Court agrees to hear insurance claim for diminished value

Court agrees to hear insurance claim for diminished value

December 31, 2007

There is no secret that, when administering an estate, the debts of the estate must be settled before any of the beneficiaries can receive the property bequeathed. After funeral costs, administration costs, and any other debts that may have arisen otherwise, an estate trustee might make a startling discovery. After payment of all of these debts, the value of the estate is insufficient to satisfy all of the specific or residuary gifts. What should be done in order to solve this problem?

This is when the principles of abatement come into play. Abatement occurs when the assets of an estate are utilized (or, in practice, are redirected) in order to satisfy the debts of the estate, or the debt that arise or have arisen in connection with the passing of the deceased. The law is that the debts and liabilities of the estate will take precedence over any distribution to beneficiaries.[1]

There has been a long accepted common law order as to how abatement is to occur when an estate cannot otherwise satisfy its debts. The abatement order is as follows:

1. Residual Gifts;

2. General Gifts;

3. Demonstrative Gifts; and

4. Specific Gifts.[2]

Residual gifts comprise the remaining property of the estate that was not earmarked in a particular manner by the deceased. If there is sufficient value within the residual gifts, this will provide the easiest answer to an unfortunate situation. However, if there is insufficient value within the residual gifts, the estate trustee must turn to the next classes of gifts, which must each abate rateably.[3]

This article appeared on the Ontario Bar Association Website.  Please click here for the full story.