How to Administer an Insolvent Estate
When an estate appears to have more debts than assets, it’s understandable to wonder why anyone would take on the task of administering it.
While finalising the deceased’s affairs is an important reason, there are also several benefits to doing so.
Priorities of Estate Debt: Funeral & Legal Fees
The first advantage is that repayment of the debts is prioritised. What this means is that expenses incurred for the funeral and those expenses, such as legal fees in administering the estate, are paid from the estate before other creditors. So rather than family members footing the bill, the funeral and legal costs can still be paid by the estate if there are sufficient assets. At the very least, if there are some assets, a contribution towards estate expenses can be sourced.
Debts Incurred in the Administration of the Estate: Administrator’s Right to Be Indemnified
A personal representative or executor of an estate will incur liabilities in the administration of an estate. Whilst personally liable for those, there is a right to be indemnified for liabilities appropriately incurred from the assets of the estate. This means that, given the prioritisation of debts, any debts incurred in the administration of an estate, such as fees to clean the yard of a deceased’s property, will be paid before other creditors.
Assets Protected From Insolvency: Life Assurance
Another advantage of administering an insolvent estate is that protected assets such as life insurance are expected to flow to the estate. This often occurs when the deceased is without dependents. Generally, life insurance cannot be used to pay debts and liabilities of a deceased estate, even if the estate is insolvent.
These protections do not extend to funeral expenses or testamentary expenses, which can be paid out of life insurance proceeds.
Despite insolvency, administering an estate can provide a financial benefit to the beneficiaries that otherwise might have remained undistributed and distributed to an unclaimed funds government organisation. As a rudimentary example, a deceased may have a credit card debt of $40,000 and life insurance to the estate of $35,000. The $35,000 can be distributed to the beneficiaries of the Will without paying the credit card debt.
Avoiding a Breach of Executor Duties
If you have been nominated as an executor, administering the estate also formally ensures that creditors are notified and debts are dealt with according to law. This is important as in some cases executors can become personally liable if they act improperly.
Probate & Letters of Administration Court Fees Can Be Avoided
Where a grant is not needed, it is possible to avoid Probate or Letters of Administration Court fees and still be compliant with your duties as an executor.
In South Australia, an executor can lodge a Section 86 – Filing of declaration that the estate is insufficient to pay debts and liabilities under the Succession Act 2023. This procedure allows the court to be notified of the financial position of the estate without the fees or formality of applying for a grant of representation.
Calling in Assets That Otherwise Would Not Be Made Available to the Estate
Administering a deceased estate under Part XI of the Bankruptcy Act enables a trustee to recover property that may not otherwise be available if such property was transferred for less than market value, or preferential payments were made to one or more creditors before the start of the administration.
Renunciation of Probate
Of course, if you are an executor, remember that legal fees can still be taken from the estate. If it all still seems too hard or too much responsibility for you, it is important to remember that you can renounce your position as an executor, meaning you are under no obligation to act for the estate. It is, however, important that you do so before you have “intermeddled” with the estate.
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As can be seen from the above, there are many advantages and reasons to administer an insolvent estate, but overall, it ensures the deceased’s assets are distributed correctly. It also means those who are left behind can rest assured the estate has been dealt with correctly, and creditors are only provided with the funds they have a legal right to.
For more information, contact Bambrick Legal today. We offer a free, no-obligation 30-min consultation for all enquiries.
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Related Blog – Distribution of an Estate to Beneficiaries in South Australia: Key Steps
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