Latest / Your Estate Matters / Episode 64 - How Executors Can Avoid Insolvent Estate Pitfalls with John Sandrelli
Transcript
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</script><meta http-equiv="content-type" content="text/html; charset=UTF-8"><script nonce="wItng2fwJMGG2ITKhYINsQ">var DOCS_timing={}; DOCS_timing['pls']=new Date().getTime();</script><meta property="og:title" content="YEM John Sandrelli Transcription"><meta property="og:type" content="article"><meta property="og:site_name" content="Google Docs"><meta property="og:url" content="https://docs.google.com/document/d/10cnD2lh3HotuR0S3cj6Pk95xxlyAGoB7Bvwo1cJnTM4/edit?usp=sharing&usp=embed_facebook"><meta property="og:image" content="https://lh7-us.googleusercontent.com/docs/AHkbwyK23vaKXHlWjVvjKcpKxv_WCHMN0s8D4gfWQ4kztwjL6MtHoz76v5LVPUskKmR9n-8TnHxsfBSXGhmgO9R8wPcnaBcrTRmXemwVA-KOD_jgtYPCixLY=w1200-h630-p"><meta property="og:image:width" content="1200"><meta property="og:image:height" content="630"><meta property="og:description" content="Nicole 00:00:02 Hello and welcome to Your Estate Matters presented by Heritage Trust. Your Estate Matters is a podcast dedicated to everything estates, including building and preserving your legacy. If it's estate related, we'll be talking about it. We're having the conversations today that will..."><meta name="google" content="notranslate"><meta name="viewport" content="width=device-width, user-scalable=no, initial-scale=1.0, minimum-scale=1.0, maximum-scale=1.0"><meta http-equiv="X-UA-Compatible" content="IE=edge;"><meta name="fragment" content="!"><meta name="referrer" content="origin"><title>YEM John Sandrelli Transcription - Google Docs</title><link rel="shortcut icon" href="https://ssl.gstatic.com/docs/documents/images/docs-favicon-2026-v2.ico"><link rel="chrome-webstore-item" href="https://chrome.google.com/webstore/detail/apdfllckaahabafndbhieahigkjlhalf"><script nonce="wItng2fwJMGG2ITKhYINsQ">_docs_webfonts_fontFaces = null; _docs_webfonts_iframe_fontFaces = null;DOCS_timing['wpid']=new Date().getTime();</script><style 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Your Estate Matters is a podcast dedicated to everything estates, including building and preserving your legacy. If it\u0027s estate related, we\u0027ll be talking about it. We\u0027re having the conversations today that will help Canadians protect their families, their assets and their legacies tomorrow. John, thank you so much for joining us.\n\nNicole 00:00:34 My pleasure. So you\u0027ve spent your career in restructuring and insolvency, mostly on the corporate side. So tell us about this particular issue of insolvent estates.\n\nJohn 00:00:43 As you note, Nicole, the area is not my focus day to day, but I became interested in the area when I was involved as managing partner of the Dentons office, building out our trust in estates practice by recruiting experts like yourself, so really became more knowledgeable about the the area and in those discussions, it became apparent to me that many individuals who become involved with the States do not have a full understanding of the implications when an estate is underwater. I thought I could help to educate those in the area, and I did have a couple of cases historically where I was involved in solving the states.\n\nNicole 00:01:16 So how common is this really? Like when you say in estates insolvent, are we talking about rare situations or is this something that ordinary people are regularly running into?\n\nJohn 00:01:26 You know, it\u0027s not very common. No, but it can have significant consequences to Canadian families and they can run into major challenges and risks. And so it is an important area. Notwithstanding that it\u0027s not an everyday occurrence, given the state of the economy currently and the challenges for individuals and businesses. People are taking on more debt. I was reading the other day, actually, that total consumer debt in Canada hit a record high of 2.6 trillion by the end of 2025, and I expect it to become more common in years to come because of that circumstance.\n\nNicole 00:01:56 That\u0027s a big number. So let\u0027s start at the beginning. So someone passes away and a family member steps in as executor. What are the signs that they may be dealing with an insolvent estate? Like are there warning signals?\n\nJohn 00:02:09 Unfortunately it\u0027s not big flashing red lights that you\u0027d like to see obviously, and give you that indication, but there are a few warning signs.\n\nJohn 00:02:16 There can be several. There could be a couple. It\u0027s very important not to ignore them, even if there\u0027s only 1 or 2. Some common examples are, you know, collection calls or demand letters that might be sitting around multiple credit cards with high balances, secured debts exceeding asset values. We\u0027ll come to that in a little bit. And again, in this environment, particularly in the Lower Mainland, we\u0027ve got significant declining real estate values and high mortgages. And sometimes deflation of the values themselves can exceed the debt ultimately. So that can sometimes be an issue. CRA liabilities run filed tax returns. Sometimes we see that and also ongoing support obligations without sort of adequate support mechanisms or life insurance in place.\n\nNicole 00:02:58 So. Insolvency isn\u0027t always obvious right away, is it? Like sometimes it only becomes apparent after the executor starts looking into things. Can you tell us about that for sure?\n\nJohn 00:03:09 you know, people may really need to look under the hood, do some diligence. You know, again, demand letters sitting around might be obvious, but other signs are not so clear.\n\nJohn 00:03:18 You may have a case where, you know CRA is not pounding on the door, but tax returns might be delinquent for a number of years and have been dealt with right away. That might not emerge immediately. There is not a stop hotline, so to speak, that you can call to find out whether an estate is insolvent or not. So you really do have to take your time and look around.\n\nNicole 00:03:36 So say an executor starts to realize that the estate may be insolvent. What should they do right away? Like what are the immediate 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And when I say stop, I mean don\u0027t take active steps in terms of, you know, distribution. Don\u0027t pay any creditors except reasonable funeral expenses. Those have a super party right to get covered. So that\u0027s the first thing, really. Pause. Take your time. Think it through. Second would be, you know, complete an asset inventory current appraisals. If you\u0027re talking about real estate or other valuable property, not just assessments necessarily, but also look into, you know, vehicles, RFPs, RIFFs, life insurance and note which ones might have designated beneficiaries and those that might not.\n\nJohn 00:04:20 So really do a complete asset inventory. And then of course, because there is a possibility you\u0027ve seen 1 or 2 warning signs about the possibility of insolvency, you want to complete a liability inventory. Mortgages. Other secured debts might exist: credit cards, taxes. There is an ability to seek information from CRA to find out what the current landscape is. On the tax side, if there was support obligations, really trying to understand those and various other costs associated with potential liabilities.\n\nNicole 00:04:50 So I think there\u0027s something really important for listeners to understand. So if someone\u0027s an executor of an insolvent estate, they can be personally at risk if things go wrong. Can you explain how that happens?\n\nJohn 00:05:02 Yeah. So just before I turn to that again, because of the possible risk of personal liability, and I\u0027ll explain that in a second, it\u0027s really important to understand the entire universe of the creditors. And we talked about sort of checking that under the hood and doing that diligence earlier. So a personal representative really is a fiduciary. They owe a duty to the creditors and the beneficiaries, of course.\n\nJohn 00:05:22 So one who proceeds without recognizing the insolvency risks personal liability for paying creditors out of priority, distributing to beneficiaries before you deal with the creditors incurring expenses that maybe the estate can\u0027t cover. The nature of insolvency is there\u0027s not enough to go around. As a result, one has to follow a distribution scheme which for insolvency can generally be quite complex. And we talked about sort of the steps that you might want to take if you think an estate is insolvent. I guess the last thing you could do as well is to consider engaging an expert, reaching out to an insolvency trustee who are experts in the area, and can identify some of the risks for you. I guess lastly, if the insolvency is clear and the named executor does not wish to proceed, there is an option not to act. And there\u0027s renunciation under the Wills and Estates Succession Act. And you can think about taking that step again, getting some advice before probate is issued and making that determination.\n\nNicole 00:06:18 So let\u0027s talk about the common traps for personal liability.\n\nNicole 00:06:23 So what is the “at-risk distribution trap”? Can you tell people what that is?\n\nJohn 00:06:27 Yeah. So we call that the “at-risk distribution trap,” which is essentially distributing money assets incorrectly. And so you\u0027ve distributed to beneficiaries before creditors are satisfied. As an example, the executor becomes personally liable to repay creditors out of their own pocket up to the value of the assets that are given away. Again, Wessel referred to the Wilson Estate Succession Act as Wesa. It has a couple of protection periods built into it as well. A distribution, a restriction 210 days can protect against Wills variation claims. Separately, notices to creditors can be sent out as well, and that can be a mechanism to assist in protection as well. 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So some of the listeners might be familiar with the insurance sector, of course. And they offer insurance products that can try to protect against needing to deal with tax obligations on death that arise as a result of a deemed disposition on capital property that occurs on death. So under the Income Tax Act. There\u0027s a deemed disposition. So even if that property isn\u0027t sold and it\u0027s not sold on death, there\u0027s a deemed disposition. And as a result, it can be a significant income tax or capital tax obligation. Sort of think about your non principal residence as an example. And again in the Lower Mainland we\u0027ve seen incredible increases in real estate values over the course of the last several decades. That gain in value. If it\u0027s a non principal residence it\u0027s going to attract tax and so on death, there\u0027s a deemed disposition of that capital asset and that tax needs to be paid. So sometimes that\u0027s overlooked by an executor. 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DOCS_modelChunkLoadStart = new Date().getTime(); DOCS_initialLoadTiming.incrementTime('mp', DOCS_modelChunkLoadStart - DOCS_modelChunkParseStart); DOCS_warmStartDocumentLoader.loadModelChunk(DOCS_modelChunk); DOCS_modelChunk = undefined;</script><script nonce="wItng2fwJMGG2ITKhYINsQ">DOCS_modelChunkParseStart = new Date().getTime();</script><script nonce="wItng2fwJMGG2ITKhYINsQ">DOCS_modelChunk = {"chunk":[{"ty":"is","ibi":12607,"s":"\nJohn 00:11:16 The executor can have their expenses paid as a priority claim under that legislation, and if they spent a lot of time early on, that may be an important factor because once there\u0027s a bankruptcy, those costs can\u0027t be recovered. Under the Bankruptcy Insolvency Act. They\u0027re essentially an unsecured creditor at that point. So generally WESA is a recommended choice for smaller, simpler states, and certainly those where an executive wants to continue to be involved in the wind up in the decision making process.\n\nNicole 00:11:44 When then should someone consider the Bankruptcy and Insolvency Act?\n\nJohn 00:11:48 Certainly complex estates with multiple assets and creditor claims, and frankly, given that a representative may wish to turn it over to somebody else, executors, particularly family members, we all have day jobs. And it\u0027s interesting right now. Actually, my father unfortunately passed away back in November, and so I\u0027m the executor of that and spending time on his estate. And it does take time. And right now I have to do it off the side of my desk. And so there are those cases, particularly in the complex estates, where using your time may not be optimal or wise.\n\nJohn 00:12:20 And so something to think about in terms of the Bankruptcy and Insolvency Act. There\u0027s also again we talked about those very aggressive creditors. Right. So the Bankruptcy and Insolvency Act creates a stay of proceedings of creditors. There\u0027s other remedies available under that legislation as well that aren\u0027t necessarily available under the provincial legislation.\n\nNicole 00:12:37 I think something people should understand is even if they choose to proceed under the provincial estate law, creditors could still push it into the federal bankruptcy legislation. Do you want to talk about that?\n\nJohn 00:12:49 Yeah. No distinction between an estate and other businesses or individuals. There is a bankruptcy legislation in place that does allow creditors to seek to petition an estate into bankruptcy. So sometimes it can be unavoidable. Very low bar. You know, any creditor that\u0027s owed $1,000 or more can bring proceedings to put an estate into bankruptcy. It is a court process in the sense that it\u0027s not automatic. They have to file that petition and then there\u0027s a court hearing. But if that happens, the Bankruptcy Act takes over completely. A licensed insolvency trustee replaces the executor.\n\nJohn 00:13:23 And again, as I mentioned earlier, it’s important to understand that because if you\u0027ve done a lot of work as an executor before the bankruptcy, you might not be paid for that work given the way the Bankruptcy Insolvency acts in terms of the priority scheme, if there\u0027s a realistic risk of a creditor petition, again, maybe multiple creditors being aggressive. So there\u0027s, you know, litigation that\u0027s been commenced, there\u0027s the collection agencies. There might be a bank that might be foreclosing on an asset. Realistically, a bankruptcy might happen regardless. And sometimes it\u0027s better for the executor to initiate that on their own. Because one of the things you can do when you assign an estate into the bankruptcy voluntarily, you can at least take some control over who the trustee is going to be. You know, you may have a good relationship with the trustee bankruptcy. You might know somebody, a good friend works with them, and you can trust that individual. You may have a good relationship with that trustee going forward. And that could be important in terms of how the estate\u0027s administered.\n\nNicole 00:14:20 So let\u0027s talk about the provincial scheme under the BC law. What is the priority list of creditors?\n\nJohn 00:14:30 Under WESA generally you have the funeral and testamentary expenses, of course. And then, as I mentioned earlier, the remuneration of the personal representative comes next. 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DOCS_modelChunkLoadStart = new Date().getTime(); DOCS_initialLoadTiming.incrementTime('mp', DOCS_modelChunkLoadStart - DOCS_modelChunkParseStart); DOCS_warmStartDocumentLoader.loadModelChunk(DOCS_modelChunk); DOCS_modelChunk = undefined;</script><script nonce="wItng2fwJMGG2ITKhYINsQ">DOCS_modelChunkParseStart = new Date().getTime();</script><script nonce="wItng2fwJMGG2ITKhYINsQ">DOCS_modelChunk = {"chunk":[{"ty":"is","ibi":25971,"s":"\nNicole 00:23:34 Isn\u0027t it true that even professionals can get in trouble if they are counseling clients to defeat creditor claims?\n\nJohn 00:23:41 Yeah, it\u0027s not uncommon for us. Sometimes you get approached by clients that, you know, their business might be hitting the wall, and they want to look at what we call sort of creditor proofing or entering into transactions. And again, advisors can\u0027t counsel through, you know, that you should do that or how to do that. And you\u0027ve got to be very careful in terms of your involvement in that regard for sure.\n\nNicole 00:24:04 So let\u0027s talk about insolvent estates and how they can intersect with family law issues. So if someone who died was separated, but not divorced.\n\nNicole 00:24:14 Can the surviving spouse claim against the estate?\n\nJohn 00:24:17 Yes. So under the Family Law Act as separate, his spouse may have a property division entitlement against the estate. That might be something that has not been totally resolved in terms of a separation or divorce. Conversely, an executor may be able to enforce a property division claim against a surviving spouse as well. So that landscape doesn\u0027t change as a result of the passing and an estate being created on bankruptcy. Family law remedies like property division claims vest in the bankruptcy trustees. So the remedies still exist, but they\u0027re just sort of advanced in a different way.\n\nNicole 00:24:52 And what about outstanding support obligations? Somebody dies and they\u0027ve got significant obligations for spousal or child support claims. What happens to those?\n\nJohn 00:25:01 I said at the beginning really trying to understand the universe of claimants, right. And so that includes if there is a form or spouse sort of thinking through, okay, what is the current landscape of the support obligations, if there are any? What are the other obligations in terms of property division.\n\nJohn 00:25:15 So support arrears. Yes. Receive priority under both WESA and a certain priority in the waterfall not to the top of the chain. And certain sections of the Family Law Act also give the court authority to order support to continue after death, and so support obligations are not released and those need to be focused on by an executor for sure.\n\nNicole 00:25:39 And what about wills? Variation of claims? If an estate is potentially or actually insolvent, is there any point in a disappointed spouse or child making a claim?\n\nJohn 00:25:49 I mean, I mean potentially, you know, they do. Again, Wills variation remedies would operate against the estate after creditor claims, administrative expenses. But again, you know, we did talk about how there might be some estate assets or exempt from creditors. So there could very well be still a net estate even in that situation. Clearly, as you say, in a significantly insolvent estate, there may be little or nothing left for variation. So that would sit at the back of the bus, so to speak.\n\nJohn 00:26:17 Much like in any, you know, business situation, you know, the quote unquote, equity claims, beneficiary claims in this estate context, you know, generally sit behind creditors.\n\nNicole 00:26:27 So there\u0027s a third option available, isn\u0027t there. So you could administer it under provincial law you could do formal bankruptcy. But what about a bankruptcy proposal?\n\nJohn 00:26:38 For our listeners a bankruptcy proposal, it\u0027s a remedy that\u0027s available where there\u0027s not a complete bankruptcy or an assignment in bankruptcy. Sort of separate this for the listeners. So a bankruptcy generally is everything vested in the trustee. Everything gets liquidated. Everything gets distributed in a proposal context. It\u0027s almost like a negotiation with the creditors. And so what you\u0027re trying to do is compromise what the obligations are. 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There is a statutory stay of proceedings. So in other words, all the creditors are sort of stopped in their tracks in terms of recovery. And then you try to settle the claims at less than full value. It can be a negotiation, but there\u0027s also a way to put basically an offer, a proposal to creditors and have them vote on it. So you may have a situation where a lot of your creditors are sympathetic and they\u0027re prepared to support something. There might be a few that are not. But if you can achieve a certain majority threshold of number and two thirds in dollar value, you can sort of force that sort of resolution on all the creditors and then ultimately have something in the net estate that could be available for the beneficiaries.\n\nNicole 00:28:04 So it\u0027d be important that somebody would get really good legal advice.\n\nJohn 00:28:07 I imagine legal advice in the trustee landscape, which are, you know, certified trustee insolvency professionals that understand this area very well as well.\n\nNicole 00:28:16 So what if the executor themselves goes bankrupt in the middle of administering the estate?\n\nJohn 00:28:21 Well, thankfully for the beneficiaries, the estate assets held by the executor are not subject to seizure by the executors personal creditors. And that\u0027s clear under both the provincial and the bankruptcy legislation excludes property held in trust and recall. When we started, I talked about an executor being a fiduciary. In a sense, they\u0027re a trustee as well. And so debts of the executor do not have any claim against those assets.\n\nNicole 00:28:46 So what if a beneficiary is bankrupt? Can a parent protect the inheritance from their child\u0027s creditors for example?\n\nJohn 00:28:55 Really good question. And again really good planning is required in terms of setting up your will to deal with that potential situation. So discretionary trusts can protect inheritances. And there\u0027s other ways to try to deal with that circumstance. And so really important to get, you know, the Wills and estates expert advice. Well before you might be considering an estate situation because you can definitely look after the beneficiaries in that way.\n\nNicole 00:29:24 Let\u0027s say a listener has just been named executor, and they\u0027re starting to worry that the estate might not be able to pay all its debts. What\u0027s the first and most important thing they should do?\n\nJohn 00:29:33 Hire an expert? Again, it\u0027s a bit, you know, as a lawyer that does a little bit of work in this space. Perhaps it\u0027s self-serving, but really it is important. And you have to think about it from the perspective of, as an executor, you are a fiduciary for the beneficiaries and the creditors. It\u0027s not, “your money.” So using some of the estate assets wisely to get the necessary expert advice, not only protect you, but also potentially maximize the recovery in this state is very good advice.\n\nNicole 00:30:01 So who might that expert be, like an insolvency lawyer or a trustee? Or who should they talk to?\n\nJohn 00:30:07 you know, wills and estates lawyers generally, you know, will have within their organization somebody in the field of insolvency as well and could work hand in glove with those individuals.\n\nJohn 00:30:17 but yeah, as well the sort of the insolvency trustee community. So all the major accounting firms and small boutiques as well have specialties. 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Thanks very much, Nicole.\n\nNicole 00:32:06 This podcast is for informational purposes only and should not be considered individual, legal, financial or tax advice.\n\nNicole 00:32:13 Make sure to consult the advisor of your choice to advise you on your own circumstances. Thank you for joining us for this episode of Your Estate Matters. If you like this podcast, make sure to follow it on your podcast platform of choice. Whether you\u0027re planning your own estate or you\u0027re acting as executor for somebody else\u0027s heritage, trust can help partner with Heritage Trust to protect your family, your assets, and your legacy. If you\u0027d like more information about Heritage Trust, please visit our website at Heritage Trust. 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