After the death of a loved one, family members are usually dealing with a lot of emotions. During this time it’s easy for them to forget about, or to be overwhelmed by, the process of settling the deceased’s estate, especially if there are number of potential creditors or debts that may be looming. This is where working with an experienced and knowledgeable probate attorney can help.
The Florida Probate Firm has handled many estates which have been burdened with numerous creditor claims, as well as estates that are considered insolvent, meaning that the liabilities of the estate exceed the available assets. We work with families to preserve as much wealth as possible, and to ensure that the expenses of the administration are funded by estate assets rather being paid out of pocket by beneficiaries, whenever possible. There are a number of options available to protect assets from potential creditors such as:
During a formal probate administration, the probate court will appoint a personal representative to be in charge of the estate. The personal representative of the decedent’s estate is a fiduciary. He or she is charged with protecting the property of the beneficiaries – one of the highest standards of care known to the law. It is their responsibility to make sure the assets are preserved, safeguarded, and protected. But, not only do they owe a duty to the beneficiaries, they also owe duties to creditors of the estate.
The personal representative must notify potential creditors of the death of the decedent, so they have the opportunity to file a claim in the probate proceeding. The attorney on record for the estate will publish a notice to creditors in the local newspaper for two weeks, which designates the beginning of the 90 day creditor period. The attorney for the personal representative will also mail Notice to Creditors directly to any known creditors of the estate informing them of the deadline for filing their claims. Creditors have the longer of 30 days from receipt of mailed Notice to Creditors, or 3 months after the first date of publication of Notice to Creditors, in order to file a claim in the estate.
It is the creditor’s responsibility to file a claim with the court within the statute of limitations in order to seek reimbursement. If not, that creditor cannot look to the personal representative nor to the decedent’s children or heirs for payment.
Once a creditor claim has been filed, the personal representative must look over all debts and claims, determine which are legitimate, which should be objected to, and, where possible, negotiate a settlement. However, it is important to understand that the estate’s debts must be paid off based on order of priority established by Florida statute.
That said, there is an important distinction between the class, or category, that each debt or expense of the estate falls into. Estate expenses must be paid according to their order of priority, and all creditor claims or expenses of administration must be addressed before any distributions can be made to beneficiaries.
The Florida statute stipulating the order of priority associated with payment of creditor claims is as follows:
733.707 Order of payment of expenses and obligations.—
(1) The personal representative shall pay the expenses of the administration and obligations of the decedent’s estate in the following order:
Expenses directly associated with the administration, such as legal fees and filing fees, are considered class 1 creditors and get paid before any other type of expenses. The vast majority of debts accumulated by the decedent during life will be categorized as class 8 creditors, which for example would include liability associated with credit cards, loans, mortgages, etc.
It is very important for the personal representative to follow the order of priority in which these claims must be paid, and that he or she does not pay a subordinate creditor before a creditor with priority, or he or she could be held financially liable if the creditor with priority goes unpaid. In order to avoid any mistakes, its advisable to strictly follow the timetables stipulated by your attorney regarding the creditor period. The personal representative should wait until the expiration of the 90 day creditor period before assessing which claims must be paid, since he or she will only have a clear picture of all the debts once creditor period has expired. The personal representative also has one additional month after the expiration of the creditor period in which to object to claims. When a claim is objected to, the creditor will have 30 days from receceipt of the objection in which to respond to the objection by filing a civil suit against the estate to enforce the claim. If the claimant does not initiate the suit and does not respond to the objection within 30 days, the claim is considered barred and the personal representative can petition the court to grant an order striking the claim.
If the personal representative forgets to pay a creditor, or gives in to the pressure and distributes all estate assets too early, and claims against the estate arise later on; he or she could be held personally liable to pay those creditors. Similarly, if the personal representative distributes estate assets without making appropriate tax payments or establishing sufficient reserves for taxes, he or she will be personally liable for any unpaid tax.
Before paying any bills (other than the funeral expenses), distributing any property, applying for death benefits, or making payments to beneficiaries, the personal representative must determine, with the help of an attorney or financial advisor, whether or not the estate is likely to be insolvent.
If the estate is insolvent, meaning that its debts are greater than the assets available to settle them, the personal representative should pay nothing (other than the cost of a reasonable funeral) from the estate until all claims, bills, and demands have come in. Each class of creditor will be satisfied in full, one class at a time, working down in the order of priority from class 1. Once you reach a class of creditors in which there is not enough funds to pay off all claimants within the class, the remaining creditors within that class will then be paid on a pro-rata basis based on their proportionate share of the debt owed by the decedent until all the assets in the estate are exhausted.
It is, therefore, very important that the personal representative consider all of the estate’s assets and liabilities before making any distribution to any beneficiary or creditor. If the estate is insolvent and the personal representative pay bills that are not entitled to priority so that priority creditors don’t get paid, he or she can be held personally liable to pay those priority creditors. That means having to reach into his or her own pocket to make up the amount they improperly paid to the wrong creditor.
By law, creditors get paid before any beneficiary can take what is left for an inheritance. If there is not enough money in your estate, it is possible that the court will direct all the money to your creditors and leave nothing for your heirs to inherit.
The best way to ensure that your creditor’s claims don’t take away from what you hoped to leave for your loved ones is to plan ahead with the help of a qualified estate planning attorney to ensure that there is enough in your estate to pay your debts.
An experienced estate planning attorney can help you and your family utilize estate planning tools and resources, such as life insurance, to simplify the process and protect your legacy.