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FAQ: Payments and Taxes
How are creditors against an estate handled?
Creditors take priority before the estate’s assets and property are distributed to beneficiaries or heirs. Part of the probate process requires notifying creditors of the death. Depending on the state, this may involve a notice in the local newspaper or letters to each creditor.
After the notification, creditors have a limited amount of time to file claims against the estate. This can be done by notifying the personal representative, notifying the probate court, or sending a bill, depending on the state. Claims approved by the personal representative or executor are paid from the estate. The personal representative can reject claims he or she believes are invalid in which case the creditor must sue.
If the estate does not have enough money to pay legitimate debts, property may be sold to satisfy debts. Afterward, the personal representative or executor will determine who is repaid and in what order creditors are paid based on state law.
Do beneficiaries and executors have to pay creditors out-of-own pocket if the estate is insolvent?
The executor is not responsible for paying creditors except with estate assets. There are some exceptions, however. An executor can be liable for debts if they cosigned a credit card or loan jointly with the decedent. Executors can also be liable for debts if they mishandled the estate’s assets and caused them to lose value.
Surviving spouses are responsible for debts incurred with the decedent. For debts the decedent incurred alone, the surviving spouse may or may not be responsible depending on state laws and how the property is held.
How are taxes handled in probate?
When someone dies, taxes are owed for their last tax year. Upon death, an estate is also created which is a separate tax entity. Depending on the income and size of the estate and the decedent’s income, a final federal income tax return will need to be filed and potentially a Federal Fiduciary Income Tax return for the estate, a Federal Estate Tax return, and a Federal Gift Tax return. The executor also needs to file the final state income tax return.
Along with state and federal taxes, the personal representative or executor may also need to pay other final taxes such as real estate taxes, personal property taxes, business taxes, and special assessments.
How does an executor know which creditors to pay?
When the estate has enough assets to pay all debts, the creditors can be paid in any order. It’s not uncommon for there to be insufficient funds and even assets to sell to pay all creditors. In this case, state law specifies the priority of creditors and debts.
Most states use a similar order of priority for the executor to pay debts of the estate:
- Administrative costs are first. This includes court fees, filing fees, and attorney fees.
- Family exemptions. Payments to help family members of the decedent cover living expenses during probate is usually the second priority.
- Funeral and final expenses. There may be a cap on the allowable expenses for burial and funeral costs in some states. This includes the cost for cremation, urns, interment, and a funeral service.
- Government debts. This includes income taxes, property taxes, and estate taxes.
- Final medical expenses. Next is the medical costs associated with the decedent’s final illness or injury which take priority over other unsecured debts like credit card debt.
- Other claims. In most states, there is no priority for other unsecured debts. Sometimes debts are paid based on the date of the claim or debts may be prorated.
When must creditors be paid?
Probate goes through specific steps. Creditors must be notified of the decedent’s death and given time to make a claim. The personal representative must pay legitimate claims from the estate before distributing assets and property. Even without an actual claim for repayment, legitimate debts should be paid if the personal representative receives informal claims in the form of bills.
What is the difference between a formal and informal claim by a creditor?
Most claims by a creditor on an estate are informal and in the form of bills. Sometimes creditors make formal claims during probate. All creditors must still be informed of their right to make a formal claim.
IMPORTANT NOTE: Please be aware that the information on this page is delivered without warranty or guarantee of accuracy. It’s provided to help you learn more and formulate specific questions to discuss with your attorney and/or your Real Estate Professional and/or to help a personal representative, executor or executrix when executing their challenging responsibilities. By accessing this page, you acknowledge that it has been provided for information only and that you are hereby advised that any decisions regarding probate issues should be discussed with an attorney and/or a Real Estate Professional.