What happens when an estate runs out of money?

When most people think of an executor’s job they imagine presiding over the distribution of a number of assets, money, personal items, even real estate. Though this is certainly true in some cases, it does not fully capture an executor’s role. He or she does not only distribute money to heirs, but must also distribute money to pay debts of the estate.

The hope is that there are enough assets to cover any liabilities, leaving something left over for family and friends, but sometimes that isn’t the case.

What happens then? To learn more about what happens when there simply isn’t enough money to go around, keep reading.

First, let’s back up as it’s worth mentioning that one of the primary duties of an executor is to pay the debts incurred by the person who passed away. Though the person is no longer around to pay the bills, his or her estate becomes legally responsible for debts entered into during the decedent’s lifetime.

What are some common examples? If the person owes money for housing, either a mortgage or rent, those payments will need to be made. The same is true if the decedent owed money for child support or alimony. These obligations do not disappear after death. Credit cards, medical bills, auto loans and many other debts must also be paid.

Things to keep in mind

Though executors are obligated to pay debts of the estate, it is important to remember that the estate is only responsible for paying legitimate debts that were created prior to the decedent passing away. If the debt arose after the person’s death it is possible that it will not be held legally enforceable against the estate. Promised charitable donations may also not be found enforceable, as these are sometimes seen as moral, rather than legal obligations.

Something else to keep in mind is that some obligations don’t need to be paid off as the debts are attached to certain items of property. For instance, auto loans follow the vehicle and it’s common for the person who inherits the property to inherit any debt associated with it.

What if the estate is running low on funds?

Unfortunately, in some cases debt has a way of piling up. When that happens, the executor may come to understand that there isn’t enough money to cover all of the estate’s debts. What do you do at that point? Pay bills randomly? Pay those that are screaming the loudest? No. If your estate lacks sufficient resources then you need to seek expert advice as there are specific rules in each state that govern the order of priority for paying creditors.

When is an estate insolvent?

An estate officially becomes insolvent when the estate has more claims (or liabilities) than it has assets to pay them. If that’s the case, then the executor needs to declare the estate officially insolvent. Be sure to work with a local probate attorney to assist with this process as it can be quite complex. If there are revocable living trusts, it is possible that they could be used to pay liabilities, though this will depend on the particular facts of your case.

In Minnesota, the law says that if an estate is insolvent that the following priority will be applied to creditors. First, any liabilities which arise after the death of decedent, such as funeral expenses, attorney fees and estate administration costs must be paid. Second, any federal taxes that are owed must be paid. Third, medical or nursing home expenses for the person’s most recent illness are owed. Fourth, medical or nursing home expenses related to the decedent’s last year of life are owed. Fifth, debts and taxes with preference under Minnesota law as well as state taxes must be paid. After that, all other claims are paid depending on how much money remains.

Minnesota Probate Lawyers

An experienced Minnesota probate lawyer can help walk you through the probate process, answering questions along the way. For more information on estate planning in Minnesota, along with a variety of other topics, contact Joseph M. Flanders of Flanders Law Firm at (612) 424-0398.

Source: “Insolvent Estates – Who Gets Paid What When an Estate’s Debts Are More Than Its Assets?” by Deirdre R. Wheatley-Liss, published LexisNexis.com.