It’s often referred to as the largest transfer of wealth in human history. “Baby boomers,” the post-war generation born between 1944 and 1964, are expected to transfer what Forbes has called “jaw-dropping amounts” to younger generations. Over the next 20 years, the United States alone will see a transfer of $30 trillion dollars. A 2020 Bloomberg opinion article points out that the top 1% of US households will receive 35% of all inheritances. In Canada, however, half of all Canadians expect to receive an inheritance, and 63% expect to leave one.
So how do these numbers breakdown?
- Canadians who are married, own property, and have an income of $80,000 or more are most likely to leave an inheritance.
- Only 69% of those planning to leave a legacy use a financial professional for their testamentary strategy.
- The average inheritance in Canada, according to a 2014 BMO survey, is just under $100,000.
It’s not all good news. The Office of the Superintendent of Financial Institutions (“OSFI”) is an independent agency of the Government of Canada that supervises and regulates federally regulated banks, insurers, trust and loan companies. In July of 2020, the OSFI released data showing that Canadian seniors are achieving record debt levels through reverse mortgages: $4.5 billion. An increase of $4 billion in 10 years. Reverse mortgage interest can be high. The December 2020, 5-year interest rate on a traditional mortgage was 1.69%, while the 5-year reverse mortgage rate was closer to 5%. Reverse mortgage rates compound and balloon and it’s easy to see how the collected debt could skyrocket. This is particularly so older Canadians are able to stay in their homes for longer.
So while so many younger Canadians are expecting an inheritance, and indeed that expectation is forming part of their long-term financial plans, caution and careful planning should be encouraged if that inheritance is already saddled with debt. While this blog has encouraged estate discussions between family members in the past, it’s important to make your heirs aware of any responsibilities and options for settling your reverse mortgage debt when the time comes.
Thanks for reading!
Ian Hull and Daniel Enright.
 Ian Hull also discusses the subject of the family conference in his book, Advising Families on Succession Planning – The High Price of Not Talking
An estate trustee must ensure that the deceased’s debts have been discharged prior to making any distributions. This is usually done by advertising for creditors in a newspaper. With today’s emphasis on technology, however, is advertising in a newspaper still the most efficient way to reach potential creditors?
The Standard Practice
An estate trustee will usually not be personally responsible for paying the deceased’s debts, as debts are paid from estate assets. The estate trustee may be found personally responsible for debts, however, if they begin to distribute the estate prior to paying the deceased’s debts.
An estate trustee may avoid personal liability for failing to pay a debt of the estate if they advertise for creditors. Section 53(1) of the Trustee Act provides personal protection for an estate trustee who advertises for creditors prior to distributing the estate assets.
The standard practice for advertising for creditors is to advertise in a newspaper three consecutive weeks in a location where the deceased lived and worked, and then wait at least one month from when the advertisement was first published to begin administration of the estate. The newspaper publisher will then usually send an Affidavit certifying that the estate trustee has properly provided notice to creditors. The Affidavit can be filed with the court as proof that the estate trustee has taken the proper precautions to advertise for creditors.
Does the Standard Practice Need an Update?
While the newspaper may be the most common means of advertising for creditors, is it the most efficient way to reach a creditor?
It is worth considering advertising for creditors online. Advertising through an online service may be more cost effective than in a newspaper. We have previously blogged on a service that provides online advertisements for creditors, and provides affidavits in support of the estate trustee’s advertisement. Using a service to publish notice to creditors has the potential to reach a larger majority of individuals, in a more cost-effective manner. Furthermore, the internet has the ability to provide information to creditors that may be located outside of the deceased’s jurisdiction, allowing for the advertisement to reach more individuals as compared to a newspaper advertisement that is generally confined to one jurisdiction.
As the Trustee Act does not specify the proper form of advertising for creditors, there is the potential for online services or cellphone applications to provide advertisements for creditors in a more efficient and effective way.
Thanks for reading,
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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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This week on Hull on Estates, David Morgan Smith and Noah Weisberg discuss the responsibility for joint debt upon death of one of the debtors.
Should you have any questions, please email us at firstname.lastname@example.org or leave a comment on our blog.
I’ve always been a fan of the “beer bet”. Whenever an interesting point of trivia should come up, and there should be two differing points of view, more often than not the matter will be settled through a “beer bet”, where the loser must buy the victor a beer the next time that they are out. While I have had some good winning streaks of “beer bets” (at one point one co-worker lost about 13 in a row), I have to give credit where credit is due, as I have never reached the sort of levels which the National Post reported on earlier this week.
In a beer bet to end all beer bets, the National Post advised of a 24,576 bottle “beer debt” that had recently been cleared by the Edmonton Eskimos’ recent victory over the Calgary Stampeders. In a math lesson which teaches you how fast “double or nothing” can get out of hand, after a repeated string of Edmonton losses to Calgary dating back to June 15, 2012, and a corresponding “double or nothing” bet that was placed on each game, one brother owed the other 24,576 bottles of beer.
While at first blush this story may have nothing to do with estate litigation, when I sent the story around to some of my co-workers who are also fans of a good “beer bet”, something near the bottom of the article caught one of their attention, as one brother referenced the fact that this bet would go on. The comment back was something to the effect of “imagine trying to collect that debt from an estate”. Well imagine no further.
Being ever one to believe that a beer bet is an unbreakable oath and debt, if you should find yourself in the unfortunate situation of having someone die before re-paying a beer bet, you may be required to turn to their estate to collect on the debt. In such situations, the first question that you must ask yourself is whether you want to demand payment of your beer bet in the form of the beer itself, or if you were willing to take a cash payment in lieu of beer. If it’s the latter, at an average price per beer of $2.50 (no true beer bet can be settled by buck a bottle beer), at 24,576 bottles this would work out to $61,440.00.
If you should find yourself needing to collect on a beer bet from an estate, make sure to keep in mind section 38(3) of the Trustee Act, which provides that no action may be brought against the estate after two years from the death of the deceased. It would be a shame to rack up a 24,576 bottle beer debt, only to have the claim thrown out as a result of the expiry of any limitation period.
Have a great weekend.
In recent years, Canadians seem more content with accumulating debt in their working years. While debt can be necessary to gain education or accumulate assets, it can cause issues into the future with regard to retirement planning.
According to a report by Hoyes, Michalos & Associates Inc., thirty per cent of personal insolvencies filed in 2013 and 2014 were by debtors 50 years of age or older. Further, the most heavily indebted group was over age 60 and reported an increasing amount of credit card debt.
Another report, published last year by the Vanier Institute of the Family, found that older Canadians are carrying more debt into retirement. The statistics are unappealing to those looking forward to retirement with the hope that a pot of money awaits them on the other side. A drop in income, income tax bills due to pension withdrawals, and expectations to assist both parents and children can create the perfect storm. A secondary factor is that payday loan companies will facilitate loans to seniors by lending against pension income. This likely explains why a growing number of seniors owed payday loans.
The Hoyes, Michalos & Associates Inc. report further found that unexpected life events are generally the trigger for filing for bankruptcy. Such an event could be a loss in employment, an illness or a relationship breakdown. These events often bring with them a shift in one’s lifestyle as well as financial situation.
Financial literacy and discussing finances with family is also helpful. Openness between family members when it comes to income and expenses may help seniors make more responsible financial decisions.
Bankruptcy triggering events should also encourage people to consider or re-consider their estate plans. Mechanisms to ensure the plan is executed and runs smoothly mirror mechanisms dealing with the prevention of individual bankruptcy. Knowledge, education, communication and professional advice are also recommended in dealing with these situations.
Thank you for reading.
It is a trite principle of estate administration that "debts must be paid before beneficiaries." Assuming this maxim is followed, the estate trustee will not assume any personal responsibility for the debts of the deceased. On the other hand, if the estate trustee distributes the estate without due consideration to creditors’ entitlements, the estate trustee may be left personally exposed unless the beneficiaries return their entitlement to the estate trustee to fund any unpaid debts.
To be fully relieved from personal liability, the estate trustee must make reasonable efforts to locate and satisfy the creditors of the deceased. Advertising for creditors is therefore an essential step in protecting the estate trustee from liability and ensuring that the creditors of the deceased have had the opportunity to be paid. But the importance of the advertisement ought not to be overstated. If an estate trustee can be proven to have had independent knowledge of a creditor who does not claim (for whatever reason) in response to the advertisement, and if the estate trustee distributes in the face of this knowledge, he or she could conceivably be personally responsible to such a creditor.
The bottom line is that the estate trustee, understandably focused on his or her fiduciary duty to the beneficiaries, stands in the shoes of the deceased and must give more than a passing regard to the creditors of the estate.
David M. Smith
David M. Smith – Click here for more information on David Smith.
Listen to Compensation for work done by estate trustees and solicitors.
This week on Hull on Estates, Paul Trudelle and Diane Vieira discuss compensation for work done by estate trustees and estate solicitors.
Rooney Estate v. Stewart Estate 2007 WL3019262 (Ont. S.C.J.), 2007 CarswellOnt 650