You know that being the executor of an estate means you have many tasks to complete. And you know that some of these tasks can be difficult, like when more than one beneficiary wants a certain item in the estate. But what do you do when the deceased had debt and how does this impact what the beneficiaries inherit?
When a person dies, their debt doesn’t die with them. That debt stays as a part of their estate, and their estate assets are used to pay the debt.
One of the early tasks the estate attorney will work with the executor to perform is to notify creditors of the death. This is because debts must be paid before any estate assets can be distributed to the beneficiaries named in the will. This will include tasks like creating a list of debts, which can be everything from outstanding credit card balances and medical bills to a home mortgage and auto loan. The executor and estate attorney will also need to understand the estate’s assets, which can be everything from real estate to bank accounts.
As executor, you or the estate attorney will also likely need to publish a notice, which gives creditors (those you know about and those you don’t know about) a specific period to submit claims against the estate. The executor should not distribute assets to the beneficiaries until this period expires and debts are paid.
It is crucial that executors communicate with beneficiaries throughout the estate administration process. As executor, you should tell beneficiaries about this process of identifying and paying debt, and remember to mention that it will take time and you cannot distribute any assets before this is complete. Beneficiaries and executors may have questions about the “what ifs,” and the most common question is about the impact of debt on the estate assets.
Absent specific instructions in the will, the executor has some discretion in determining which estate assets can be used to pay debt. If there are only small debts, there may be sufficient money in the deceased’s bank account to pay them. But for larger debts, an executor may have to sell estate assets to pay the debt. For example, if the deceased had a car loan, the executor could sell the car and use the proceeds to satisfy the loan.
When decisions need to be made about which estate assets to sell, the executor should consult the will and communicate with the beneficiaries. If specific assets are given to a beneficiary, those should not be the first items sold. Similarly, there may be some things, like a family home, that are most important to the beneficiary and they might be willing for the executor to sell everything in the estate so the home doesn’t have to be sold. Communication is key!
Paying debts is a priority in estate administration. This obligates an executor to pay debts with assets in the estate even if it means the beneficiaries don’t get what the will lists they should receive. For example, if a beneficiary gets the deceased’s car in the will, but the car must be sold to pay debts, the executor will have to sell the car. The executor doesn’t have a choice not to pay debts–they must pay debts before anything can be given to beneficiaries.
But what if the executor must sell everything in the estate to pay the debts? Then the executor must do so. And if there are more debts than the value of everything in the estate, state laws create a priority of how creditors will be paid. This often involves paying secured debts, such as a mortgage, before unsecured debts, like credit card debt. When the money runs out, the remaining creditors will go unpaid. Remember, executors never have to use their own money to pay any estate debts. Similarly, beneficiaries will never have to pay estate debts. Often, though, if there are items in an estate that must be sold, beneficiaries are given first opportunity to purchase them at a fair market value, giving loved ones of the deceased an opportunity to own items from the estate.
One part of the executor role is paying debts of the deceased. Sometimes, an executor has the difficult task of selling estate assets, even specific bequests, to satisfy these debts. The executor is obligated to do this, no matter how much they may want beneficiaries to have these assets. So where can executors go for help with this and other executor tasks? Executor.org provides a customized list of executor duties and can even help answer important questions like whether they should accept payment for their role as an executor.