How to Pay the Debts of an Estate
If a loved one dies, and you are a beneficiary of their estate, you're really lucky if they leave you lots of property and funds, and no debt. However, this is not often the case. Even with a well managed trust or estate, the person who passes will likely have some debt that is owed.
The executor of an estate, or the trustee of a trust, is the one who is responsible for administering the deceased person's estate. An important part of their job is paying the estate's creditors. This could include credit cards, bank loans, or any number of other types of debt. While this can seem like a daunting task, there are certain legal procedures in place that make it easier to deal with. If your duties as a trustee or executor do become unnecessarily complicated, it is recommended you enlist the help of an experienced Trust and Estate Attorney. An attorney who specializes in Trust Administration can guide you in fulfilling your role as trustee or executor, to ensure that you meet your legal responsibility.
One common way of dealing with creditors is to publish a notification in your local newspaper. Under California law, creditors have 120 days from the establishment of a trust to request payment. Publishing in a newspaper will safeguard the trust against unknown creditors. Once the 4 months have passed, creditors can no longer make claims. For known creditors, sending them a notice of the establishment of trust is another way to safeguard the trust's interests. When creditors are noticed, they have 60 days from the receipt of notice to request payment or issue a claim.
Be aware that there are exceptions to the creditor rule. Debts such as liens or federal/state taxes do not have to adhere to time limits. Now, once the creditor has been noticed and has filed a claim with the estate or trust, the trustee or executor can choose to accept or reject the claim. If a claim is rejected, however, the creditor may choose to sue the estate.
Now, should there be more debt than funds available in the estate, the executor or trustee must declare that the estate is insolvent. Beneficiaries in this case would not get anything. In the majority of cases I see in my Walnut Creek Trust & Estate Planning practice, beneficiaries typically get something from the estate, but often much less than they were expecting. This is because funeral expenses, administration fees, taxes, and creditor claims have priority. The distribution to heirs is typically the last step in the administration of an estate. One further complication that the trustee or executor must deal with is paying creditors in order of their priority group. Some creditors must be paid before others. In addition, if there are not enough funds to pay all creditors, payments must be prorated among creditors in all groups. The bottom line when you are the executor or trustee of an estate is this: do your homework, or hire a good estate lawyer. You can be held liable for any mistakes you make as executor, and in estates with significant assets, beneficiaries are always quick to hold the person in charge responsible.
As an Elder Law and Estate Planning Lawyer in Walnut Creek, I frequently help clients with Estate Matters, whether they are Trust, Probate, or Will related. Contact me here for more information.