comes to light later.

Administering an estate can often throw up legal difficulties and complex situations which require professional assistance. The personal representatives must be careful to avoid any claims of negligence or personal liability. It is therefore advisable for them to consult an experienced probate solicitor who can ensure that the personal representatives don’t accidentally step on any ‘landmines’.

For further information and trusted legal advice regarding probate, get in touch with us at Carlsons Solicitors.