Legitimate costs of an estate include funeral, legal and accounting costs. There are also a wide range of other estate expenses that can be payable by an estate such as household bills, rent, mortgage repayments and insurance premiums – this all depends on the assets and liabilities owned by the deceased.
It can be confusing for executors, administrators, and beneficiaries to work out what should be paid, by whom and whether estate funds can be used to meet costs.
The starting point is that the executor or the administrator of the estate is responsible for ensuring that debts and costs are paid. Debts of the deceased and costs of the estate should be paid from estate funds. The executor/administrator and beneficiaries are not required to make payment personally for costs, but an executor may be required to pay upfront costs such as legal and accounting costs and then be reimbursed from the estate in due course.
Generally, an executor is not paid for their time and effort in managing the estate unless specifically authorised by the Will. There is also no allowance in the legislation for an administrator to be paid from an estate. It is possible for an executor/administrator to apply to the Court for a commission from the estate in place of payment, but this is a separate matter.
In the first instance, all executors/administrators should notify creditors of the estate of the deceased’s death and advise them that payment will be made in due course, once funds are available from the estate. Before an executor can access the deceased’s funds to make payments, they will usually need to obtain a grant of probate of the will or a grant of Letters of Administration (if there is no will) from the Court. It can take time for this to occur, and creditors will usually wait for payment once they are properly advised that the process is underway.
In situations where it will take some time to obtain access to the deceased’s funds the executor/administrator or a relative may opt to make payment of bills and expenses themselves for later reimbursement. This often occurs in family situations but there is no obligation to do so.
It is important for the executor/administrator to keep clear records of estate costs and the payments made to meet them. This is because an executor/administrator is required to account to the beneficiaries of the estate for how the estate’s funds have been used. Evidence of payments must be kept including invoices and receipts so that the beneficiaries are able to understand the nature of any payments made.
When it comes to paying debts, certain assets such as superannuation and life insurance are ‘protected’ and are not required to be used for the payment of the existing debts of the deceased person. Although this situation can be altered by the terms of the Will or if all beneficiaries agree. Great care must be taken to ensure that the correct assets are used to pay debts and that protected assets are not used inadvertently in this way. This is particularly important in insolvent (or nearly insolvent) estates.
If the estate is insolvent- that is the assets are insufficient to meet the liabilities- the executor/administrator must notify creditors and take care in allocating the assets of the estate to meet the costs that arise. Professional advice should be taken in these situations to ensure that assets are allocated correctly.
For instance, funeral and legal costs are a priority on an estate and should be taken into account first, before other debts and costs are paid. Where an executor/administrator arranges the funeral, they are personally liable for funeral costs and can be sued directly to recover these expenses.
In some circumstances, the Australian Taxation Office will also hold an executor/administrator personally liable for any outstanding tax owed by a deceased person, so it is essential that such debts are investigated and properly managed to avoid liability.
If you are administering a deceased estate and have queries about how to manage the estate expenses or process please contact our estates team on 9375 3411.
About the author: After completing a double degree Bachelor of Arts (Politics and International Relations) and a Bachelor of Law, Matthew was admitted into the Supreme Court of Western Australia in 2016.