Death can come suddenly and unexpectedly, and it is rare to be prepared for it. As a matter of fact, nearly half of all Americans over the age of 55 do not have a will, and only 18 percent of Americans above age 55 have an established estate plan (with more than just a will). Could this go down the probate road?
Many Americans leave their affairs unsettled when passing away, often without a will. Relatives and loved ones are tasked with sorting out all final arrangements and dealing with any remaining financial responsibilities.
Sometimes, the end result can be contradictory to what many expect of an inheritance – rather than leaving behind a tidy sum, a decedent may leave behind a number of outstanding costs, from unpaid bills to continuing loan obligations.
But whose responsibility is it to pick up the tab? That depends on the nature of the unpaid bill, the timeline, and several other factors.
Defining Probate
When a person dies, their possessions must be distributed. Will or no will, the estate of a decedent must be wholly distributed. This is where the probate process becomes important.
After a person’s death, once their death certificate has been notarized and all immediate costs are taken care of, one person – the administrator or executor – is tasked with beginning the probate process, a public legal process of overseeing the lawful and proper distribution of an estate’s assets.
Probate begins with a petition made to the courts in the decedent’s place of residence, and the process consists of several stages. The first requires that the executor notifies all creditors through the local newspaper, while sending a letter to the creditors they know of.
Notifying Creditors
Once creditors have been notified, they have a set deadline for filing a claim against the estate. If they fail to file a claim within that time, they are generally out of luck. In California, the deadline for filing a claim is 60 days after a notice of administration is sent to the creditor.
An estate includes all of the decedent’s assets and property, as well as their financial obligations. It is an executor’s duty to accurately and completely take stock of the estate, manage an inventory of the estate, total its full value with the help of a valuator/appraiser, and keep track of all of the estate’s ongoing and final expenses.
Managing Administrative Expenses
Managing an estate can be costly. Utility bills must be covered, salaries must be paid, and the estate must cover the costs of all professionals involved in providing services for the probate process. This includes the probate attorney and the appraiser(s), and the executor’s modest share.
In general, administrative expenses can be divided into attorney fees, the executor’s cut, and miscellaneous costs. This is for the purpose of managing and distributing the estate in a timely fashion.
Settling the Final Bills
The ‘final bills’ include all final costs that must be covered by the estate, including:
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- Salaries
- Final tax reports
- Credit card debts
- Student loans
- Car loans
- Mortgage
- Home equity loans
- Utilities
- And so on
In general, an estate must first pay any and all debtors and creditors. What’s left over is distributed according to a decedent’s estate plan, or the state’s intestacy laws (if no will was made).
Some Debts Are ‘Inheritable’
When a person has a debt, that debt cannot be inherited in most cases. However, there are certain exceptions.
For example, when a person inherits a home with a mortgage or a home equity loan attached to it, the lender may be able to force the new owner to either pay up as is the case in home equity loans, or the new owner will be expected to continue paying off the mortgage.
In most other cases, it depends whether any surviving family members were co-signers when the loan or debt was first created. In that case, that debt becomes their responsibility if the estate cannot cover it.
Finally, in states that have community property laws (including California), spouses are responsible for any debts their partners incurred while married, including student loan debts, credit card debts, and more.
Some debts are automatically forgiven upon death. These include certain student loans (federal student loans as well as private loans by specific lenders).
Probate and Asset Protection
When a creditor comes to file a claim against an estate, the estate must pay up (if the claim was filed in a timely fashion). However, there are methods to allow certain assets to be protected against creditor claims. This is so that if the entire estate is used up in an attempt to settle affairs; specific assets and accounts may pass along to any surviving kin unscathed.
One example is an asset protection trust, which is a type of irrevocable trust that must be set up before the principal’s death. The trust is designed to completely separate certain assets from the estate without gifting them to anyone.
Instead, they are held ‘in-trust’ by the trust entity itself. It is no longer owned by the principal, and as such, not part of the estate. Anything in an asset protection trust does not count towards an individual’s estate tax exemption limit. And it cannot be claimed by creditors (as it is no longer a part of the estate).
When designing anything in an estate made to protect against creditors, it is important to pick an experienced estate planning attorney to help draft up and finalize the documents. A single mistake can be extremely costly, and waste numerous resources.
Certain assets are inherently protected against creditors. Typically, creditors cannot go after the contents of retirement accounts and life insurance policies, so long as beneficiaries are named for these accounts.
Be Careful About Personal Liability
It is the executor’s job to properly administrate the probate process, and the distribution of all assets. For trusts, which bypass probate, it is the trustee’s job to oversee a similar process. Failing to do so properly can leave the executor liable to cover any and all damages.
To avoid any mistakes that might be financially ruinous, do not administrate an estate without the help of an experienced probate attorney. Every estate is different, and a single factor can wildly change the recommended course of action.