Avoiding probate is one of the main goals of estate planning because it saves money and time, so the beneficiaries can enjoy their inheritances sooner. However, avoiding probate has no effect on the taxes to be paid or the debts owed to creditors.
One common misconception is that a person’s debt will pass to their spouses, family, or friends after he or she dies. This is untrue, as while heirs can inherit the decedent’s assets they cannot inherit the debt. However, there is an exception if someone was jointly liable on the debt.
Where does the debt go? The obligation to pay the debt stays with the estate of the decedent. When someone dies, their estate is born and is the sum of all of that person’s assets. The estate will have an executor that is designated by the will or the court to handle the estate’s affairs. This means transferring assets to the beneficiaries, paying the gift and estate taxes, and settling debts owed to creditors.
If the estate has creditors, the executor should notify them shortly after the decedent has passed. This usually means the executor will notify the big three credit reporting agencies: Equifax, TransUnion, and Experian. An executor will normally also request a creditor report for the decedent. Usually the assets of an estate are not distributed until after these debts have been paid
So what happens where there are not enough assets in the estate to cover the debts? Again, the beneficiary is not directly responsible for paying the deceased’s debts. A court may order the deceased’s assets to be liquidated to pay the debts, or order some of the gifts mean for beneficiaries be returned to cover the debts first.
The court will usually decide which beneficiaries do not get paid or which beneficiary gets paid less than the others. This is referred to as abatement by the courts, and the court will do this when a deceased person did not leave enough property to fulfill all the bequests made in the will and other expenses. The distributions to beneficiaries will be cut back to pay taxes, satisfy debts or even take care of other gifts that are given a higher priority by the will.
The court will deem the estate insolvent if the estate still cannot pay off its debts even with all of the assets. An insolvent estate is an estate that does not have enough assets to pay off the debts. If the estate is ruled to be insolvent, then the beneficiaries will not receive an inheritance. The good news is that while the beneficiaries might not receive any assets, they will not be stuck with the bill.
For more information on how creditors can affect a probate estate, contact David Goldman at the Law Office of David Goldman PLLC.