What to do when an estate owes more than it has

Losing a loved one is an emotional, overwhelming and turbulent time for everyone. This anxiety, coupled with the sudden responsibility to administer the estate of the deceased (if you have been appointed as the estate trustee) can be treacherous to navigate.

This can be particularly challenging when the liabilities of the estate are greater than the assets.

Duties of estate trustee in an insolvent estate

The duties and obligations of an estate trustee are multifold. The first and foremost responsibility of an estate trustee is to find, secure and review the will of the deceased if the deceased had one. Thereafter, the legally prescribed duties of an estate trustee are broadly to arrange the funeral, secure and appraise the assets of the deceased, apply for probate, (if required), pay taxes and other debts of the deceased, provide accounting to the beneficiaries and distribute the assets in the prescribed manner.

In situations when the liabilities of the estate exceed the assets, the estate would be considered an “insolvent estate.” The estate trustee should consider whether they would simply pay the debts, for example, if there are sufficient funds for these debts (but nothing leftover remaining) or if it would be more prudent to file for bankruptcy of the estate.

Filing for bankruptcy

 The Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (Act) stipulates that the trustee has to administer the estate and file for its bankruptcy. An insolvent estate is not automatically bankrupt, it must be formally declared bankrupt under the Act. This can be done so either by the creditors or the estate trustee.

The estate trustee would have to proceed with filing formal proceedings for bankruptcy of the estate. The court will then proceed with the bankruptcy proceedings under the Act, including appointing an official receiver.

Estate trustee absolved of duties

 Once a trustee in bankruptcy is appointed, the estate trustee would be absolved of all his/her responsibilities and liabilities towards the administration of the estate as this is now the responsibility of the trustee in bankruptcy. This would also ensure that the estate trustee is not held personally liable for any mishaps with the administration of the estate as they have essentially “passed on the baton” for administering the estate.

Notwithstanding the utmost care and efforts that may be put in by the estate trustee to administer the estate, certain unanticipated claims may arise. Therefore, putting the estate into bankruptcy may be practically and legally the most viable way to administer the estate.

Many estate trustees might not be aware of the depth of legal responsibilities that comes with the administration of an estate. An insolvent estate poses greater risks to an administer as debtors have complicated rankings regarding who should be getting paid first.



Kim Gale is an estate litigation lawyer and principal of Gale Law, an estate litigation firm in Toronto. She can be reached at 416-868-3263 or [email protected] She is the author and creator of the blog Law for Millennials –  The Complete Beginners Guide to Law and is co-founder of diversity and inclusion group NCA Network. Patak Mahajan is an internationally trained lawyer with over five years of experience in disputes resolution and litigation in India. She is registered with the Bar Council of India since 2016 and is currently an L.L.M. candidate at Osgoode Hall Law School, York University.

She is a summer student with Gale Law, outreach and events co-ordinator with the NCA Network and the L.L.M representative of Asian Law Students Association (ALSA) of Osgoode 2022-2023.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the author’s firm, its clients, The Lawyer’s Daily, LexisNexis Canada, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

The Family Cottage: How to Plan What Happens Next

The Family Cottage: How to Plan What Happens Next

For many families, a summer cottage has been their getaway home. It’s their break from the hustle and bustle of their lives and a breather from the mundane that life tends to be. It also becomes the place where families unite for vacations or breaks and therefore, holds immense emotional value.

The estate trustee must follow the terms of the will, or if no will, the laws of intestacy and have the legal and fiduciary duty to act in the best interest of the estate and maximize its value. Trustees must follow the terms of the trust. Family members usually have different ideas on how to utilize the property upon the owner’s death. Sometimes the cottage must sell.

When planning for their estate, owners of the cottage may wish to consider some of the following estate planning options.

Cottage trust

 Cottage owners may wish to consider setting up a cottage trust in their will or by an inter vivas trust (a trust set up while they are living).

The cottage trust set up in their will may state that the cottage will be held for the benefit of their children and grandchildren and cannot be sold for a certain period. The will may stipulate that at the end of the period of time, any of the remaining beneficiaries would be able to purchase the cottage with the remaining beneficiaries receiving the sale proceeds (ie. a buy-back mechanism).

If set up via an inter vivas trust, the trust instrument can appoint a trustee and transfer the cottage to the trustees. The trustees would hold the cottage in trust pursuant to the terms of the trust.

This is one way of avoiding conflicts amongst the parties as it allows the children to use the cottage for a certain period of time. However, trusts must be managed by a trustee (and their fees for managing the trust) and don’t forget the rule in Saunders v. Vautier [1841] C.C.S. NO. 14 which says that if all the beneficiaries of a trust are of the age of majority and sound mind (ie. sui juris) the trust may be terminated if all the beneficiaries wish for this to happen. We note that this rule stemming from the English case has become more complicated. Overall, the testator must use caution when considering setting up a cottage trust as it may have unintended consequences.

Right of first refusal

This clause can be used in a will or trust instrument to give an individual the option to purchase specific property from an estate or trust. It is most common for real estate, such as a cottage. This provides the testator with an opportunity to set up a mechanism for handling the distribution of the cottage by giving one child the first right of first refusal to buy the cottage.

Capital gains tax

It is likely that the cottage will not be considered the principal residence of the deceased. A cottage is considered a capital asset when it comes to taxation. Therefore, during the estate planning, the owner ought to consider the implications and applicability of the capital gains tax upon the transfer of the cottage to the proposed titleholder. If the cottage is held in joint tenancy, it passes through right of survivorship to the surviving spouse and there are no tax implications. However, on the death of the surviving spouse, the cottage must be first transferred to the estate. The estate trustee administers the cottage pursuant to the terms of the will, or if no will, the laws of intestacy.

Disposition of the cottage (transferring title from the estate to someone else), if it is not the deceased’s principal residence, would trigger capital gains tax. Half of the cottage capital gain would be taxable on the increase in value from when it was purchased to when it is sold to someone else.

Probate fee and property tax

 Like the capital gains tax, a probate fee (and some other property taxes) may be applicable. Real estate in Ontario is an asset subject to probate tax (which is 1.5 per cent of value of estate over $50,000). To avoid probate tax, families may wish to add their adult child as a joint tenant, but you must be cautious when doing this as there is a risk of the child taking the position that they own the cottage outright as it is an asset that passes outside the estate. However, there is a presumption that the child is holding it on a resulting trust for the benefit of the estate (see Pecore v. Pecore, 2007 sec 17. Also, see our articles: What is estate administration tax, parts one, and two for more information on probate tax, particularly part two which discusses joint ownership).

The cottage is a meaningful asset that forms part of the estate and there are many considerations for the testator who is planning their estate as well as to the beneficiaries inheriting the cottage. A recent issue of Maclean’s dubbed Ontario’s Muskoka region as “The Olde Faithful,” estimating the average recreational property price in 2022 to be $842,000! Careful consideration must be made when dealing with the cottage.