Does an estate have to pay a creditor or a dependant first?

How do dependants rank in terms of priority over others with a claim or interest in an estate’s assets? Let’s get a running start with a quick review of the law.

During their lifetime people often borrow money. Sometimes the loan is to buy a house or car, or even to invest in a business. When a person dies, one of the jobs of the executor is to pay off all the debts before dividing the estate amongst the beneficiaries. But, what about those people who relied on the deceased for support? Who gets paid first – the creditors or the dependants?

The answer is not straightforward, but it was an issue that the court in Grieco v. Grieco Estate, 2013 ONSC 2465 (“Grieco”) considered. In Grieco, claims were brought against the estate by the deceased’s divorced spouse, his surviving common-law spouse, and two of the deceased’s adult children. Those family members reached an agreement as to how the assets should be distributed between them. However, there were also creditors. The court was therefore tasked with considering the priority of support claims from these family members over the claims of other creditors of the non-bankrupt estate.¹

Before we reveal the court’s finding in Grieco, it is important to review the law on dependant support applications generally.

Law on Dependant Support Applications

Where the deceased does not adequately provide for a living “dependant” in their estate plan, the living dependant may wish to commence what is known as a “dependant support application” under Part V of the Succession Law Reform Act (“SLRA”), to seek an order that the estate provide adequate support to the dependant. The SLRA defines “dependant” as including the deceased’s spouse, parents, children, and siblings, if the deceased was providing support to those individuals or was under a legal obligation to do so immediately before his death.²

The priority of minor children and spouses in dependant support claims is of utmost importance to the courts. The view of dependants’ relief legislation is to, among other things, ensure that the spouses and children receive a fair share of family wealth.³ Modern Canadian law expects that children will be properly supported, and that spouses are entitled to proper support and to share in each other’s estate when a marriage ends.⁴

The Ontario Court of Appeal in Cummings specifically considered the balancing act that courts must undertake when determining the quantum to be awarded to a dependant, and held that courts must consider both legal obligations of the deceased during his lifetime, and any “moral” obligations that arise between the deceased and his or her dependants in the eyes of what society considers judicious.⁵ Those general considerations are intertwined with the dozens of factors enumerated in s. 62 of the SLRA that a court must consider when determining the amount to be provided to dependants.

Dependants will also need to consider the priority of equalization payments that the lawful spouse may claim. When a spouse dies, the surviving spouse is entitled to half of the difference in net family property between them and the deceased spouse.⁶ Under the Family Law Act, R.S.O. 1990, c. F.3 (“FLA”), a spouse’s claim for equalization takes priority over dependant support claims under the SLRA, as well as priority over gifts made in the deceased’s will or any gifts conveyed through the laws of intestacy (if no valid will exists).⁷ An exception to this is when a gift was bequeathed in a will in accordance with a contract that the deceased spouse entered into in good faith and for valuable consideration.⁸ Another exception is that equalization claims do not have priority over dependant support claims brought on behalf of a child.⁹

Dependants that receive judgment for a support order should also anticipate how those support orders rank in priority to creditors, where the estate is not bankrupt. The Creditors’ Relief Act, 2010¹⁰ (“CRA”) establishes that support orders have priority over other judgment debts, other than debts owing to the Crown (i.e. taxes).¹¹ Support orders rank equally with one another and with any maintenance orders.¹² This legislation is significant in that it gives priority to support claims over virtually all other claims.¹³

Not only do judgments for support rank ahead of most creditors, but s. 72 of the SLRA permits dependants to claw back assets to pay their support order that are typically out of a creditors’ reach. That provision gives dependants priority over gifts mortis causa made by the deceased, certain monies deposited in the deceased’s account, disposition of the deceased’s property where the deceased acted as a joint tenant, life insurance and group insurance policies, and funds provided for by the deceased in designated plans.¹⁴

Court’s Finding in Grieco

In Grieco, the court applied much of the above-noted legislation to assess how the creditors’ claims should rank against the dependants’ orders for support.

With respect to the deceased’s spouse, the court confirmed that her equalization claim took priority over the non-family member’s claims per the CRA.¹⁵ The court further found that, in the event that its analysis was incorrect regarding the equalization claim, the divorced spouse’s judgment still had priority over the non-family member’s claims since she also sought dependant support under Part V of the SLRA.¹⁶ The court likewise found that the surviving spouse’s consent judgment to dependant support against the estate would have priority over the non-family member claims.¹⁷

With respect to the deceased’s adult children, the court did not find that there was sufficient evidence of the deceased providing support to them prior to his death, and as such the court could not conclude that they were entitled to bring a dependant’s support application under the SLRA. As a result, the court did not find that the adult children held a priority over other non-family member claimants.¹⁸

The decision in Grieco is an insightful review as to how the rights of dependants rank against creditors. Where a dependant’s support application is properly brought and judgment is obtained, that judgment acts as powerful protection against creditors that could compromise those claims. A consent judgment for support, however, does not absolve the dependants from needing to prove their entitlement to support in the event that a court is tasked with deciding how those claims rank against creditors of the estate.