Yes.  Your estate can go bankrupt.  And it is possible that when it does, your heirs are not required to become heirs of your estate.  And, therefore, would not be responsible for any of your estate’s bills.

However, what normally happens is quite different.

Often, people make the executor of their estate one of the beneficiaries, such an adult child (when both spouses are gone).

Estates can take a long time to wind up and finalize.  They are not finalized until all the creditors, including CRA (Canada Revenue Agency) are paid.  If the executor (such as your adult child) distributes any part of the estate, before it is finalized and settled, then the Executor is responsible for those distributions.  This can happen early in the estate settling process, when an Executor/beneficiary believes that there is enough in the estate, but as time goes along, it becomes clear that their are still bills to be paid, or CRA needs to be paid and there is no cash in the estate to do it.

People have life insurance to pay for these bills.  But often, they name a loved one the beneficiary of the life insurance proceeds, instead of directly into the estate, thinking that the loved one will pay for the estate’s debts.  And they do this to bypass the estate, avoid probate, and estate fees.  But they are counting on their loved ones to ensure the estate gets settled properly.

If you made your loved one the beneficiary of your life insurance policies, they get the life insurance proceeds directly, bypassing the estate. Free and clear – no taxes, no probate, no estate fees.   And the creditors of the estate have no rights to it. And it will be paid fast.

If you really intended for those life insurance proceeds that were directly paid to your loved ones,  to be used for your estate –  and your executor/beneficiary didn’t realize it, or they initially thought the estate had enough assets to pay off the creditors, it could be a big financial headache for them. They may have already used the life insurance money to pay their own debts, such as a mortgage, or buying a bigger house, before they got the final estate settling calculation. And with the life insurance money all gone, then your estate has no way of paying the bills.  And the executor/beneficiary is responsible.  They could end up in a real pickle financially.

This may happen even if they have good intentions, but are unaware of how it all works.

So.  When thinking about how you set up your beneficiaries – consider carefully, how much life insurance should go directly into the estate, and how much should go directly to named beneficiaries such as loved ones.

And…if you are trying to avoid probate and estate costs on the life insurance proceeds and designate a named beneficiary, make sure they are aware that you also wished for the proceeds to be used to pay off your estate creditors. And you should read my post on “Leave a Love Note”. 

Disclaimer – Everyone is different.  So please seek professional advice about your personal situation.  These blog posts are meant to be helpful as generalities, and your personal situation needs to be addressed individually by professionals.  Best Jane.