Executors: settling estate debts

Laith Khatib, partner at Howells, explains executor duties when settling debts.

debtThe responsibility for administering the estate of a deceased person rests with the executor. One of the essential duties imposed on the executor is to ensure that all debts and liabilities of the deceased and their estate are paid, to the extent that this is possible.

It's not always that simple, though. For example, in some cases, the estate may be unable to settle all its debts and liabilities in full, or there may be unknown and/or untraceable creditors.

Here are some sensible steps to take as an executor to avoid problems when it comes to discharging debts and liabilities as part of estate administration.

What are the executor’s duties?

An executor who enters a contract on behalf of the estate is contractually liable to pay the other party. The cost of performing the contract is recoverable from the assets of the estate. 

However, if the estate can’t pay the sum due under the contract, the executor will be personally liable for any shortfall.  So it is essential that an executor doesn’t enter into a contract unless it’s been established that the estate will be able to meets its obligations.

An executor can protect themselves from personal liability for other debts or tax liabilities by dealing with the estate in a proper manner. They then can’t be held personally liable for any debts that the estate doesn’t have the funds to pay.

Is the estate solvent?

The first thing the executor should therefore do – before paying any debts – is ascertain the solvency of the estate. A simple balance sheet exercise should reveal if the estate is solvent or not. If there is any risk that liabilities will outweigh assets, no immediate payments should be made to any creditors. 

If the estate is insolvent, the executor should seek specialist legal advice to ensure that creditors are paid in the correct order of priority. It is crucial that no creditors are preferred ahead of others who are equally or higher ranked.  Any fees incurred by the executor for professional advice would be a priority debt and would be payable out of the estate before most other creditors’ claims.

Identify all debts and liabilities

If the estate is solvent, the executor should be certain that they are aware of all the debts and liabilities they are obliged to pay before finalising the estate. In most estates, it’s not possible to be absolutely sure that all creditors have been identified, but protection against unknown claims can be easily obtained by placing notices under Section 27 of the Trustee Act 1925 (the Trustee Act 1958 in Northern Ireland) in The Gazette (see ‘How to place a notice), and a local newspaper.

A deceased estates notice specifies a two-month period for claimants to contact the executor to register a claim against the estate. Once that time has expired, the executor may distribute the estate, having regard only to the claims they have received notice of. 

A creditor who misses the deadline has no recourse against the executor personally, but can still pursue the beneficiaries who receive the estate. But the important thing for the executor is that they can, at a given point in time, hand the estate over to the beneficiaries, safe in the knowledge that they will face no personal difficulty if an unknown creditor later surfaces.

What are the risks of not placing a deceased estates notice?

If a deceased estates notice is not placed, a creditor may be able to enforce a debt against the executor long after the estate has been distributed. So it’s vital for an executor who wants to bring their duty to creditors to an end to place a notice. 

If you are dealing with an estate and have any concerns about your duties and obligations, it’s always best to seek specialist legal advice.

About the author

Laith Khatib is a partner at Howells Solicitors in Cardiff, and has considerable experience in advising executors. He specialises in high value, complex and insolvent estates.

Publication date: 14 May 2015