When a beneficiary of an estate is a “judgment debtor,” meaning the court has ordered a debt payable to a creditor, can the creditor come after the estate for the beneficiary’s money? Like many legal responses, the answer is – it depends.
The legal process whereby a creditor can collect what is owed to them from a debtor by intercepting the debtor’s property/assets from another source is called “garnishment.” There are specific formal procedures surrounding garnishment with respect to notice given by the creditor, the rights and obligations of the “garnishee,” the source where the debtor’s property is being intercepted (i.e. the estate), and specific deadlines which are statute-based, set out in the Rules of Civil Procedure.
A creditor is only able to garnish from a beneficiary’s interest in an estate if the beneficiary’s interest can be considered a “debt” of the estate, that is, that the estate is deemed to owe the debtor, and this determination is based on case law. For example, a Will which sets out that there is to be an outright distribution of money to a beneficiary which has not yet been paid out by the estate, is considered a debt (i.e. presumably a monetary legacy). On the other hand, it is unclear in the case law as to whether a beneficiary’s “unvested” interest in an estate (i.e. an interest held in a discretionary trust) can be considered a debt payable to the beneficiary and garnishable by the creditor because the trust property would not be in the beneficiary’s hands or control as yet. Also, the case law has different answers depending on the type of estate asset looking to be garnished by a creditor – for example, there are cases where a bank account is garnishable but an RRSP is not.
When an estate trustee is served with a notice of garnishment from a creditor relating to a beneficiary of the estate who is a judgment debtor, the estate trustee should proceed with extreme caution. On the one hand, if the estate trustee releases a beneficiary’s property to a creditor who is not entitled to the property, the estate trustee could be held personally liable by the beneficiary. On the other hand, if the estate trustee does not pay out amounts owing to a rightfully entitled creditor, then the estate trustee could be held personally liable by the creditor. Estate trustees put in such situations should seek legal advice as to what his or her obligations are.
By: Karen A. Forhan