Dealing with particular liabilities

Liabilities relating to a deceased estate divide themselves into 2 categories.

The first type is the liabilities which were incurred by the deceased person prior to death.

• These are sometimes referred to as “liabilities of the deceased”.  The executors have had no part to play in incurring these liabilities – they have merely, in effect, “inherited” them.
• In recognition of this, if these liabilities cannot be met from the assets of the estate, the estate is insolvent (assets – liabilities = negative sum).
• In that case, executors may choose to have the administration of the estate determined under the laws relating to bankruptcy.

The other type of estate liabilities is those which are incurred after death.

• These are sometimes referred to as “liabilities of the estate”.  They are incurred because of the involvement of the executors. If properly incurred, then although the executors are primarily liable (and can be obliged to pay with their own funds), the executors have a right of indemnity against the assets of the estate.
• This can produce a timing issue.  The liability might be incurred at one point in time, and because of its nature, it needs to be paid quickly (for example a pending property insurance premium) to avoid a difficult situation.  Therefore, the executors might be putting their hands in their own pockets well ahead of the time when the estate can reimburse them.
• Executors are generally not too concerned with having to wait a few months for reimbursement, if they are confident that the estate is well able to produce the funds for reimbursement.

It follows from these 2 categories that some liabilities are well quantified at or shortly after the date of death (liabilities of the deceased) whereas others continue to be incurred after date of death (liabilities of the estate).  Prudent executors and their advisors always have one eye on maintaining sufficient liquidity to meet all types of liabilities.

There can sometime be issues regarding the integrity of an amount which some party claims is owed to him – either by the deceased or the estate.  Such issues more likely arise in relation to liabilities of the deceased because the executors were not involved in, and therefore have no knowledge of, the circumstances of the transaction giving rise to the alleged debt.  The executors can, in appropriate circumstances, require an alleged creditor to prove the integrity of a claim.

Guarantees can present problems.

• The lesser problem is where the consideration for the guarantee is divisible (such a guarantee usually being referred to as a “continuing guarantee”), because future liability can often be avoided by giving notice of death.
• The greater problem is where the consideration is entire (and where the guarantee is referred to as a “specific guarantee”).  In that case, no effective notice to avoid future liability can be given without the creditor’s approval.

Tax liabilities can be relevant in a deceased estate even if the taxpayer, when alive, was no longer a taxpayer in the sense of being obliged to lodge tax returns.

• For such a non-tax paying deceased, his or her estate may become liable for tax because the distribution of the estate may involve sales of assets, crystalising capital gains within assets which had remained embedded and uncrystallised during the lifetime of the deceased.
• The executors are responsible for not only the personal tax liabilities of the deceased (in other words, those arising in respect of all tax returns lodged up to and including the date of death), but also the lodging of returns to disclose taxable income earned after death.