Insolvent and Bankrupt Estates
Administration of an insolvent estate raises a number of unique challenges that the estate trustee must maneuver. One particularly unique challenge is the determination of whether or not it would be beneficial to petition the estate into formal bankruptcy or to administer the estate as an insolvent testamentary estate.
Commonly, an estate that does not have sufficient assets to pay its liabilities is referred to as “insolvent” or “bankrupt” interchangeably. However, these two concepts are distinctly different. An estate that is bankrupt is one that has been assigned and declared formally bankrupt. An insolvent estate, on the other hand, is one that simply does not have enough funds, liquid or otherwise, to pay all of its debts.
When an estate trustee is confronted with the task of administering an insolvent estate, there are a number of matters that ought to be considered and explored, including exposure to personal liability, the priority of payment of creditors and level of desired control over the estate in question.
First and foremost, an estate trustee must consider the level of exposure to personal liability that he or she is willing to accept. As a fiduciary, an estate trustee is obligated to pay the estate debts and may attract personal liability if they fail to appropriately apportion available funds among the deceased’s creditors. If an estate trustee makes a petition to have the estate declared bankrupt, then he or she will not only relinquish complete control of the estate to the appointed trustee in bankruptcy, but may also avoid personal liability if the estate assets are not appropriately proportioned among its creditors.
An estate trustee must avoid giving preferential treatment to creditors of the estate. This principle is codified in s. 50 of the Trustee Act, R.S.O. 1990, c. T. 23, and s. 5 of the Estate Administration Act, R.S.O. 1990, c. E.22. However, the priority of which estate debts ought to be paid differ depending on whether the estate is administered as an insolvent testamentary estate or a bankrupt estate. For instance, when in bankruptcy the Bankruptcy and Insolvency Act, provides that payment of support arrears will take priority over the payment of federal income taxes, while in the case of an insolvent estate, federal income taxes take priority.
Finally, an estate trustee must understand that it is not possible to retain any level of control over the administration of an estate once it has gone into formal bankruptcy proceedings. Accordingly, it would be prudent to first obtain advice in relation to the most effective and appropriate manner to move forward with the administration of an insolvent estate.
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