How to Pay the Decedent's Debts and When to Declare Insolvency
Once a decedent’s estate is established, the executor’s next step is to identify and pay the decedent’s debts, administration expenses, and any claims against the estate. Identifying and paying these debts and expenses will help the executor determine whether to declare the estate insolvent.
Paying debts of the decedent and administration expenses
As executor, you should have collected all the decedent’s bills. One of your first tasks is to pay all administration expenses and debts of the decedent before you make any distributions to beneficiaries — if you have enough assets to do so.
How and when to pay a decendent's claims
As executor, one of your first duties is to pay the decedent’s debts. Some common claims include these:
A lease on the decedent’s residence: Be sure to review the lease, because some may have a provision for termination upon death. Often, you can reach an agreement with the landlord for early termination. Payments under the lease are claims against the estate, but executor extensions of the lease are administration expenses. Utility bills following the decedent’s death are also administration expenses.
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.
When you’re paying off the decedent’s debts, remember:
A debt is only considered a claim against the estate if it 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 different 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, such as utility bills, but you may have to investigate others more thoroughly. Your state’s legal precedents can likely help determine whether the claim is valid and can be paid. If actual services were rendered, the claimant is probably entitled to something from the estate.
Check to see whether any life insurance related to the debt is intended to pay it off upon death. Also make sure there are no agreements that make the indebtedness vanish upon death.
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 to which they’re attached.
Keep in mind your state’s statutory period for filing claims. Be aware that each state has exceptions to this statute of limitations, including the following:
Federal claims
State estate or inheritance tax
Creditors’ liens on property
Certain governmental and private claims for environmental damage
State statute may also provide that, after a specified time, 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.
Prioritizing payment of decedent's debts
Every state sets its own order of priority; check with a competent attorney or with the probate court to determine the order.
The following is a list of the types of claims that typically take priority:
Reasonable administration expenses
Funeral expenses and the expenses of last illness
Federal and state taxes
Medicare claims
Generally, you can only pay all other claims after you’ve paid these in full.
Declaring the estate insolvent
When you have more claims against the estate than assets to pay them, you must declare the estate insolvent. First consult with a probate attorney who has experience with insolvent estates in your jurisdiction.
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 administration expenses by the trustees; that way, an insolvent estate doesn’t have to go through the courts to access the trust fund.
