2 March 2021

Dealing with estate debts

By Anna French, Chartered Legal Executive.

If you are an executor of an estate, your duties involve not only dealing with the assets of the deceased, but also any debts that have been left behind. Any estate may have debts, even if the deceased was wealthy – it is reported that Michael Jackson died with around $500 million worth of debt. It is the duty of the executors to make sure debts are repaid.

Impact of debts on beneficiaries

Naturally, if an estate includes debts, this will reduce the amount that is available for distribution to the beneficiaries. If the estate is solvent, there will be sufficient funds to pay all debts, but the amount the beneficiaries receive will be reduced. If the estate is insolvent and the debts outweigh the assets, then the beneficiaries will not receive anything. As an executor you should keep the beneficiaries informed and manage their expectations about what they will inherit.

For a solvent estate

If you are dealing with a solvent estate, you should ensure that any debts are repaid quickly to reduce the interest the estate needs to pay. Once estate debts have been cleared, you will need to think about the beneficiaries. A legal procedure called abatement applies wherever assets are insufficient to pay all the legacies in full. If this is the case, the residuary beneficiaries will not receive anything, as the payment of legacies takes priority over the residue of the estate.

A residuary beneficiary is a beneficiary who has been left a percentage of what’s left over in the estate after all legacies (specific gifts and sums of money to named individuals) have been distributed and all debts and expenses have been settled. For example, you might leave £10,000 to your niece and an antique vase to your best friend (legacies) and leave your residuary estate, which could include your property, to your partner.

An insolvent estate

If an estate is insolvent, the available assets are insufficient to pay all the debts of the deceased. As executor, you must obtain full details of all those debts. You should also consider placing Statutory Notices to Creditors in a local newspaper and the London Gazette. This would provide protection if any further unknown creditors come forward in the future.

When dealing with an insolvent estate, you need to follow a strict order for paying debts. This order is set out in law and it is important that you understand the difference between the types of debt as well as the order itself.

Personal debt cannot normally be inherited, providing the debt was incurred in the sole name of the deceased. But there are exceptions, such as if the debt was guaranteed by a third party or if the deceased gifted money close to their death which could be seen as an attempt to avoid payment to creditors from the estate.

Consulting a solicitor

Though it may seem beneficial to minimise costs by dealing with the administration yourself, instructing a solicitor ensures that debts are dealt with correctly and offers reassurance that you will not be held personally liable if mistakes are made.

If you are responsible for administering an estate and would like some advice, call: 01328 863231 and ask to speak to someone in our private client department.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.