What Happens If An Estate Is ‘Insolvent’?

When administering an estate, a personal representative is responsible for collecting all assets in, paying all debts / liabilities and then distributing the estate, either in accordance with a will, or the rules of intestacy.

But what happens if there are not sufficient funds in the estate to pay out all that is required?

Insufficient funds to pay all gifts

If there are insufficient funds remaining in the estate to discharge all gifts contained in the will of the deceased, once all debts of the deceased have been paid, what happens is known as abatement.

Essentially, if there are insufficient assets to pay all legacies, the order in which gifts will be paid is as follows:

• First all specific / demonstrative legacies will be discharged. These are items which are distinguishable i.e. items of jewellery or personal possessions, or even, for example, a gift of money held in a particular, specified, account.
• Next, if assets remain, pecuniary / general legacies are paid i.e. gifts of money.
• Finally, if any assets remain, the ‘residue’ of the estate will be distributed in accordance with the provisions of the will.

If there are insufficient funds, the gifts in the will ‘abate’ in the reverse order, i.e. the residue is reduced first, then pecuniary legacies, then specific gifts.

If, for example, there are sufficient assets to discharge the specific gifts, but then not enough funds to pay all pecuniary legacies, these will then abate proportionately. Each category must be exhausted, before moving on to the next category of gifts.

This is, however, subject to the expression of any contrary intention in the willInsufficient funds to pay all debts

If there are insufficient assets to discharge all liabilities owed by the deceased, the estate is then what is known as ‘insolvent’.

The first thing to note is that the debts of the deceased do not generally become the personal liability of the personal representatives, unless they are, for example, joint debts, or if the personal representative fails to discharge the debts as required by law.

As above, if there are insufficient assets to settle the same, then the debts of the deceased should be paid in a particular order.

In the most simplistic order, this starts with funeral costs, testamentary expenses and any taxes etc. which may be due, then secured debts i.e. mortgages, then pensions arrears (both state and occupational), then unsecured debts.

Again, if there are insufficient funds to clear all debts in a particular category after having paid the debts which rank in priority, then all of the debts in that category abate proportionately, as they rank equally.