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Avoid Headaches from Settling an Insolvent Estate

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Three Challenges for the Executor when Administering an Insolvent Estate

Debt is a part of life for the majority of us. As an executor, settling debts on behalf of the deceased can be a burdensome task, especially when it is a loved one that the executor just lost. However, that task can become all the more complicated when you find that there are insufficient assets left in the estate to cover all debts and liabilities, which is the case in insolvent estates. 

An insolvent estate can be much more complicated, costly, and burdensome for the executor, making it important for them to understand what to expect. In other words, they need to know what they might be walking into.

Here are the challenges and complications you should consider.

Challenge #1: What Debts Should be Paid First?

One of the first things an executor for an insolvent estate will have to deal with is what debts should be paid first. It’s important to understand that state law can dictate this order of priority, as the probate process is done through the state and those laws can differ from one state to the next. 

However, you can expect to follow this general order of priority:

  • Funeral expenses
  • Estate expenses (legal, executor, and court fees)
  • Taxes
  • Creditors
  • Payments to beneficiaries

Challenge #2: What Happens When an Estate Doesn’t Have Enough to Pay Taxes and Debts?

One of the biggest questions an executor may have is, if there isn’t enough to pay the debts, are they personally responsible for paying the deceased’s taxes or debts. The answer to this is no, with a few exceptions.

The first exception is that if you were a co-signer on a loan with the deceased, you will still be responsible for that loan. Second, if you are the surviving spouse in a community property state, you will still be responsible for those payments as well. 

It’s also important to understand that most states provide creditors a set period of time to come forward and make a claim against the estate once a person has passed away. If a creditor does make a claim, the executor may potentially have to deal with those creditors directly. Probate court will determine the validity of any claims made in the allotted time, so only deal with creditors that the court has determined have a valid claim. 

If the estate runs out of money or available liquid assets prior to all debts and taxes being paid, the executor must petition the court to declare the estate insolvent. This means that beneficiaries named in a will won’t receive any assets or cash distributions, charitable estate giving is nil, and unpaid creditors will remain unpaid. 

Challenge #3: What Happens When an Estate Doesn’t Have Enough to Pay Beneficiaries?

One of the biggest challenges an executor can face is when there is enough to pay all the debts and taxes, but not enough to pay beneficiaries named in the will. The reason this can become a tricky situation is that some heirs may feel entitled to funds or specific property that had to be liquidated to pay debts. 

Just like with debts and taxes, the executor is not personally liable for paying beneficiaries. However, it’s important to know that some beneficiaries may petition the court if they believe there was mismanagement of the estate funds that resulted in the loss of their benefits. Probate court will oversee the process with beneficiaries as well, deciding which beneficiaries will receive what amounts. If there isn’t enough, the court may issue a reduction, referred to as an abatement. 

Conclusion

Managing an estate with significant debts can be a big challenge and higher complexity for an Executor. Leaving a ton of surprises for loved ones when it comes to debts and taxes can be troubling for many. To alleviate the fears one may have about leaving an insolvent estate to their heirs, OneDigitalTrust can help identify if an estate is at risk of insolvency before it becomes a bigger headache for everyone involved. Learn more about our revolutionary digital legacy planning platform for your or your clients, by heading to our website today.