After someone dies, proper debts must be paid in probate if there are assets to pay them. The personal representative appointed by the Probate Court needs to assess what is owed and if debts can be fully paid. Figuring out those things is sometimes easy, but it often takes time to assess, especially if there is litigation involved.
Of course, everything that must be addressed in settling an estate becomes more complicated when there is no will or if no estate planning has taken place before the person dies. Debts are a particular area of concern for the estate and the executor. What has to be paid, and who gets paid first? These topics are explained in the article “Dealing with Debts and Mortgages in Probate” from The Balance.
Probate is the process of gaining court approval of the estate and paying off final expenses before property can be transferred to beneficiaries. Dealing with the debts of a deceased person can be started before probate officially begins.
Start by making a list of all of the decedent’s liabilities, and look for the following bills or statements:
- Mortgages
- Reverse mortgages
- Home equity loans
- Lines of credit
- Condo fees
- Property taxes
- Federal and state income taxes
- Car and boat loans
- Personal loans
- Loans against life insurance policies
- Loans against retirement accounts
- Credit card bills
- Utility bills
- Cell phone bills
Next, divide those items into two categories: those that will be ongoing during probate—consider them administrative expenses—and those that can be paid off after the probate estate is opened. These are considered “final bills.” Administrative bills include things like mortgages, condo fees, property taxes, and utility bills. They must be kept current. Final bills include income taxes, personal loans, credit card bills, cell phone bills, and loans against retirement accounts and/or life insurance policies.
The executors and heirs should not pay any bills out of their own pockets. The executor deals with all of these liabilities in the process of settling the estate. An inexperienced executor could advance funds to cover expenses without properly surveying the estate’s assets and later find that their loans to the estate cannot be repaid.
For some of the liabilities, heirs may have a decision to make about whether to keep the assets with loans. If the beneficiary wants to keep the house or a car, they may, but they have to keep paying down the debt. Otherwise, these payments should be made only by the estate.
The executor decides what bills to pay and which assets should be liquidated to pay final bills.
A far better plan for your beneficiaries is to create a comprehensive estate plan that includes a will that details how you want your assets distributed and addresses what your wishes are. If you want to leave a house to a loved one, your estate planning attorney will be able to explain how to make that happen, while minimizing taxes on your estate.
Also, when specifically assigning assets to people in your estate plan, remember that the bills must be paid. We have worked with numerous estates where the beneficiaries get reduced inheritances because many assets were paid outside the probate estate, forcing the sale of remaining items to pay the bills.
Reference: The Balance (March 21, 2019) “Dealing with Debts and Mortgages in Probate”
