In our last installment (Part 3), we discussed the attorney's role in the estate administration process. As promised, we will now explore how the debts of a deceased individual get paid.
As we have previously discussed, the assets of the estate are the assets that the deceased owned in their name only. Those assets, prior to any distributions to beneficiaries, are available to pay the debts that the deceased incurred during their lifetime.
When an estate is opened, the Personal Representative (with the help of the attorney) is required to publish a notice of the case in a newspaper of general circulation within the County. That notice is known as a Claim Notice, and is published once a week for three weeks. The first date of publication starts what is known as the "claim period." The claim period runs for six months from the date of first publication. It is a notice to the world that the estate is open, and anyone who believes they are owed money by the deceased must file a claim within that timeframe.
That's all well and good, but should people who are owed money be scouring the legal notices of the local newspaper to make sure they don't miss out? Maybe. However, the requirements for debts that the Personal Representative knows the deceased had are handled a little differently. It is a requirement that the Personal Representative send a Claim Notice directly to those known creditors. The creditor then has the burden of making a claim against the estate within a certain time period if they want to try to get paid.
In addition to debts that are owed, there are various other claims that might be made against the estate. These might include spousal awards, minor child awards, etc. These are somewhat specialized, and I am not going to get into too much detail here, but they are worth mentioning.
If a creditor fails to make a claim after the requisite claim period runs, the creditor is barred from ever making a claim against the estate. So, after the claim period runs, the Personal Representative then knows what, if any, debts need to first be paid. They can then pay those claims and distribute the remaining assets accordingly.
But what if there are not enough assets in the estate to pay all the debts? Good question—I'm glad you asked. If there are not enough assets in the estate to pay the claims, the estate is known as an "insolvent" estate. We then must turn to our state law to determine which class any claims fall in. The law assigns a priority to different claims based on their class. For example, funeral expenses, costs of administration, and attorneys fees are all Class 1 claims. So, these types of claims would get paid first before we moved to Class 2 claims. If you reach a class of claims that there is not enough money to pay, those claims get paid out pro-rata based on the available funds. Anyone in a lower class would lose out.
As you can see, it is extremely important for the Personal Representative to wait to distribute assets until the claim period has run, especially with an insolvent estate. If a Personal Representative were to distribute assets early and be unable to reclaim those assets to pay debts, the Personal Representative would then become personally responsible for the amounts previously distributed. Obviously, this is not a good scenario.
In our next installment (Part 5), we will discuss everyone's favorite topic: taxes.
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