What is a Deceased Estate? (NSW)

When someone dies in New South Wales, their deceased estate is made up of all their property and assets (including real estate, cash in the bank, vehicles, shares and stocks and household and personal belongings). However, it is not always obvious what property is included in a deceased estate: for example, any jointly held property is not included, but domestic pets are considered property for inclusion. The deceased estate also includes any liabilities and debts that remain after a person dies that must be discharged using the equity in the estate. This article examines the general rules that apply to deceased estate administration, particularly in regard to the payment of liabilities and allocation of assets to beneficiaries.

Who is Responsible for Administering a Deceased Estate?

In an ideal scenario, when someone dies they have left comprehensive instructions about their testamentary wishes in the form of a valid will. One of the most important instructions contained in the will is the appointment of one or more people to act as executor of the deceased estate. During probate, the executor is tasked with collecting together the assets of the deceased, paying any creditors and distributing the residual estate to the nominated beneficiaries. If someone passes away without making a valid will, they are intestate and the deceased estate must be administered according to intestacy law. In cases of intestacy, the Supreme Court of New South Wales will appoint an administrator to assume its management.

What is Excluded From a Deceased Estate in NSW?

Wills are legal instruments that are exclusively concerned with the distribution of property. As such, other instructions left in the will regarding the guardianship of children, are not binding. However, it is an established practice that these wishes are included in the will as a convenience and to ensure that they are taken into consideration.

In addition, property that is jointly owned with someone else, and trust-held and company-held assets, are typically not eligible for inclusion in a deceased estate. If the deceased has nominated a beneficiary for a life insurance policy or superannuation policy, these assets are also not included unless the court makes a Notional Estate Order to recover the asset.

Which Debts are Paid From a Deceased Estate?

The testator should make provision in their will for immediate outlays such as funeral expenses and household bills, and also to discharge the debts of the deceased estate. The executor must ensure that a final tax return is lodged for the deceased and that any other tax liability (such as from superannuation payouts or capital gains on the sale of investments) is discharged.

An executor is legally obligated to pay the debts of the deceased estate before any assets are transferred to beneficiaries. However, some assets, such as life insurance payouts and superannuation death benefits, are theoretically protected from being used to discharge the debt of the deceased estate. They are only theoretically protected because if a beneficiary lodges a Notional Estate Claim and the court finds the claim persuasive, these payouts will be treated as part of the deceased estate for redistribution.

What Happens If the Debts Cannot Be Discharged?

If there is insufficient equity in the deceased estate to discharge the outstanding debts, the executor must pay out the debts in the order dictated by either insolvent estate provisions or bankruptcy provisions. There is no obligation for the family of the deceased to discharge these debts. The bankruptcy of a deceased estate will not affect the credit of the family members unless they also acted as a guarantor, joint borrower or co-owner of the debts.

Legislative provisions dictate that the testamentary, funeral and administration expenses are paid before any other debts. After that, the executor must discharge any taxation debt, and then secured debts such as car and home loans. Another high priority is the payment of outstanding and ongoing child support owed by the deceased for their offspring. If the deceased had a HECS-HELP education liability, the final tax return will make an appropriate final repayment, but the balance of the debt will be forgiven.

Unsecured debts are the final category of liabilities that are paid from the capital available in a deceased estate, and consequently the most likely to go unpaid if the estate ends up insolvent. As such, even if the testator made provision in their will to repay an unsecured loan to a family member or friend this debt is the least likely to be paid back. This can be a particular concern if the loan was a substantial contribution towards a business interest or real estate purchase. It is highly recommended that family loans be formalised and registered to avoid such situations.

The rules that apply to the inclusion and exclusion of property in a deceased estate, and the guidelines for discharging debt, can be confusing for any testator, executor or administrator. For more information on the nature of deceased estates in New South Wales, please contact Armstrong Legal on 1300 038 223 or send our Wills and Estates team an email to make an appointment.