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How Does an Estate's Debts Get Paid?

by Jeffrey Asher, Estate Planning Expert
October 29, 2015

Question: How Does an Estate's Debts Get Paid?

Answer: Simply put, an estate’s debts get paid by either the Executor of the Will (in the case of someone who dies with a Will) or the Administrator of the estate (in the case of someone who dies without a Will).  But, it is a little more complicated than that.

When a person passes away with a Will, his or her loved ones file the Will with the Court asking that the Will be “admitted to probate”.  The decedent’s Will is “probated” – and the Executor is appointed – when this proceeding is complete.  Before admitting a Will to probate, however, the Judge must inquire into the particulars of the Will and be satisfied with the validity and genuineness of the Will and its execution.  If the Judge is satisfied that the Will was executed properly, and there were no objections to the probate the Will (i.e., objections to the validity of the Will), the Judge then “admits the Will to probate” and issues its Decree granting probate.  It is based on the Decree granting probate that the Letters Testamentary are issued.  Letters Testamentary, or the Certificate of Letters Testamentary, is the evidence given to the Executor that the Will was admitted to probate and the Executor is qualified to as act as Executor and was duly appointed as the Executor by the Court.

When a decedent dies without a valid Will, he or she is said to have died “intestate”.  Accordingly, the administration of a decedent’s estate where the decedent died without a Will is called an “intestate administration”.  When the Judge is satisfied that the administration proceeding is complete, and there was no production of a valid Will, the Judge will issue Letters of Administration to the Administrator of the decedent’s estate.  The Letters of Administration, or the Certificate of Letters of Administration, is the evidence given to the Administrator that he or she is qualified to act on behalf of the estate.

Once appointed, the Executor or the Administrator, as the case may be, has three (3) essential parts of his or her job:  First, to marshall, or gather, the decedent’s assets and re-name them into the name of the estate; second, to pay the estate’s legitimate creditor claims and reasonable expenses; and third, to distribute the net assets of the estate to the beneficiary(ies) of the estate, in accordance with either the terms of the Will or the provisions of state law, as the case may be.

With respect to the second part of the job, the Executor or Administrator, as the case may be, may only pay the legitimate creditor claims and reasonable expenses of the estate.  Legitimate creditor claims mean the following:  the deceased person had a debt and/or an unpaid obligation, such as a doctor’s bill, or a credit card bill, or a Medicaid claim, that is real, documented, and unpaid.  However, the estate does not have an obligation to pay these claims unless the person or company to whom the deceased owed money (or, creditor) files a claim against the estate.  When the creditor files a claim against the estate, the Executor or Administrator, as the case may be, can dispute the claim or pay it.  If the Executor/Administrator choose to dispute the claim, then the creditor will have to prove his, her, or its claim.  It is only when the court is satisfied that the creditor has proved his, her or its claim, or the Executor/Administrator accepts the claim, that the estate will have to pay it.  

In most states, creditors have a certain amount of time in which to file their claim(s) against an estate.  For example, in New York, a creditor has 7 months from the date the Executor/Administrator is appointed in which to file a claim against an estate.  That does not mean that the creditor is out of luck if he, she, or it files a claim against an estate after the 7-month period.  It means that if the Executor/Administrator distributes net assets to the beneficiary(ies) within 7 months of the Executor/Administrator being appointed and a creditor files a claim against the estate within the 7-month period, the Executor/Administrator must satisfy the claim – even getting back the money, if necessary.  Moreover, if the creditor files a claim against the estate after the 7 months are up and the estate still has funds, then the creditor’s claim can be satisfied.  However, if the Executor/Administrator waits the 7 months, then distributes the net assets of the estate to the beneficiary(ies), and, then, after the 7 months, the creditor files a claim against an empty estate, the creditor is out of luck.

With respect to expenses, the Executor/Administrator may pay only those expenses in connection with the administration of the estate.  Such expenses include, but are not limited to, Executor/Administrator commissions, attorney fees, accountant fees, appraisal expenses, funeral expenses, bank fees, postage, photocopies, taxes, expenses of sale, etc.  In other words, all of the expenses necessary to manage the estate, allow the Executor/Administrator to do his/her job, and to get the estate to the point where the Executor or Administrator, as the case may be, can distribute the net assets to the beneficiary(ies).  These expenses do not have to be incurred or claimed within any time period.  They are part of the administration of the estate and must be paid before assets are distributed.

Do not attempt to manage an estate, or deal with the payment of claims and/or expenses, without the advice and protection of a qualified estate attorney.  Managing an estate is very complicated and there are traps for the unwary and unguided.  Seek out the solid advice of a qualified estate attorney.”

Jeffrey Asher is a prominent Trusts & Estates and Elder Law attorney in Westchester County and New York City. Mr. Asher concentrates primarily in the areas of Estate Planning, Probate and Estate Administration, Elder Law, Medicaid Planning, and Special Needs Planning. Mr. Asher provides comprehensive legal services, tailored to meet your specific needs.

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