DEBT OWED BY BENEFICIARY


One question which executors (or estate administrators) find quite challenging is: What action can be taken concerning a debt owed to the estate by a beneficiary of the estate? We have provided advice to executors and administrator on the procedure to be taken in such cases. This is a difficult problem where the beneficiary does not have the funds to pay the debt before the assets of the estate may be distributed.

A recent case concerned a loan which had been obtained by the deceased and his de facto spouse (“W”). The bank was given a mortgage of the residence solely owned by the deceased to secure the loan. It had been agreed that the bank could, if necessary, proceed to recover the loan from either the deceased or W or both of them.

The deceased died without making a Will. W was not able to repay the loan after the death. As a de facto spouse, W was entitled to receive an amount exceeding $350,000 from the estate. The remainder was to be distributed to W and the deceased’s two sons from an earlier marriage. The residence needed to be sold to repay the loan before any distributions could be made to W or the sons of the deceased.

We advised the administrator of the principle to be applied in these circumstances: A person who owes money to an estate, or who is bound to make a contribution to it, cannot claim her or his allocated share without first making the contribution to the estate. In the process, nothing is retained by the administrator and nothing is set-off. The contributor is paid by holding “in his own hands a part of” the estate, which, if paid, “he would receive back”.

Please contact our consultant Jeffrey Johnson if you would like further information on this interesting case or for advice concerning a question arising during estate administration.

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