How to Deal With An Estate That Does Not Have Enough Money

Estate_Not_Enough_Money

Being appointed Executor of an estate is often considered an honor. When the assets do not match up with the bills or with required distributions, the position can, however, result in headaches. An experienced elder law or estate attorney can help you through with sound advice. However, here are some things to know.

  • Probate assets and nonprobate assets are considered separately. It is important to know what your role as Executor involves. The Executor’s job is to pull together the assets that are going to pass by Will and the bills or debts to be paid, then to pay the debts, including taxes and expenses of probate, and distribute the remaining funds to the beneficiaries as the Will directs.
  • The Executor has authority over probate assets, those that pass by Will. However, many assets do not pass by Will. These include the proceeds of life insurance policies where individual beneficiaries are named. Jointly held property if titled as joint tenants with right of survivorship or, as to married couples, tenancy by the entireties pass directly. Tax qualified funds – IRA’s, 401(k)’s and so on often pass outside the Will by beneficiary. However, Inheritance Tax in Pennsylvania is still due even if property does not pass by Will with some exceptions. Life insurance, for instance, is not subject to inheritance tax. Property received from your deceased spouse has 0% inheritance tax. If the Will states that any Inheritance Tax due on nonprobate assets is to be paid from the residuary estate, then the Executor must pay tax on those assets from the probate estate. (Otherwise it would be due from the beneficiary directly.)
  • Beneficiaries inherit after the bills are paid. It might seem obvious but the Executor, when dealing with assets that pass by Will must first use those assets to pay bills of the estate and any valid remaining bills of the decedent. This includes Inheritance Tax. (Very few estates are subject to federal estate tax.) So, you and the remaining beneficiaries might not receive everything you expected. If Uncle George’s estate, after paying the bills including funeral bills, final medical bills, taxes and so on has only $50,000 the chances are good you will not receive the full $75,000 expected. This is because beneficiaries are paid from the net estate. There is, however, one other consideration. If you are also serving as Executor, unless the Will indicates otherwise, you are entitled to a fee. Your attorney can discuss with you what is considered to be a reasonable fee considering both the size of the estate and the amount of work involved.
  • First things first. If there is concern the estate will not have enough even to pay creditors there is an order of priority estatablished by state law. Credit card debt, for instance is not the top priority. Sometimes funeral bills and others are ignored or delayed during a time when survivors are seriously concerned about final VISA or Mastercard bills. Credit card debt is unsecured debt, on the bottom of the list of priorities indicated by Pennsylvania and most other states’ laws. Some bills are more important than others. It can be very helpful to know the order of priority especially if there are cash flow issues.You should pay administrative expenses, including attorney’s and executor fees, the funeral home, the nursing home, and medical bills not covered by insurance which were incurred within six months of death as a priority. All of these expenses are deductible when factoring Inheritance Tax. If the medical bill is going to be paid by health insurance or the nursing home bill is covered by Medicare or Medicaid you need to confirm this information. If Medicaid paid, there is a likely priority claim under Estate Recovery that should not be ignored. The most important of these expenses would be those paid by Medicaid within six months of passing but Medicaid can reach back for all expenses paid under the Estate Recovery program. Get help from an elder law attorney if needed for details.
  • You can pay yourself back if you paid priority expenses. Sometimes an Executor pays administrative expenses or other priority expenses or the cost of the funeral from his or her own funds initially. If you do this you should keep a record of this and repay yourself after an estate account is established. The same goes for expenses paid from a joint account with the decedent.

About the Author Janet Colliton

Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.

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