When a loved ones passes away we often are overwhelmed by grief. When a loved one passes away with a multitude of debts, this feeling of being overwhelmed can increase greatly. Family members do not fully understand how to deal with these debts. In fact, there is a legal order of priority of how outstanding debts should be paid if there are not enough assets to satisfy all debts. This type of estate is called an “insolvent” estate.
Most individuals have a Last Will and Testament which names a Personal Representative (sometimes referred to as “Executor/Executrix”) to administer the individual’s probate estate. The Personal Representative is the individual in charge of winding up the affairs of the decedent. If an individual passes away without a Last Will and Testament, Pennsylvania’s intestate laws determine the priority of who may petition the Register of Wills in the county where the decedent resided to be appointed Personal Representative.
After being appointed Personal Representative, an individual’s first duty is to gather information regarding the decedent’s assets and debts. The Personal Representative also has a duty to advertise that an estate has been opened to allow creditors and debtors to be notified of the individual’s death so that they may file a claim.
For some estates, the value of all assets may not be enough to satisfy all valid debts. In that case, the Personal Representative should be aware that there is a statutory order of priorities that determines which creditors get paid from the decedent’s available assets.
- Cost of Administration
First, debts and expenses related to the costs of administration of an estate have highest priority for payment. These costs include probate fees, court filing fees, attorney’s fees, accounting fees, and an executor’s fee. Probate fees are charged based upon the value of the estate’s probate assets. If an estate is insolvent there also may be limits on fees that an executor or attorney can charge for their services.
2.Family Exemption
The second level of priority for payment is an exemption of up to $3,500 available to a surviving spouse from the real or personal property of the decedent. In the event the decedent does not have a surviving spouse or the spouse has forfeited his or her right to the exemption, then any child of the decedent individual may claim the exemption provided they resided in the same household as the decedent at the time of death. Claiming this exemption may be more difficult if the decedent was a resident of a nursing home and lived there for more than a year prior to death. The Personal Representative may be required to provide proof of residence of a family member in order for that person to receive the exemption.
3.Cost of Funeral; Cost of Medicine and Cost of Medical Care Paid Within Six Months of Death
The third level of priority for payment is the cost incurred for the decedent’s funeral and burial. At this same level of priority are any invoices for medicine, hospital care, nursing, or medical services received by the decedent, or services provided under the Medical Assistance program, within six months of the decedent’s death.
If there is more than one claimant entitled to this level of priority for payment and there are insufficient resources to satisfy all claims at this level of priority, remaining resources will be divided proportionally among all creditors at this level of priority according to the amount of each creditor’s claim.
Because this level of priority relates only to medicine and medical services provided within the six month period prior to the decedent’s death, it is imperative for the Personal Representative to be aware of when such medicine or medical services were provided. Invoices are often sent by providers after the decedent’s death for services that were provided more than six months prior to death.
4. Cost of Grave Marker
The fourth level of priority for payment after the above mentioned claims is the cost of a headstone or other grave marker incurred on behalf of the decedent. Please note that a headstone or grave marker is different from the cost of a funeral service and burial and falls under a different priority.
5. Rent Owed for Decedent’s Residence for Preceding Six Months Prior to Death
Fifth, any rent owed by the decedent for the six months prior to his or her death will be paid out of any remaining assets after the higher priority claims are paid.
(5.1) Claims by the Commonwealth of Pennsylvania and its Subdivisions
Next, claims made by the Commonwealth and any political subdivisions are paid. Examples of a political subdivision include counties, cities, towns, school districts, water districts, and other special districts. A political subdivision does not include a homeowners’ or condominium association. Claims subject to this level of priority include, but are not limited to, tax liens and municipal liens filed by the Commonwealth and its political subdivisions.
6. All Other Debts and Claims
Finally, after all of the above debts are paid, any outstanding claims will be paid out of remaining assets. As one can imagine, creditors with this priority level of claim often do not receive full satisfaction of their debt when an estate is insolvent. In such an event, all claims at this level receive equal priority. This means that remaining assets will be divided on a pro rata basis among creditors at this level of claim. It is also possible that there may not be any assets left to pay any claims at this priority level.
In addition to the responsibility to pay creditors, the Personal Representative is required to file a Pennsylvania inheritance tax return within nine months from the date of the decedent’s death. Most property in which the decedent had an ownership interest at the time of death is subject to Pennsylvania inheritance tax. Deductions for certain costs and expenses are available to reduce the amount of inheritance tax owed. Most debts and expenses described above will be allowable deductions from the amount of inheritance tax owed. In the event that a decedent’s estate is determined to be insolvent, it is likely that no inheritance tax will be owed. The Personal Representative is still required to submit a return, however, along with documentation that supports the deductions taken.
A Personal Representative should keep in mind that he or she generally is not responsible for the debts of a decedent individual. If a mistake is made, however and beneficiaries are paid prior to all valid debts being paid or if debts are paid incorrectly, the Personal Representative may be personally responsible for paying any remaining debt if he or she cannot recover distributions already paid improperly to beneficiaries. In order to prevent such mistakes from occurring, distributions from an insolvent estate often are not paid to beneficiaries without first receiving court approval.
A Personal Representative who is unsure if sufficient assets exist to pay all of a decedent’s debts should contact an experienced Estate Administration attorney. This will ensure that he or she receives full instructions about the rules governing payment of creditors and priority of claims prior to making any distributions to beneficiaries.
By: Ryan A. Webber, Attorney