At our law firm, we focus exclusively in the areas of Wills, Estates and Trusts. As a result, I have the opportunity to work with a lot of individuals and couples on their estate planning at our office in the Kanata-Stittsville area of Ottawa. Below are some of the questions that I have been asked by estate planning clients as well as estate trustees or executors and beneficiaries.
How do the deceased’s debts affect the beneficiaries? When are the debts paid?
After a person dies, the deceased’s debts are paid from the estate’s assets before any distributions are made to beneficiaries. Debts are usually paid from the collective estate assets as a whole rather than from any particular beneficiary’s share.
Payment of the deceased’s debts will, of course, reduce the amount available to be distributed among all of the beneficiaries. Some debts, such as a mortgage, might be mentioned in the Will. For example, the estate trustee or executor might be directed to pay off the mortgage using estate funds and then transfer the real property to a particular beneficiary mortgage-free. Or the mortgaged real property might be directed to be sold, the mortgage paid off and the balance of the sale proceeds transferred to a beneficiary.
If the estate does not have enough money to pay all of the deceased’s debts, it is very important that the estate trustee or executor get legal advice quickly to ensure he or she handles things properly. Generally, if the estate is administered properly, an estate trustee or executor is not personally liable for the deceased’s debts.
What if the deceased loaned money before passing away and had not been paid back?
If the deceased was owed money at the date of death, for example, if a deceased parent had loaned money to a daughter, the loan is an asset of the estate unless there are specific instructions that the loan was to be forgiven on the death of the parent. If the debt was not forgiven, the loan would be deducted from the daughter’s share of the estate before she receives her share.
Should I leave particular assets to particular beneficiaries?
For many reasons, it is usually not a good idea to direct certain assets to specific beneficiaries. A major reason for avoiding an asset-by-asset distribution is that all assets are not taxed in the same manner.
For example, if a person has three children and names one of them as the beneficiary of an RRSP, the RRSP is fully paid to the named child but the deceased’s estate takes the tax hit. Because no tax is paid on funds deposited into an RRSP, at death the RRSP proceeds are considered taxable income in the year of death which can result in a very large tax bill unless the RRSP is left to a surviving spouse. If the other two children are sharing the balance of the estate, they will be footing the tax bill on the RRSP which can result in an unequal and unfair division of the estate among the three children.
Another reason to avoid asset-by-asset distribution is that the type and value of a person’s assets can change significantly over time. A particular asset may no longer exist at the date of death. Without careful Will drafting, the beneficiary who was supposed to receive a particular asset might end up with nothing.
There are some exceptions. Clients may choose to leave a particular real property, such as the family cottage, to one of their children. Perhaps other children live too far away or have no interest in the costs of cottage upkeep and maintenance. In that situation, a careful review of tax implications is essential because the cottage could be subject to capital gains tax on the death of the last parent.
Do you have questions about your estate planning? Don’t delay. Call 613.836.9915 or email [email protected] to make an appointment to meet with me. We will review your unique situation and discuss your estate planning options to help you decide how to best provide for your loved ones.
Blog posts pre-dated December 1, 2015 were originally published under Neff Law Office Professional Corporation.
