When a loved one passes away, it is common for them to leave behind debts of various types, such as funeral bills, credit card bills, mortgages, and other obligations. If you are the executor of an estate, it can be very confusing to determine what bills to pay and in what order. Unfortunately, not following the rules can potentially result in the executor having personal financial responsibility.
Which creditors get paid first?
Under New York State law, the priority for creditor payment is as follows:
1) Administration expenses, including fees and commissions,
2) Reasonable funeral expenses,
3) Obligations owed to the federal or state governments,
4) Debts from docketed judgments or entered decrees, and
5) Unsecured claims.
The order of priority is important, because you may find that the creditors with the lowest priority may be the first to request payment. Oftentimes, credit card companies are the first to call, but it is important to understand that they have the lowest priority to get paid because they have unsecured claims.
When do creditors get paid?
Estates in New York must stay open for seven months, in order to allow creditors to come forward and make their claims. After seven months, the executor may pay the claims of all known, legitimate creditors, in the order set forth above.
If an executor pays all claims, in the proper order by priority, more than seven months after being appointed, then the executor avoids any potential argument that they should be personally liable for any claims. If a legitimate claim arises after all the estate funds are distributed, the creditor may, in certain cases, pursue his claim against the beneficiaries who received the estate funds.
Are mortgages handled differently?
When it comes to real property, the decedent may have had a mortgage at the time of his death. If that property is then specifically given to a beneficiary in his Will, the real property is given to the beneficiary subject to the mortgage. Put another way, it is the beneficiary’s obligation to satisfy the mortgage and not the estate’s burden. The exception to this rule is when the decedent specifically states in his Will that he wants the general assets of the estate to satisfy the mortgage before the property is transferred to the beneficiary.
In cases where a beneficiary receives real property subject to a mortgage, the beneficiary can potentially keep the property and re-finance the mortgage in their own name. In the alternative, the beneficiary can simply sell the real property, satisfy the mortgage, and then keep the net sale proceeds of the sale.
What if there isn’t enough money to pay debts?
If the debts of the estate exceed the assets, then the estate is insolvent. In those cases, the named executor in the Will may be unwilling to file the estate proceeding. If the named executor is unwilling, one of the creditors may bring the proceeding and seek to get the County Treasurer appointed as Administrator of the estate. In those cases, the creditors may get some, if not all, of what they are due.
What if there isn’t enough money to pay all the bequests?
Sometimes there are assets in the estate, but not enough to pay all the bequests. For example, a decedent might have an estate worth $100,000 with debts of $40,000. The net estate in that case is $60,000. If the decedent’s Will leaves $50,000 each to his son and his daughter, then the children will have their bequests reduced to $30,000 each because only a total of $60,000 is available to satisfy the bequests.
Is any property exempt from creditor’s claims?
Certain property is exempt from creditors’ claims. Exempt property includes: life insurance proceeds on the decedent’s life payable to an individual beneficiary, some pensions and annuities, and family exempt property under section 5-3.1 of the Estates Powers and Trusts Law. Family exempt property includes certain property that passes outside of a decedent’s estate to his close family. For example, a surviving spouse of a decedent may receive the decedent’s car, up to a value of $25,000.
The rules for proper payment of estate creditors can be complex and the executor of a decedent’s estate should seek experienced legal counsel in order to ensure they comply with the law.