Liabilities of the Estate
Once the executors or personal representatives have received money from the deceased’s estate as part of the probate work they should try to pay all of the debts of the estate before distributing any bequests. If you are certain that the estate is solvent and has ample debt cover you can distribute any specific bequests in the will of items such as jewellery. You can also pay the debts in any order but if there are any which are accruing interest you will probably want to settle these first.
If you took out a loan to pay the Inheritance Tax you should record the amount of interest paid. An executor is able to claim tax relief for up to one year’s interest payments on this loan.
Be sure to properly record all payments. If you pay by cheque there is no need to ask for a receipt, but do confirm that all cheques have been banked by checking your executor account statement. Get receipts for any payments made by cash, even to family members.
If the estate is insolvent, this is something you should have known about and prepared for at an early stage in the probate process. See the earlier section on Insolvent Estates. If a solicitor is not already involved, you may want to obtain some advice from one. In any case you must be extremely careful that you pay outstanding debts in strict priority:
- Secured Loans – normally a mortgage
- Funeral Expenses
- Executor’s expenses
- Wages to employees
- Unsecured creditors – ordinary banks loans, credit cards, utility bills etc.
- Interest on secured loans
- Informal loans (family & friends)
All debts in each category must be fully settled before any from the next category are paid. If there is not enough money to pay all creditors in a particular category then they must each be paid in proportion to the amount owed to them.
Contrary to popular belief gambling debts have been enforceable since 1 September 2007 providing they relate to gambling that is lawful in the UK.
If the estate has insufficient assets to pay all debts but some assets fall outside of the estate because they were owned as Joint Tenants then these assets are vulnerable and potentially may have to be sold to settle the debts. Take, for instance, the case of a widow who acquires sole ownership of the family home by survivorship. If there are debts which are unpaid the remaining creditors can jointly apply for an Insolvency Administration Order within five years of the death. This is very similar to a Bankruptcy Order and could mean that the home would have to be sold to pay the remaining debts.
The executor or administrator of an insolvent estate will often negotiate with the creditors to pay a proportion of the debts and write off the balance.