What happens if someone dies with their estate in the red?

On Behalf of | Apr 26, 2021 | Estate Planning

Executing an estate is challenging, but you get the satisfaction of seeing assets pass from one generation to the next. If you are one of those receiving assets, so much the better. Yet, what happens if you discover the person who died had nothing left to give?

An insolvent estate is one where the debts outweigh the assets. Sometimes you may suspect this, such as your elderly aunty living off tins of tuna and struggling to meet her mortgage. At other times it may come as a shock. Your “rich” uncle may have lived the high life, throwing parties on his yacht and showering his girlfriends with presents.

As executor of the estate, you need to notify creditors and publish a notice of death so that other unknown creditors have a chance to come forward. You need to pay funeral expenses, outstanding taxes, final bills and estate administration costs first. You must then use what money remains to settle debts. You may have to sell assets to pay debts. The court will tell you in what order you must pay creditors. Some creditors may not get paid, or at least not in full. Generally, the debts die with the deceased unless they are in a joint name with someone else.

If the estate is insolvent, does that mean beneficiaries get nothing?

If the estate is insolvent, people named as beneficiaries will not get any of the assets that pass through probate. However, the deceased may have kept specific assets out of probate.

There are several ways to avoid assets passing through probate to protect them from creditors. Those assets can reach the people intended, despite the estate being insolvent. These include trusts or pay on death bank accounts. It is best to get help when executing an estate to ensure you uncover the whole situation.