What Debts Must Be Paid Before and After Probate?

Part of estate planning is considering how future repayment of debts, both owed to the person and debts they are responsible for, will impact inheritances received by beneficiaries. Everything that must be addressed in settling an estate becomes more complicated, when there is no will and no estate planning has taken place before the person dies. Debts are a particular area of concern for the estate and the executor. What has to be paid, and who gets paid first? These are explained in the article “Dealing with Debts and Mortgages in Probate” from The Balance.

Probate is the process of gaining court approval of the estate and paying off final bills and expenses, before property can be transferred to beneficiaries. Dealing with the debts of a deceased person can be started before probate officially begins.

Start by making a list of all of the decedent’s liabilities and look for the following bills or statements:

• Mortgages
• Reverse mortgages
• Home equity loans
• Lines of credit
• Condo fees
• Property taxes
• Federal and state income taxes
• Car and boat loans
• Personal loans
• Loans against life insurance policies
• Loans against retirement accounts
• Loans between family members (parent to child or child to parent)
• Credit card bills
• Utility bills
• Cell phone bills

Next, divide those items into two categories: those that will be ongoing during probate—consider them administrative expenses—and those that can be paid off after the probate estate is opened. These are considered “final bills.” Administrative bills include things like mortgages, condo fees, property taxes and utility bills. They must be kept current. Final bills include income taxes, personal loans, credit card bills, cell phone bills and loans against retirement accounts and/or life insurance policies.

The executors and heirs should not pay any bills out of their own pockets. The executor deals with all of these liabilities in the process of settling the estate.

For some of the liabilities, heirs may have a decision to make about whether to keep the assets with loans. If the beneficiary wants to keep the house or a car, they may, but they have to keep paying down the debt. Otherwise, these payments should be made only by the estate.

The executor decides what bills to pay and which assets should be liquidated to pay final bills. Find more helpful details for serving as the executor in our article, Use this Executor Checklist.

A far better plan for your beneficiaries to avoid issues with debt and probate is to create a comprehensive estate plan that includes a will that details how you want your assets distributed and addresses what your wishes are. In addition, debt can be acknowledged and the means of repaying the debt must be made clear in the plan. New City Estate Planning Attorney David Parker will help document and build repayment into the estate plan. In addition, he can help you plan for assets that you wish to pass to a beneficiary directly, outside of probate, which are not typically subject to paying a decedent’s debts. These are life insurance proceeds, joint tenancy assets, Payable on Death (POD) and Transfer on Death (TOD), to name a few. Schedule a call with our New City estate planning office to create a clear plan for managing your assets and debts while minimizing taxes on your estate.

Reference: The Balance (March 21, 2019) “Dealing with Debts and Mortgages in Probate”