When a person passes away, their assets are distributed according to their will or the laws of intestacy. However, before any beneficiaries receive their inheritance, several other parties may have claims on the estate. This article will explain who gets paid first from an estate and the order of priority for these payments.
Order of Payment in Estate Administration:
- Funeral and Burial Expenses: The estate must cover the costs of the deceased’s funeral and burial or cremation. These expenses are given the highest priority, as they are necessary to lay the deceased to rest with dignity.
- Administrative Costs: The estate is responsible for the costs associated with administering the estate, such as court fees, legal fees, and payments to the executor or personal representative. These costs are essential for ensuring the proper management and distribution of the estate’s assets.
- Family Allowance: In some states, surviving spouses and dependents may be entitled to receive a family allowance during the probate process. This allowance provides financial support to the immediate family while the estate is being settled.
- Taxes: The estate is responsible for paying any outstanding taxes owed by the deceased, including income tax, property tax, and estate tax. These taxes must be paid before any distributions can be made to beneficiaries.
- Medical Bills: The estate is responsible for paying the deceased’s medical bills, which are often given a higher priority than other unsecured debts. This ensures that healthcare providers are compensated for their services.
- Secured Debts: Secured debts, such as mortgages and car loans, are given priority over unsecured debts. This means that the creditors holding these debts have a claim on specific assets of the estate, such as the house or car, to satisfy their claims.
- Unsecured Debts: Unsecured debts, such as credit card bills and personal loans, are paid after all other debts and expenses have been satisfied. These debts are typically paid in the order they were incurred, with older debts being paid first.
What Happens When the Estate Doesn’t Have Enough Money?
In some cases, the estate may not have enough assets to cover all of its debts and expenses. In this situation, the estate is considered insolvent, and the beneficiaries may not receive any inheritance. The creditors will be paid according to the order of priority mentioned above, and any remaining assets will be distributed to the beneficiaries.
Understanding the order of payment in estate administration is crucial for both executors and beneficiaries. Executors must ensure that all debts and expenses are paid in the correct order to avoid legal liability. Beneficiaries should be aware of the potential delays in receiving their inheritance, especially if the estate is complex or insolvent.
Additional Considerations:
- The specific order of payment may vary slightly depending on state laws.
- The executor may need to sell assets to generate funds to pay debts and expenses.
- Beneficiaries may need to wait several months or even years to receive their inheritance.
- It is advisable to consult with an attorney or financial advisor for guidance on estate administration and inheritance matters.
Keywords: Estate administration, order of payment, beneficiaries, debts, expenses, executor, probate, insolvency, inheritance.
Probate laws determine priority
Many of us believe that the will determines who gets what after someone passes away. But regardless of whether a person leaves a will or not, the sequence of payments is determined by the probate laws of each state.
But isn’t probate all about doing what the will says?
The process of allocating a deceased person’s assets, satisfying their debts, and concluding their affairs is known as probate. A will seldom covers the details of how an executor will settle debts, pay for funeral expenses, or pay taxes, even though it may name who will inherit certain assets or the value of the estate.
State probate laws specify precisely which payments get made first in order to guarantee that significant debts and taxes are paid. In this manner, the executor avoids giving money to heirs and then running out of money to settle debts with creditors.
Note: These payment priorities do not apply to estates that are exempt from probate due to a state’s small estate exemption or to the fact that all of the estate’s assets are not subject to probate (for example, because they are all held in trust).
The most crucial thing to remember is that before you can give anything to the heirs, you have to pay off the estate’s obligations.
Furthermore, debt doesn’t only refer to outstanding mortgage or credit card payments from the deceased’s prior life. Debt also includes any money the estate owes currently. This covers taxes, burial expenses (typically reimbursed to a family member who paid the costs), and possibly a family allowance.
What is a family allowance? Under certain state laws, a decedent’s spouse and dependents may petition the court to receive a portion of the estate during the probate process. These laws recognize that the loss of the deceased’s income may make it difficult for the deceased’s immediate family to manage their finances. It’s crucial to remember that any money given to the family lowers the estate’s total value, and that the judge has discretion over whether to grant a family allowance in the majority of states.
Every state has its own regulations governing probate, just like any other. However, the following is the general order of priority for estate payments:
- Funeral costs. The burial or cremation expenses and the funeral service must be covered by the estate. States may, however, impose a cap on these expenses, so take that into account before scheduling a pricey service.
- Administrative costs. The costs of managing the estate, such as court fees, attorney fees, and executor payments, are borne by the estate.
- Family allowance. When family allowances are permitted in a state, they are typically accorded great importance.
- Taxes. The estate has to pay any unpaid income tax and file the deceased’s final tax return. Any necessary estate taxes and property taxes must also be paid by the estate.
- Medical bills. The costs of the deceased’s medical treatment are prioritized for payment over other unsecured debts, such as credit card loans, and are classified as such.
- All other debts. Notifying creditors of the deceased’s passing is the executor’s responsibility, and they typically have three to six months to file a claim. Unless the executor was a co-signer or joint owner, they are not obligated to personally pay any of the estate’s debts.
Take note that mortgage debt (and other liens on real property) is one common type of debt that is treated differently.
The mortgage company has the contractual right to foreclose on the property and, in effect, avoid probate in order to recover assets.
What does that mean? Well, in practice a mortgage company becomes the #1 entity to get paid because they have the option to foreclose if the payments are not made. In the event that the house is sold, the estate receives the remaining proceeds after the mortgage company is paid at closing.
Even if it must sell assets to pay its debts, the estate is obligated to do so. This could entail liquidating non-exempt assets like jewelry, stocks, a house (unless it’s a homestead), or cars. Generally speaking, life insurance policies and retirement accounts are the only asset classes that cannot be liquidated to satisfy creditors. These are considered exempt assets.
Good question, but what would happen if the estate is unable to pay off all of these debts?
Who pays for will probate
FAQ
How do beneficiaries receive their money?
How does will money get distributed?
What happens when someone leaves you money in their will?
Which is the correct order of payment from an estate?
Can an executor be paid during the probate process?
In other states, an executor can be paid throughout the probate process, though beneficiaries can request that fees be held until the end of the process to ensure that there are sufficient funds to pay all debts and taxes. Can an executor get reimbursed for expenses?
Can an executor pay a debt?
Executors can pay most ordinary bills. If the estate passes through probate, creditors must submit formal written claims, typically within a four-to-six-month window. In estates with limited liquid assets, executors may need to sell other assets to pay debts. When selling assets, the executor must ensure fairness to all beneficiaries.
Who is responsible if the executor refuses to pay you?
In most cases, the executor is a trusted loved one that the deceased knew, such as a family member or close friend. This relationship can complicate the payment process. However, the executor has a legal responsibility to the estate and the beneficiaries. If you are a beneficiary and the executor refuses to pay you, you can hold them accountable.
Do executors get paid a fee in a will?
Some Wills request that the executor not receive any compensation for their work or that the executor receive a flat fee. Some testators leave a bequest rather than a fee because a bequest is non-taxable whereas a fee is taxable as income. Probate courts usually uphold the provisions of a will addressing executor payment.