How to Pay the Decedent's Debts and When to Declare Insolvency
As executor, you should have all the decedent’s bills (or be in the process of collecting them). One of your first tasks is to pay all administration expenses and legitimate debts of the decedent before you make any distributions to beneficiaries. That is, if you have enough assets to do so.
How and when to pay claims
One of your first duties as executor (after the payment of administration expenses) is to pay the debts incurred by the decedent during his or her life. Some types of claims that frequently arise include
A lease on the decedent’s residence: Be sure to review the lease. In many cases, you can reach an agreement with the landlord for early termination of the lease. Payments under the lease are claims against the estate, but extensions of the lease by the executor while the estate is administered are administration expenses, as are all utility bills for periods of time after the decedent’s death.
Child support and alimony: Agreements or court orders to pay alimony and child support are claims against the estate, and you must hold back sufficient funds for future payments.
Here are a few points to keep in mind when you’re paying off the decedent’s debts:
A debt is only considered a claim against the estate if the debt was created before the decedent died. If it wasn’t created before death, it may still be enforceable against the estate as an administration expense; administration expenses are dealt with differently than debts of the decedent.
Before you pay any debts, verify the validity of each claim. Doing so is a simple matter for most debts, but you may have to investigate others more thoroughly. For instance, if a relative, friend, or nurse provided care to the decedent with an oral understanding that they would be paid from the proceeds of the estate, go directly to an attorney who is expert in probate law.
Check to see whether any life insurance related to the debt (such as life insurance relating to a mortgage) is intended to pay it off upon death. Also make sure that no agreements are in place that make the indebtedness vanish upon the death of the decedent.
Consider whether the debt is legally enforceable. Debts such as charitable pledges may only be considered moral obligations.
Frequently, your decedent’s largest obligations don’t need to be paid in full. Many are secured obligations that stay with the property they’re attached to. Mortgages and auto loans, for instance, stay with the property, and whoever inherits the property inherits it with the debt attached.
Keep in mind your state’s statutory requirements regarding claims. Unless your estate qualifies to use a small estate procedure, you’ll have to give notice to the decedent’s creditors of the estate’s deadline for filing of claims by publishing a notice in a publication approved by the probate court.
You’ll receive a publisher’s affidavit, which you’ll file with the probate court. And, typically, you must also give actual notice to each estate creditor of whom you are aware within a set period of time. You must also give notice to the trustees of the decedent’s revocable trust. If proper notice was given, then a claimant will have a set amount of time in which to file a claim.
Be aware, however, that each state has exceptions to this statute of limitations, including the following:
Federal claims, including the federal estate tax
State estate or inheritance tax, if any
Creditors’ liens on property
Certain governmental and private claims for environmental damage
State statute may also provide that, after that period for filing a claim, you may pay those claims that have been presented to you, and you won’t be held liable if funds are needed for later claims.
Prioritize payment of decedent’s debt
When the estate doesn’t have enough money to pay all the claims against it, don’t start paying bills on the basis of the order received or who’s screaming loudest for the money. Every state sets its own order of priority; check with a competent attorney or with the probate court to determine in what order you must pay the claims.
The following is a list of the types of claims that typically take priority:
Reasonable administration expenses, including attorney and other professional fees
Reasonable funeral expenses and the expenses of last illness
Exempt tangible property
Debts and taxes with priority under federal law, including medical assistance payments that are subject to recovery (Medicaid liens)
Reasonable and necessary medical and hospital expenses of the decedent's last illness, including compensation of persons attending the decedent
Debts and taxes with priority under other laws of the state
Federal and state taxes
Generally, you can only pay any other claims after you’ve paid all these claims in full.
When to declare the estate insolvent
When you have more claims against the estate than assets to pay them, you must declare the estate insolvent. Before taking this step, consult with a probate attorney who has experience with insolvent estates in your jurisdiction. You’re going to need her guidance to know the procedure for declaring insolvency in your state and to figure out what you’re allowed to pay.
If the decedent had a funded revocable living trust, you can usually use it to satisfy creditor’s claims. Hopefully, a decedent who funded a living trust made provisions in it for the payment of debts and expenses of administration by the trustees; that way, an insolvent estate doesn’t have to go through the courts to access the trust fund.