Paying Off Debts of the Estate

One of the executor's most important jobs is to pay the legitimate debts of the deceased person and the estate, using estate assets.

How to Start Paying Off Debts

Who pays the bills before the court has officially appointed an executor, or if there won't be a formal probate proceeding? When the bills start rolling in, some of them will need to be paid quickly, without waiting for the executor to open an estate bank account and start writing checks. In most situations, the people who will inherit the property in the estate should go ahead and pay these ongoing bills, such as:

• utility bills
• mortgage
• house or car insurance
• car payments
• real estate taxes

If these expenses aren't paid, valuable property could be lost or damaged. If, however, the beneficiaries have already decided that they don't want to keep certain property—for example, a house that's worth less than the outstanding balance on the mortgage—then they would want to stop making mortgage payments. Paying the utility bills, however, would still be crucial; it would be difficult to sell a house that didn't have lights or heat, and it might be damaged from break-ins or frozen pipes.

People who pay bills with their own money should keep careful records of all the expenses. Later, the executor can provide reimbursement from estate assets.

Handling Bills During Probate

Creditors may submit both formal and informal claims. Most claims are informal—that is, they're just ordinary bills, sent to the deceased person, that get forwarded to the executor. The executor has authority to pay these debts as they come in, using estate assets. (Usually, the executor consolidates the deceased person's liquid assets into an estate checking account.)

If the estate goes through probate, the executor must publish notice of the proceeding in a local newspaper, and creditors have a certain amount of time to submit formal written claims. Most states give them about four to six months. If they don't submit a claim by the deadline, most creditors are out of luck. (The federal government, however, isn't bound by the time limit.) If the executor refuses to pay a formal claim, the creditor can appeal the decision.

If the estate doesn't have a lot of liquid assets—cash or assets that can be easily converted to cash, such as securities—the executor may need to sell other assets to raise cash to pay bills. Be careful here; you have a legal duty to be fair to all beneficiaries. It wouldn't be fair to sell some assets that were specifically left to certain beneficiaries and use the proceeds to pay bills, while giving other beneficiaries the assets they were specifically left. You'll need to work out a system, perhaps with advice from a lawyer, to protect everyone's interests as best you can.

If There's Not Enough Money to Pay All the Debts

If it appears that there are more debts than assets, you are dealing with what's called an insolvent estate. Don't pay any debts you don't have to—state law will set out a priority list for you to follow. If you pay some low-priority creditors, you may find yourself personally liable for the amount you shouldn't have paid out.