19 May Do Beneficiaries Have to Pay Creditors Out of Their Own Pocket If the State Is Involved?
By: Barry E. Haimo, Esq.
May 19, 2015
Do Beneficiaries Have to Pay Creditors Out of Their Own Pocket If the State Is Involved?
BARRY HAIMO: Generally, in probate proceedings, the assets from an estate are pooled together and creditors are paid out of the estate assets. If there are insufficient estate assets to pay creditors, generally the beneficiaries will not be responsible for satisfying the debts.
A common misconception is that when a person dies, the responsibility of paying their debts falls on their next of kin—their family, spouses, or other beneficiaries of their estate. Heirs can inherit assets, but they do not inherit the decedent’s debt.
The obligation of the debt stays with the estate. Anytime a person dies, they create an estate, compiled of all of their assets. There is an executor of this estate—a person designated by a will or by the court to settle the affairs of the individual who passed away. Part of the responsibility of the executor (also referred to as a “personal representative”) is to settle the debts of the decedent.
If the deceased person had open accounts with creditors, the personal representative should let them know that the individual is no longer alive. Usually, the personal representative does this by notifying the big three credit agencies: TransUnion, Experian, and Equifax, and requesting a creditor report of the decedent.
Until the debts of the decedent are settled, in most cases the assets of his or her estate cannot be distributed to the heirs. Beneficiaries are not responsible for settling the debts of the decedent, but a court may order that a portion or all of the deceased person’s assets be liquidated in order to settle the debt.
After debts are paid with the estate, there may not be enough funds to fulfill the gifts outlined in the will. A portion of the debt may also be used to settle taxes. Because a will is often composed long before death, the decedent may not have anticipated the debts or other expense that will subtract from the sum total of the estate’s value.
Unfortunately, this may mean that some beneficiaries named in the will can only be paid partially, or not at all. The courts will usually decide which of the beneficiaries will not receive anything, or which beneficiaries receive less. This is called “abatement.” Florida Statutes section 733.805 covers the process of abatement.
If the debt is greater than the value of the estate, then it is deemed “insolvent” by the court. The heirs will not receive any of the estate, nor will they receive the debt.
For example, if the value of an estate after liquidation was $100,000, but medical bills and funeral expenses came to a total of $150,000, the estate might be declared insolvent. The personal representative would need to prioritize settling the debt over paying the gifts to the beneficiaries.
In the above situation, the personal representative would need to determine which of the creditors should be paid in full, partially, or not at all. These debts are not settled according the order they were incurred—or which creditor is applying the most pressure to settle the debt.
Instead, the debts are assigned priority according to federal and state law. An experienced estate attorney should be able to help a personal representative decide which creditors should be paid, and what portion of the decedent’s debt should be settled with estate funds.
Barry E. Haimo, Esq.