When a person passes away, their estate—comprising assets and liabilities—must go through a legal process to settle debts and distribute any remaining assets to beneficiaries. However, when the liabilities exceed the assets, the estate is considered insolvent. Managing such an estate is particularly challenging and requires adherence to specific legal procedures. This article explores how insolvent estates are handled in New South Wales (NSW), the responsibilities of the executor, and the implications for beneficiaries and creditors.
An insolvent estate occurs when the assets from a deceased person’s estate are insufficient to cover the liabilities and expenses. The administration of such estates is governed by the Probate and Administration Act 1898 in NSW and may also involve the Bankruptcy Act 1966 (Cth). The legal personal representative (LPR), whether an executor or administrator, is responsible for managing the estate and ensuring that debts are settled in the correct order.
If the deceased person was bankrupt at the time of death, the bankruptcy proceedings will generally continue. If the estate is insolvent—meaning there are not enough assets to cover the liabilities—you are not personally responsible for any shortfall.
Each state and territory in Australia has laws that outline how insolvent estates should be administered, including how assets are distributed to creditors. In some cases, an LPR or a creditor can apply to have a bankruptcy trustee appointed to manage the estate. If you are handling an insolvent estate, it’s advisable to seek professional guidance. The Australian Financial Security Authority provides valuable information on managing insolvent deceased estates.
As the LPR, it is essential to inform the Australian Taxation Office (ATO) of the estate’s financial situation. This will help the ATO assess the necessary actions regarding the estate’s tax liabilities.
The ATO has guidelines (PCG 2018/4) that allow an authorized LPR managing a straightforward estate to finalize the estate without worrying about personal liability for the deceased person’s tax, provided certain conditions are met:
These guidelines apply only to the tax affairs of the deceased person before death and do not cover the tax obligations of the deceased estate trust after death.
Alfred passed away on 1 June 2023, leaving an estate valued at less than $1 million. His estate included:
Alfred had been receiving a pension and fully franked dividends but had informed the ATO in 2018 that he no longer needed to file tax returns.
Yiannis, the executor, obtained probate in July 2023. Based on the available information, Yiannis determined that no final tax return was required and submitted a non-lodgment advice on 31 October 2023. By 30 April 2024, the ATO had not notified Yiannis of any intent to review Alfred’s tax affairs. As a result, Yiannis could safely distribute the estate to beneficiaries without risking personal liability for any of Alfred’s tax obligations.
When someone dies in Australia, their debts don’t just disappear. These debts become part of the deceased’s estate, which is handled by the executor according to the deceased’s will.
An estate is considered solvent if it has enough assets to pay off all remaining debts. Conversely, an estate is insolvent if the assets are insufficient to cover the debts and liabilities. The process for handling debts differs depending on the estate's solvency.
For solvent estates, the executor must pay off debts in the following order:
For insolvent estates, the executor follows these steps:
Generally, beneficiaries do not inherit the deceased’s debts if the estate is insolvent. Exceptions include joint debts or debts where the beneficiary was a guarantor.
Superannuation is a significant component of many Australians' financial planning and can play a crucial role in the administration of a deceased estate, particularly if the estate is insolvent. However, it's essential to understand how superannuation is treated in these circumstances.
Superannuation is generally not automatically included as an estate asset unless the deceased specifically nominated their estate as the beneficiary via a binding death benefit nomination (BDBN). Instead, superannuation is typically paid out according to the trustee's discretion or as directed by the BDBN to the nominated beneficiaries, such as a spouse, children, or other dependents.
If the superannuation is paid directly to the beneficiaries, it bypasses the estate and cannot be used to pay off the estate's debts, including those in insolvent estates. This protection makes superannuation a valuable tool for ensuring that dependents receive financial support after the account holder's death.
In cases where no beneficiary has been nominated, the superannuation trustee may decide to pay the superannuation death benefit into the estate. When this occurs, the superannuation becomes part of the estate's assets and can be used to settle the deceased's debts. This includes paying secured and unsecured debts, funeral costs, and other liabilities.
If the estate is insolvent, and the superannuation is paid into the estate, it is treated like any other asset in the estate. It will be distributed according to the priority rules for paying off debts. However, it is important to note that superannuation funds are generally protected from creditors, and only in specific circumstances—such as when there is no binding nomination or the trustee exercises discretion—can superannuation be used to pay debts.
Two notable cases illustrate the complexities surrounding superannuation and insolvent estates:
Executors handling insolvent estates should carefully assess whether superannuation benefits are part of the estate or paid directly to beneficiaries. If the superannuation is part of the estate, it may be used to pay off debts, but if paid directly to beneficiaries, it is generally protected.
It is also advisable for executors to seek legal advice when dealing with superannuation in insolvent estates, as the laws and regulations surrounding superannuation can be complex and vary depending on the specific circumstances of the estate.
In some situations, a person may be declared bankrupt even after they die, especially if their estate is insolvent. The executor or a creditor may apply to the court to manage the estate's liquidation and debt repayment professionally.
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