Since 2006, the Pension Protection Act has been the only significant change in retirement legislation…
The Creditors and the Probate
A legal approach to avoiding probate is an excellent way to minimize taxes, keep your estate private, and avoid having to seek court approval at every stage. Time, frustration, and, in many cases, significant court and attorney fees can be saved by utilizing this service. You must formally notify all your creditors of your death through your personal representative, sometimes referred to as your executor. This action is one of the first steps in the probate process. Often, this is as simple as placing a notice of death in the local media, which is responded to by creditors, who then file a claim with the probate court to receive payment.
Outstanding debts typically include credit card payments, mortgage, car payments, insurance, real estate taxes, utility bills, medical and funeral expenses, and other legal debts incurred but not yet paid. The probate timeline for creditors to file a claim varies by state. On average, between three to six months is a creditor’s window of opportunity to submit formal claims to your estate for payment. If there is no contest over the debt, the personal representative will pay the outstanding bill with estate funds; the creditor will receive payment in full, which completes the claim.
Personal representatives, beware. Do not distribute assets to beneficiaries before the balance of the estate’s taxes and all outstanding debts are completely paid or dismissed by the probate court. It is the responsibility of the personal representative to cover all estate expenses, and you may become personally liable for deficiencies in estate debt payments unless beneficiaries return their portions of inheritance to cover those outstanding debts. If you feel you must make a partial distribution to heirs, withhold enough monies to cover all estimated expenses.
If the decedent’s property does not go through the probate process, creditors’ claims remain pursuable for a longer time. Partly this is because there is no legal requirement to notify creditors of a person’s death. By the time a creditor may learn of the death, the debt might be so small they are unwilling to pursue its collection. A creditor may find a tax write-off of bad debt more advantageous than chasing down repayment that is not cost-beneficial.
In other cases, an estate may not have liquid assets yet hold real property with enough value to cover the outstanding debt claim if sold. Valuable inheritable property can be lost to a forced sale to cover creditor claims in probate court. A creditor forcing this type of sale drags out probate proceedings, incurring additional costs. Secured creditors receive priority over unsecured creditors. Banks are the primary secured creditor with which a personal representative may have to contend.
Suppose a person dies with substantial debt and there are limited assets to cover these debts. In that case, the estate is deemed insolvent, and there is a generally accepted prioritization of debt payment by all states. A personal representative should always pay debts in order of a state’s recognized priority list. Otherwise, debts that may be dismissible, pro-rated, or forgiven may receive payment, while secured debts never “go away.” It is essential to understand the priority order for estate debts. Note that these are generalities, and some state laws may prioritize these categories differently.
- Administrative costs – Common costs include court fees, filing fees, notice costs, attorney’s fees, and the administrator’s commission.
- Family exemptions – Many states will provide payments helping family members handle their living expenses during the estate’s probate. This family exemption usually gets high priority to lessen financial stress as a family mourns the loss of their loved one.
- Funeral and burial costs – These expenses address funeral and burial costs by state law. Costs of cremation, interment, urns, markers, and associated funerary service costs are permissible as part of funeral and burial costs.
- Government debts – Income taxes, property taxes, and estate taxes take priority over other debt obligations.
- Final medical bills – The decedent’s final sickness or injury receives priority over other unsecured debts. Some hospitals will reduce final medical bills if the newly negotiated amount is paid promptly and in full.
- All other claims – Usually, states do not prioritize these other more general unsecured debts. Some cases permit debt payment based on the filing date of claims, and other times debts may be pro-rated.
Assets such as retirement accounts and insurance proceed with a designated beneficiary receive different treatment and provide more protection from creditors. The same holds for an irrevocable trust which upon death also provides protection from creditors. A beneficiary designation and specific trust entity can help to shield an estate with a heavy debt burden.
When someone dies, their estate assets must be secured and eventually distributed according to the existing Will or state intestate laws. Another vital function of the estate is for the personal representative to ensure the decedent’s genuine debt obligations receive payment. When an estate has sufficient assets to pay all outstanding debts, payment can occur in any order. If the estate leans to insolvency, the personal representative should withhold asset distribution to heirs until the probate court approves the debt fulfillment priorities. If you would like to discuss ways we can help, please contact our office at (352) 565-7737. Conversations are complimentary.