Have you been nominated as an executor or are the next of kin for someone who has died without a valid Will? Did you know that, during his or her lifetime, they had a significant amount of debt? Are you concerned whether there are enough assets to repay the debt?
Before you take any steps in the estate administration, it is important to understand the key parts to administering an insolvent estate. (In this blog, the role of the executor or administration is collectively referred to as “the legal personal representative”).
What is an insolvent estate?
A deceased estate is insolvent when there are insufficient assets to pay the liabilities of the estate.
In Queensland, an insolvent estate can be administered either under s s57 of the Succession Act 1981 (Qld) (“Succession Act”) or Part XI of the Bankruptcy Act 1966 (Cth) (“Bankruptcy Act”).
An insolvent estate will be administered under the Bankruptcy Act if there are debts of $10,000 or more (the current statutory minimum for petitioning bankruptcy) and the legal personal representative or a creditor seeks a sequestration order. In this case, the legal personal representative or the creditor can seek to have a trustee in bankruptcy appointed to administer the estate.
There are consequences for the legal personal representative failing to comply with the provisions of the Bankruptcy Act. For example, if the legal personal representative attends to payment or transfer of property of a deceased person after service of the petition for the sequestration order, he or she may be personally liable to the trustee in bankruptcy.
Further, it is an offence for the legal personal representative not to provide the Court and others with information regarding the personal affairs of the deceased and details of the estate administration.
Payment of debts in an insolvent estate
There are differences between administering an insolvent estate under the Bankruptcy Act or the Succession Act.
For example, under the Succession Act, the payment of funeral, testamentary and administration expenses take priority. Whereas, under the Bankruptcy Act, there are numerous other payments that are prioritised before the payment of estate expenses. A spouse must be careful of incurring debt for the deceased for estate expenses, as the trustee in bankruptcy will review and may reject them.
There are also provisions within the Bankruptcy Act to ‘claw back’ some transactions which occurred up to six months before the petition was presented. The Succession Act does not afford the legal personal representative the benefits in these provisions.
The Succession Act otherwise provides that the rules of bankruptcy apply with respect to the administration of insolvent estates.
Life insurance proceeds
If the assets of the deceased estate include life insurance proceeds, superannuation benefits and damages for personal injury, these are not liable to be applied or made available in payment of the deceased person’s debts. However, cases suggest that these assets may be applied towards debts arising out of the administration of the estate or debts personal to the legal personal representative.
If you are the legal personal representative of a deceased estate, then it is important to seek legal advice before taking any steps in the estate administration.
It is often recommended that the legal personal representative seeks an order for the administration of a deceased insolvent estate to the Federal Circuit Court or the Federal Court.
The legal personal representative should refrain from obtaining a Grant of Probate or Letters of Administration with/without the Will, as they may incur personal liability in circumstances where the deceased died with tax debts.
If you would like to speak with us about the administration of an insolvent or solvent estate, please contact Tony Crilly or Elizabeth Ulrick of our office on 07 3839 7555 or email us at firstname.lastname@example.org.