An executor of an estate is responsible for gathering and ascertaining all the assets and debts or liabilities of the estate. This information will help to determine whether an estate is solvent or insolvent. A solvent estate is one where the total value of the estate’s assets exceeds the debts of the estate. On the other hand, an insolvent estate is where the total value of an estate’s assets is less than the total debts and liabilities owed by the estate.
Dealing with an insolvent estate can be a daunting task for executors as they must ensure the debts of the estate are settled while bearing in mind that this will put some beneficiaries at risk of “losing” their gift. The estate assets must first be used to settle the deceased’s funeral expenses, then the estate taxes and administration expenses including but not limited to legal fees, followed by payment to creditors and thereafter settling preferential and ordinary debts. Regardless of any bequests made in the Last Will and Testament of the deceased, this must be completed before any gifts are distributed to beneficiaries. In an insolvent estate, knowledge of this can often lead to beneficiaries worrying about the status of their gift.
In Jamaica, there is no legislation that specifically governs which assets should be used to settle the estate’s debts. When writing a will, the testator can include how debts are to be settled and which assets should be used. However, where this is not expressly stated in the deceased’s will or where the asset is not sufficient to settle the estate debts, the rules of administration in England applicable to the estates of persons who died before 1926 are typically used to guide the issue. The order in which assets may be applied to estate debts and expenses are as follows:
- The general or residuary personalty not specifically bequeathed, exonerated or exempted. This is personal property which may include money, furniture, jewellery, art or vehicles not gifted to a specific individual in the deceased’s Last Will & Testament nor has the testator expressly exempted such personalty from being used for settlement of debts. Note that this does not include real estate.
- Real estate devised in trust for payment of debts. This will include those real estate properties left on trust by the testator for the payment of debt. This does not include real property that is charged with a lien or debt in relation to the specific property, such as a mortgage.
- Real estate descended to the heir and not charged with payment of debts. This includes real estate that the deceased inherited, whether acquired before or after the making of the will, that is undisposed of and not expressly stated to be used to settle the estate debts.
- Real estate devised charged with the payment of debts. The law has taken the position that where there is a general direction made by the testator that his debts and liabilities must be paid, even if that direction is only found in the general introductory words of the will, a charge for payment of debts will be implied against the real estate of the deceased. This does not mean that assets found in class 1, 2, and 3 above will not be used, but rather the assets of class 4 will be used in aid of the above assets where they are insufficient to settle the debts remaining. in aid of the personalty identified in category 1 above, but not in relief of it as the primary fund. To illustrate, where a testator includes a general direction to pay debts out of the estate, even though the testator devised land to a specific individual and the remainder of his real property to the residue, all the real property forming part of the estate will contribute pro rata to the payment of debts remaining after the exhaustion of the general personalty.
- General pecuniary legacies. This includes a sum of money gifted to a beneficiary or beneficiaries that is not identified with specificity or particularity as to amount to a bequest but rather forms part of the general assets of the deceased. For example, “I give $250,000.00 to …”.
- Specific devises, specific legacies and residuary devises to contribute pro rata. Specific devices and legacies include those gifts and real estate properties that have been gifted to specific individuals and identified with sufficient specificity so that the asset being gifted is clearly separated from the general estate. Residuary devises then includes all other real estate that has not been disposed of.
- Real and personal property which the testator had power to appoint and which he had appointed by his/her will. This encompasses the real and personal property that does not strictly form part of the testator’s estate (that is being the rightful owner of such property), but rather are those assets which the testator was given possession over by another either by a deed or that individual’s will. The testator then, in his or her Last Will and Testament, expressly grants that same power to a specific individual or his/her personal representative directing how that power shall be exercised over the asset(s) which is the subject of the power. Such property is only liable for use to settle debts once all other assets of the estate have been exhausted and a deficiency still exists.
Contribution of assets in the same class
Where any given class contains more than one asset, the general position is that each asset must contribute ratebly to the payment of debts. This means that regardless of the value attached to a certain asset, each asset within the class will be liable to contribute the same proportion in respect of its value to settle the debt in full. For example, if there are 4 assets of varying values in class 5 and a debt of $380.00 dollars to be paid, each asset will contribute 20% of its value to settle the debt in full.
Executors can be guided by the above order to assist in determining how to settle the debts of the estate. Apart from the above order, the option is also available for executors and beneficiaries to discuss the issue and come to an agreement on what assets should be used. However, if there is still uncertainty as to how to proceed, executors are encouraged to seek the assistance of an attorney to help navigate them through the administration of these estates and ensure their duties are faithfully fulfilled while protecting against potential liability.
It is no surprise that insolvent estates are likely to occur and managing insolvent estates can be complex. The regulation of these estates should be given serious consideration to help provide certainty throughout the administration process for both executors and beneficiaries who find themselves in an insolvent estate.
Kandi Chin is an Associate at Myers, Fletcher & Gordon, and is a member of the firm’s Property Department. Kandi may be contacted via Kandi Chin email@example.com or www.myersfletcher.com . This article is for general information purposes only and does not constitute legal advice.