Q&A: Why is my inheritance being passed to creditors?
Q: My mum has recently, and unexpectedly, passed away. She named myself and my brother in her will as beneficiaries of her estate, which includes her home and a few other assets. However, since she died, we're now discovering she was in thousands of pounds worth of debt and her creditors are catching up with us one by one. Surely, now my brother and I own her estate, these creditors have no right to anything - or the debt is written off after her death. Where does this leave us in the eyes of the law?
A: Firstly, I'm very sorry to hear that you've lost your mother so suddenly. It must be hard enough for you and your brother to come to terms with your grief, and you are now finding out that your mother was in debt too.
A person’s debt unfortunately does not automatically get written off on their death. It could therefore be that your mother's estate becomes insolvent - if her personal liabilities exceed the value of assets. Therefore, creditors owed money can insist they are repaid, as far as funds allow. The liability does not pass to beneficiaries though, therefore creditors can only claim what funds are actually in the estate.
There's a hierarchy of payment for deceased solvent estates and the executor of the will, if not you or your brother, will be responsible for ensuring these debts are paid. This is important as the executor can be held personally responsible if they distribute payments incorrectly.
The hierarchy is as follows:
- Secured creditors – mortgage lenders/loans secured on an asset
- Funeral expenses
- Testamentary expenses – costs incurred by the person administering the estate
- Preferential creditors
- Unsecured creditors, including credit card and store card providers, utility companies, and unsecured bank loans
- Interest due on unsecured loans
- Deferred debts – loans to family members, for example
Each category must be repaid in full before moving on to the next. If the estate is insolvent, then creditors receive funds on a pro rata basis. Only once all liabilities are repaid, will the beneficiaries receive any funds.
You should also check that your mother hadn't already applied for bankruptcy if her level of debt was very high as this would continue as though she was still alive. This would prevent the Administration of Insolvent Estates of Deceased Persons Order 1986 from taking place - otherwise, the executor can apply to the court for this.
If a personal representative is unaware the estate is insolvent, and of the rules that apply in these cases, it can lead to significant problems. Deceased insolvent estates are complex to deal with and a high degree of risk exists for personal representatives, both prior and during the administration. Notices to creditors can be undertaken to provide some level of protection for those administering the estate.
Always seek the right independent legal advice - contact Downs Solicitors private client for more information.