- Debts are not automatically extinguished on death.
- Special rules apply to the administration of insolvent estates.
- Beware of bankrupt beneficiaries.
Death is certain but debt is not. Occasionally, these worlds collide leaving astronomical problems behind. This article looks at some of the ways insolvency and bankruptcy can affect administration of a deceased estate and the considerations for practitioners when advising testators and executors about estate administration.
It is the duty of the legal personal representative (‘LPR’) to discharge the debts and liabilities of the estate with due diligence (In Re Tankard; Tankard v Midland Bank Executor and Trustee Co Ltd (1942) Ch 69).
Where an estate is solvent, the LPR will ordinarily apply assets to satisfy the estate liabilities in the prescribed statutory order before making distributions to the beneficiaries (Probate and Administration Act 1898 (NSW), s 46C(2) and Part 2 of the Third Schedule). Where the estate is insolvent, different considerations and rules will apply however funeral, testamentary and administration expenses have priority (Probate and Administration Act,
s 46C(1) and Part 1 of the Third Schedule).
NSW succession legislation defines ‘insolvent’ as ‘insufficient for the payment in full of the debts and liabilities of the deceased’ (Probate and Administration Act, s 46C(3)). Bankruptcy legislation defines ‘insolvent’ as the inability to ‘pay all the person’s debts, as and when they become due and payable’ (Bankruptcy Act 1996 (Cth), ss 5(2) and 5(3)).