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Administering a Deceased Estate and Dealing with Debts

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Administering a Deceased Estate and Dealing with Debts Powered By Docstoc
					    Administering a Deceased Estate
    and Dealing with Debts

Introduction
What is the order when paying debts from a deceased estate, and do you know the procedure when the
estate is bankrupt?
This article explains the correct order of payments from a deceased estate, from both a solvent and a
bankrupt estate. The article also defines probate, the process or obtaining probate, letters of administration
and the role of the executor, particularly in relation to the payments of debts from an estate.
To give advice in the product(s) referred to in this article, you must be licensed or accredited by your
licensee and operating in accordance with the terms of your/their licence.



  Learning objectives
  After reading this article you should be able to:
        >     Explain probate
        >     Describe the process by which probate of a Will is obtained
        >     Outline circumstances in which letters of administration will be required
        >     Describe the role of executor in the administration of debts of the deceased
        >     Describe the proper order of payment of debts in a solvent and bankrupt estate


What is probate?
Probate is the process by which a Will is proved legally valid by the Supreme Court. The grant of probate
means that the Court has recognised and approved the executor named in the Will. Once probate is granted,
the executor has permission to deal with the estate assets and liabilities, in accordance with the terms of the
Will.
A person nominated in the Will as executor is not bound to the role, and may choose to "renounce probate",
but once she/he has accepted the office, the executor can be compelled to act and cannot cease to act
without a good reason.

The process of obtaining probate
Before probate can be obtained there are a number of tasks that must be fulfilled:
    >       The Will of the testator must be located, along with any other documents relevant to the estate. For
            this reason the Will should be kept in a safe place that is easily accessible to the executor. It may be
            held by the testator’s solicitor or have been lodged with the Probate Office of the Supreme Court.




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    >    The executor must advertise their intention to apply for probate, through a Notice of Intended
         Application. This should be placed in a major newspaper in the city in which the deceased person
         lived.
    >    After 14 days from publication of the Notice, the executor should lodge the application for probate
         with the Probate registry of the Supreme Court. The application will include:
          »   a summons requesting that probate is granted (signed by the estate solicitor);
          »   an affidavit detailing relevant information required by the court, such as the address of the
              executor and their relationship with the deceased, confirmation that the Will is in fact the last
              known Will of the deceased, confirmation that a Notice of Intention to apply for probate has been
              advertised, the marital status of the deceased, the details of beneficiaries and their entitlements,
              estate assets and any liabilities, and the gross and net value of the estate.
          »   In some cases, such as when the validity of the Will is disputed, another form of probate is used.
              This is known as solemn form. Rather than the standard affidavit, or common form evidencing
              the validity, the Will must be proved by oral evidence of the executor in the open court;
          »   a declaration from the executor that they will administer the estate according to law and that they
              will provide the Court with accounts of the estate as required;
          »   the original death certificate;
          »   the original will; and
          »   verification of the Notice of Intended Application.
Once the Court has granted probate the executor has the legal power to deal with the estate. The executor
can then apply for a tax file number and establish a bank account for the estate.

Letters of administration
Where there is no Will or the Will is invalid (therefore, the deceased died intestate), or where no executor is
appointed in the Will, a person may apply to the Court to appoint an administrator to deal with the estate.
This process is known as obtaining the “letters of administration” and essentially has the same effect as the
grant of probate.
Letters of administration may also be required if the executor predeceased the testator, where the executor
cannot prove the Will or there are difficulties associated with the executor. The Court will generally appoint a
person that has an interest in the estate, but it also has the discretion to appoint another person or party if
the circumstances warrant.

The role of executor
Once probate or letters of administration are granted, the executor or administrator has permission to deal
with the estate assets and liabilities, in accordance with the terms of the Will.
The executor’s or administrator’s role is to:
    >    Carry out the terms of the Will;
    >    Determine the assets of the estate;
    >    Pay any debts; and
    >    Distribute assets to beneficiaries named in the Will.
Dealing with estate assets will be in accordance with the Will or, if no Will exists, in accordance with the
relevant State intestacy laws.



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In addition the executor or administrator will need to take care of funeral arrangements, following any
instructions in the Will.
There is also a requirement to maintain records of assets and distribution.
Obviously distribution of assets is an important part of the executor/administrator’s role. This cannot be done
however, until assets and liabilities of the estate are ascertained, and the debts are dealt with. The remainder
of this article focuses on dealing with debts of the deceased.

Administering debts of the deceased
The executor of a deceased estate has a number of important duties that they must perform in relation to
administering the debts of the deceased. These duties include identifying and “calling in” the assets of the
estate, including all outstanding debts due to the estate, determining the liabilities and applying those assets
as required to meet outstanding debts of the deceased. The executor can then distribute any surplus in
accordance with the terms of the will or the rules of intestacy.
Once probate is granted the executor is required to act promptly to call in estate assets and determine
liabilities. If any loss is suffered through the neglect of the executor they may be held personally responsible.
Ideally all estate debts should be collected and paid within 12 months of the date of death, however the Court
may grant an extension if there are reasonable circumstances.
The proper administration of debts of the deceased and the order in which assets are applied to meet debts,
may have a direct impact on whether the beneficiaries’ entitlements are available as bequeathed or used up
in part or in full.

Order of payment of debts - solvent estate
The order in which the deceased’s assets must be applied to meet estate liabilities is determined under the
Wills, Probate and Administration Act 1898 (NSW), and similar legislation in other states. A solvent estate is
one in which there are sufficient estate assets or funds to meet the expenses or liabilities of the estate.
The order of payment of debts in a solvent estate is not specified in the Act, as by definition, in a solvent
estate all of the debts can be paid.
The order of expenditure of assets in a solvent estate is listed in the Act in Schedule 3, however this is
subject to any express direction in the will. The following lists the order in which estate assets are to be
applied to meet estate liabilities:
         1. Assets not dealt with under the Will;
         2. Residual assets, i.e. property not specifically gifted;
         3. Assets specifically appropriated or disposed of by Will for payment of debts;
         4. Assets over which there is a charge or lien;
         5. Any funds held to meet pecuniary legacies; then
         6. Other property specifically gifted, rateably according to value.




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Order of payment of debts – bankrupt estate
A bankrupt estate is one in which the total debts exceed the total assets. The order of payment of debts in a
bankrupt estate is as follows:
    >    Funeral, testamentary and administration expenses; then
    >    In accordance with the Bankruptcy Act, 1966 (Cth) (the Act). The Act stipulates that payments to
         creditors be met in the following manner:
          »   Costs, charges and expenses of the petitioning creditor, the administration of the bankruptcy,
              including the remuneration and expenses of the trustee and audit costs;
          »   In payment of:
              ~   the remuneration of any controlling trustee; and
              ~   the costs, charges and expenses properly and reasonably incurred by the controlling trustee
                  while the authority was in force;
          »   Where the bankruptcy is within two months after a deed of assignment or a deed of arrangement
              executed by the bankrupt, or a scheme of arrangement accepted by the bankrupt's creditors has
              been declared to be void or been annulled, set aside or terminated, then in payment of liabilities,
              commitments, expenses or remuneration under that deed or scheme;
          »   Proper funeral and testamentary expenses;
          »   Payments due to former employees of up to $1500 each or an amount prescribed in the
              regulations, whichever is greater (including amounts payable by way of allowance or
              reimbursement under a contract of employment or under an award or employment agreement,
              but not including long service leave, extended leave, annual leave, recreation leave or sick leave
              payments);
          »   Amounts due in respect of any worker’s compensation payable;
          »   All amounts due to or in respect of any former employee of the bankrupt, in respect of long
              service leave, extended leave, annual leave, recreation leave or sick leave;
          »   Payments in respect of any former apprentice of the bankrupt;
          »   In payment of:
              ~   preferences, priorities or advantages in favour of any creditor or group of creditors; and
              ~    costs, charges and expenses incurred in the interests of creditors before the date of the
                  bankruptcy; as a meeting of the creditors, by special resolution, resolves.
All other debts not specified above rank equally, and where they cannot be met they should be paid
proportionately.
Since 1994, complying superannuation and life insurance policies have been protected from creditors up the
value of the pension reasonable benefits limit (RBL). Some experts argue that the value might actually be up
to the transitional RBL.
Life insurance policies are given legislative protection against liability for debts of an estate under Sections
204 and 205 of the Life Insurance Act 1995 (Cth).




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Benefits exceeding the RBL limit become available to creditors of the estate. They become unprotected in
the following order of priority:
    >    Life monies;
    >    Non-preserved benefits; then
    >    Preserved benefits.
Accumulation superannuation fund interests become available before defined benefits.




Acknowledgement & thanks
We thank the following people for their contribution to this article:
    >    Justine Harris, Tribeca Professional Development




Knowledge areas
This article is relevant to knowledge areas:
    >    Estate Planning (30 minutes)




                                                                     DISCLAIMER
              This document was prepared by and for Tribeca Learning (Aust.) Pty Limited ABN 54 089 002 371. It contains information of
              a general nature only and is not intended to be used as advice on specific issues. Opinions expressed are subject to change.
                 The information contained in this document is gathered from sources deemed reliable, and we have taken every care in
               preparing the document. We do not guarantee the document’s accuracy or completeness and Tribeca Learning (Aust.) Pty
                 Limited disclaims responsibility for any errors or omissions. Information contained in this document may not be used or
                                     reproduced without the written consent of Tribeca Learning (Aust.) Pty Limited.




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