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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.

FAQ: Probate Terminology

Beneficiary:

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Someone who inherits something from an estate with a will. A beneficiary is named in the will.

Conservator:

sSomeone appointed to manage the affairs of someone who is incompetent or unable to make decisions for themself.

How long does probate usually take to complete?

sAs a general rule, the probate process takes 9 to 18 months. Some states like Texas and California have a simplified probate process for simple or small estates that don’t require much court oversight. With a simplified probate, the process can be completed in weeks.However, probate can, on occasion, take 1-3 years or even longer. There are many factors that can affect the probate process. Probate may up to several years if any of these issues complicate probate:

  • The state’s probate court process.
  • Difficulty locating beneficiaries or heirs.
  • The number of beneficiaries and where they live.
  • A contest of the will by beneficiaries or heirs.
  • Real estate and property that can’t be sold easily.
  • Unsettled liens and claims against the estate.
  • Failing to notify creditors during the claim period.
  • A personal representative that fails to meet their legal obligations.
  • The estate is large enough to owe estate taxes.
How is the probate process started?

sProbate doesn’t begin automatically when someone passes away. When a will is identified, the executor named in the will can begin the probate process by filing a petition with the court to be officially acknowledged as the legal executor. The will and death certificate must also be filed.

If there is no will, an administration process is started instead. A petition must still be filed with the probate court to appoint an administrator for the estate.

Once this petition is filed, the court schedules a hearing to approve the appointed executive/administrator or listen to objections, if any. Notice of the hearing must be given to all beneficiaries and heirs of the decedent. Once an executive/administrator is approved, the probate case is opened with the court and the executive/administrator has the legal authority to act on behalf of the estate.

Why is probate required?

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Probate may seem like little more than a time-consuming and expensive endeavor, but there are many important reasons it exists. The purpose of probate is to protect the assets in an estate and ensure they go to the right beneficiaries or heirs while also ensuring creditors and taxes are paid. Probate is also designed to make sure a will is valid and the decedent’s true wishes are followed.

Here are the most important things that probate accomplishes and why it’s required:

  • Legally transfers title or ownership of property and assets to beneficiaries and heirs. This ensures beneficiaries receive clear title and no one can take out a mortgage or otherwise dispose of the property.
  • Ensures taxes owed by the decedent and/or the estate are paid, including taxes that become due when property in the estate is transferred.
  • Offers creditors an avenue for having debts paid. Probate creates a deadline for creditors to file claims. This protects beneficiaries and heirs from future claims and ensures debts are paid before assets are distributed to heirs and beneficiaries.
  • Safeguards assets to make sure they go to the beneficiaries and heirs. Otherwise, property could be easily stolen or sold.
  • Ensures property and assets are distributed to the right people or organizations according to the decedent’s wishes.

Probate can also avoid a variety of issues that may come up after someone dies. For example, it ensures beneficiaries are legally able to receive assets they should receive and makes sure that the will is valid.

Note that not all assets need to go through probate and probate isn’t necessary for all estates. This legal process can be avoided in many ways with different ownership and title options, for example, to directly pass property and assets to heirs and beneficiaries without court oversight.

How much does probate cost?

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The cost of probate depends on many factors including:

  • State law
  • Local practices
  • Complexity of the estate
  • Whether a probate attorney is involved
  • Whether the will is challenged
  • Executor fees, if any
  • The cost of the surety bond

As a general rule, probate can cost anywhere from 2% to 7% of the estate’s total value. The cost can be even higher with complex estates and especially if the will is contested.

Many of these fees are set and can’t be changed or negotiated. Costs can depend greatly on your state. In some states like California, statutory attorney fees are set as a percentage of the estate’s gross value, not the net value which is usually lower. Only the following states have percentage fees allowed by statute: Arkansas, California, Florida, Iowa, Missouri, Montana, and Wyoming. In other states, probate attorneys may charge a flat fee or by the hour.

With many professionals you will use, you may be able to negotiate a lower rate, however, even when the statute provides for a percentage fee.

If the estate is very small, is probate still required?

aProbate isn’t required for many estates but it depends on both the value of the estate and the type of property. If the property in the estate is designed to pass to beneficiaries outside of probate, probate isn’t necessary.

Many states also have a simplified probate process for small estates or allow probate to be skipped entirely. In California, probate is required if the value of the estate exceeds $150,000. In Texas, probate isn’t required for estates valued at $50,000 or less. Each state has its own rules on when probate can be skipped; sometimes there is a dollar cap on the estate value and rules on what type of assets affect the estate’s value for probate purposes. For example, Georgia doesn’t require full probate if there is no will, no debts are owed, and heirs agree on how property will be distributed.

For small estates, there are two probate shortcuts that may be available:

  • Claiming property with an affidavit. This may be an option if the value of all assets except real estate is below a certain amount.
  • Simplified court procedure. Many states have a simpler version of their probate that still involves the probate court but with less control over how the estate is settled.
What happens during probate of an uncontested will?

aProbate is handled by the probate court in the county and state in which the decedent lived as their primary residence at the time of death. Note that this refers to the decedent’s state of primary residence, not where they may have been living or vacationing when they passed away. Each state has its own name for its probate court. In many states, it’s simply called probate court but it may be called Surrogate’s Court (New York) or Superior Court, Probate Division (California).

Personal Representative (Executor or Executrix):

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There is almost never a legal requirement to use a lawyer during the probate process, although probate can be complex and very formal. Some states like Florida do require an attorney for the probate process. A missed deadline or failing to follow proper procedures can result in an executor being liable for mistakes or debts, for example. As a general rule, a probate lawyer is recommended for estates that are large or complex enough to require probate.

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