Abatement

[This post describes common law rules of abatement which are replaced under the Wills, Estates and Succession Act, which comes into effect March 31, 2014. Since I wrote the post below, I have written about the changes here.]

When there are insufficient assets in an estate to both pay the deceased’s debts in full and to make all of the gifts to the beneficiaries set out in the deceased’s will, the debts must be paid first. This means that at least some of the beneficiaries will be disappointed. When gifts must bear the burden of the deceased’s debts, the gifts are said to abate.

Not all gifts are treated alike. Some types of gifts are sold to pay the debts before others.

In British Columbia, the law distinguishes between the following types of gifts:

1. a gift of specific land;
2. a gift of specific personal property (assets other than land);
3. a demonstrative legacy, which includes a sum of money that the will says is to be paid out of a specific investment or out of the proceeds of sale of some other asset;
4. a general legacy, such as a specific amount of cash;
5. a residual gift of land, such as a gift of “the residue of my real estate,” rather than a specific parcel or specific parcels of land;
6. a residual gift of personal property; such as a gift of all of “the residue of my estate.”

Unless the will provides otherwise, of these gifts, the type of gift described in 6 (the residue of personal property) is used to pay debts first, followed by 5, then 4 and so on.

There is an exception for a mortgage of land. Unless the will indicates otherwise, section 30 of the Wills Act, RSBC 1996, c. 489, provides that if mortgaged land is left to a beneficiary, the beneficiary takes the land subject to the mortgage. In other words, the mortgage must be paid off out of the beneficiary’s interest in the land.

In a recent case, Thompson v. Gollan, 2005 BCSC 1814, Arthur Thompson in his will left his wife the house, and provided that two other parcels of land he owned were to be sold with the proceeds divided among the Mr. Thompson’s wife and two of his children. There were a few other assets in the estate, but they were not worth enough to pay off Mr. Thompson’s debts when he died. The daughters asked the court to decide whether the parcel of land with the house that Mr. Thompson left to his wife would have to bear part of the burden of paying the debts proportionally with the other two parcels of land, or if the proceeds from the sale of the other parcels of land would have to bear the full burden of paying the debts.

If the gift of the proceeds of the sale of the two parcels of land abates first, Mr Thompson’s daughters—who were from a previous marriage—would end up with less money out of the estate, than if the house had to share the burden of the debts ratably with the other two parcels of land.

Mr. Justice Melnick of the Supreme Court of British Columbia held that the gift of the house to Mr. Thompson’s wife was a specific gift of land, while the gift of the proceeds from the sale of the other parcels of land were either specific or general legacies, rather than a specific gift of land. Accordingly, the proceeds of sale from the other parcels of land would be used first to pay Mr. Thompson’s debts, before the house would bear any part of the burden of the debts. Mr. Justice Melnick noted, however, that if the debts included a mortgage on the house, the wife would take the house subject to the mortgage.