Probate can be avoided by using legal techniques which save you taxes, keep your estate out of public view, and avoid the necessity of court approval at every stage. Those legal techniques can also save you time, frustration, and in many cases, significant attorney and court fees. Your personal representative, sometimes referred to as an executor, must formally notify all your creditors of your death. This action is one of the first steps in the probate process.
Outstanding debts of a decedent typically include credit card, mortgage, car, and insurance payments, real estate taxes, utility bills, medical and funeral expenses, and other legal debts incurred but not yet paid. In New York, the probate timeline for creditors to file a claim to your estate for payment is seven months. If there is no contest over the debt, the personal representative will pay with estate funds the outstanding bill, either in full or in the amount he/she negotiated and agreed upon with the creditor. The executor will then ask the creditor for a Satisfaction of Claim and that will complete the claim the creditor has.
Personal representatives, beware. Do not distribute assets to beneficiaries before the balance of the estate’s taxes and all outstanding debts are paid or dismissed by the probate court. It is the responsibility of the personal representative to cover all estate expenses, and you may become personally liable for deficiencies in estate debt payments unless beneficiaries return their portions of inheritance to cover those outstanding debts. If you feel you must make a partial distribution to heirs, withhold enough monies to cover all estimated expenses.
If the decedent’s property does not go through the probate process, creditors’ claims remain pursuable for a longer time. This is partly because there is no legal requirement to notify creditors of a person’s death if a probate or administration proceeding is not started. Depending on the size of a debt and the assets available, a creditor may find a tax write-off more advantageous than chasing down repayment that is not cost-beneficial.
In other cases, an estate may not have liquid assets yet hold real property with enough value to cover the outstanding debt claim if sold. Valuable inheritable property can be lost to a forced sale to cover creditor claims in probate court. A creditor forcing this type of sale drags out probate proceedings and incurs additional costs to the estate. Secured creditors receive priority over unsecured creditors. Banks such as those holding mortgages that decedents had at the time of their deaths are the primary secured creditors with which personal representatives may have to contend.
Suppose a person dies with substantial debt and there are limited assets to cover these debts. In that case, the estate is deemed insolvent, and the personal representative must follow New York State’s generally accepted prioritization of debt payments. A personal representative should always pay debts in the order of New York State’s recognized priority list. Otherwise, debts that may be dismissible, pro-rated, or forgiven may receive payment, while secured debts never “go away.” Therefore, it is essential to understand the priority order for estate debts in New York. Below is a generalized list of how New York State prioritizes the categories of estate debts:
- Administrative costs – Common costs include court fees, filing fees, notice costs, attorney’s fees, and the personal representative’s commission.
- Family exemptions – New York provides payments to help family members handle their living expenses during the estate’s probate. This family exemption usually gets high priority to lessen financial stress as a family mourns the loss of their loved one.
- Funeral and burial costs – Costs of cremation, interment, urns, markers, and associated funerary service costs are permissible as part of funeral and burial costs.
- Government debts – Income taxes, property taxes, and estate taxes take priority over other debt obligations.
- Final medical bills – The bills related to the decedent’s final sickness or injury receives priority over other unsecured debts. Some hospitals will reduce final medical bills if the newly negotiated amount is paid promptly and in full.
- All other claims – Usually, New York does not prioritize these other more general unsecured debts. Some cases permit debt payment based on the filing date of claims, and other times debts may be pro-rated.
Assets such as retirement accounts and insurance proceeds with a designated beneficiary receive different treatment and provide more protection from creditors. The same holds for some irrevocable trusts which upon death may also provide protection from creditors. A beneficiary designation and specific trust entity can help to shield an estate from a heavy debt burden.
When a resident of New York dies, their estate assets must be marshaled and eventually distributed according to the existing Will or New York State’s intestate laws. Another vital function of the estate is for the personal representative to ensure the decedent’s valid debt obligations receive payment. When an estate has sufficient assets to pay all outstanding debts, payment can occur in any order. If the estate leans to insolvency, the personal representative should withhold asset distribution to heirs until the probate court approves the debt fulfillment priorities.
We hope you found this article helpful. If you are going to be appointed or are already appointed as the personal representative of an estate, please contact us today at (631) 686-6500 to schedule a consultation to discuss your duties. We look forward to the opportunity to work with you.