Every person who dies, whether wealthy or not, will owe money. Whether there is a credit card balance outstanding or estate taxes due to the State of New York, most people will leave this world with a financial obligation of some type. The questions to be addressed in this blog post involve how the fiduciary of the estate should address such debts and whether the fiduciary is personally responsible for the debts. Also, should debts of the deceased be deducted from estate proceeds before distribution to beneficiaries?
The first step is to analyze the types of potential debts. There are secured and unsecured debts. Secured debts are collateralized, such as a mortgage recorded against the house in which the deceased lived, or a car lease. An example of an unsecured debt would be a credit card balance with Visa, Mastercard and the like. Other common unsecured financial obligations include funeral expenses, administration expenses of the estate, estate taxes due to the state or federal government and real estate taxes on property owned by the deceased. Of course, ordinary bills from utilities and doctors will most likely be received.
The fiduciary of an estate in New York is called an Executor if there was a Will, or an Administrator if there was not a Will. Such a fiduciary is charged with collecting all assets of the estate, paying all legitimate obligations, and distributing the balance, if any, to the beneficiaries of the estate. Being a fiduciary is a significant responsibility. Provided that the fiduciary acts ethically and in good faith, he will have no personal obligation for financial obligations of the estate.
Fiduciaries should satisfy all known obligations of the estate prior to distribution to beneficiaries. Estate beneficiaries are liable to the extent of the value of property received by them for the debts of the deceased, funeral and estate administration expenses and estate taxes if there is insufficient property of the estate available to the fiduciary for such purposes. As such, the beneficiaries would rather not receive the monies without estate obligations being satisfied.
Creditors generally have seven months after the issuance of Letters Testamentary or Letters of Administration (the documents that appoint the fiduciary in a probate or administration proceeding) to present a claim against the estate. For this reason, most fiduciaries wait seven months after they are appointed before distributing assets to beneficiaries, in order to allow any claimants to come forward. If the fiduciary in good faith pays obligations of which he is aware, without the duty of investigation as to additional obligations, prior to distribution to beneficiaries, the estate will not be liable for other claims if they are made after this seven month timeframe.
A valid claim by a creditor must be in writing, contain the facts upon which it is based and the amount due and be delivered to the fiduciary as required by the statute. The fiduciary has the obligation to research the claim and pay or decline same. Of course, an “obligation” obtained through identity theft or other illegal means is to be rejected. In order to preserve estate assets for the beneficiaries, a fiduciary should not necessarily pay every claim presented.
New York’s Surrogate’s Court Procedure Act provides for the priority of debts of the estate. The first debts to be paid are reasonable funeral expenses and expenses of administration. Then, debts given preference by the United States or New York State governments and estate taxes are to be paid. This is why the early paragraphs of most Wills contain the language that is familiar to most of us: “I direct that my just debts and funeral expenses and estate taxes be paid”. Judgments docketed against the deceased follow in priority. Following in priority after judgments will be bonds, sealed instruments, notes, bills, unliquidated demands and accounts. If there are insufficient assets available to pay all legitimate estate obligations, the fiduciary will need to pay the debts of the deceased according to the priority listed in the applicable statute.
Our attorneys are available to address your questions concerning financial obligations of the deceased.