What executors might do when an estate is ‘under water’
An elder law attorney friend of mine was known to advise parents on a fail-safe way to tell adult children that one of them was named as executor of the will. What they should say, he commented, is that there are three reasons why “John” was named as executor.
The parents would allow the children to decide for themselves which one it was. Either the parent loved John more that any of the remaining children and was rewarding him by making him executor, or the parent regarded John as more competent and better able to handle the estate or, finally, the parent did not want to trouble his remaining children with the work and annoyance involved in the settling of an estate and he wanted John to have to handle all the work.
In the past year or so the third possibility may have become more plausible as some executors are searching for greater liquidity to be able to resolve their parent’s estates.
Here, as in so many other fields, real estate is a common culprit. If the family home does not sell or, worse, if the remaining mortgage balance on the house is higher that its current value, the so-called “under water” property, the executor can have a real headache to confront.
This has not been a common topic for discussion and maybe it should be. Executors need to know what to do when there is not enough to go around for all of the creditors and beneficiaries.
Should you probate the will? Suppose, after a parent’s death and, on review of all of their assets, including the house, and all of their debts, including the mortgage, a person appointed as executor of the will realizes that there is negative equity in the house and there are no offsetting assets in the estate to make up the difference. There would be nothing to distribute to beneficiaries since the bills need to be paid first. The good news, if any, is that there might not be Pennsylvania inheritance tax since the beneficiaries would not be paid.
The question could arise and I have, in fact, been asked, whether the executor is legally required to probate a will. There is no legal requirement to probate a will. On the other hand, if there are assets on which inheritance tax would be due, even if there is no probate, then an inheritance tax return, at least, needs to be filed and the taxes paid. Otherwise, interest will begin to accumulate on the amount owed to the Pennsylvania Department of Revenue beginning nine months after the date of death.
The assets that might pass directly without probate would include jointly titled property, transfer on death (TOD) accounts, and retirement funds including IRAs. Life insurance death benefits are not taxable for inheritance tax purposes. If you do not know whether inheritance tax is due on certain assets, seek professional advice.
When the will is probated, what are the executor’s responsibilities? Suppose the executor has probated the will. He or she is responsible then to locate and secure the assets, pay the bills, including taxes, and distribute the balance of the estate to the beneficiaries in accordance with the terms of the will.
If there is not enough money in the estate to pay the bills, Pennsylvania has an order of priority as to which bills are to be paid. Under 20 Pa. CSA Section 3392, the order is (1) costs of administration; (2) the family exemption if a family member lived with a decedent at the time of death; (3) the cost of the decedent’s funeral and burial and of medicines and medical, nursing and hospital services provided within six months of death including costs paid by Medicaid during that time; (4) cost of a gravemarker, (5) rent for occupancy of the decedent’s residence for six months prior to death; (5.1) claims by the Commonwealth and political subdivisions of the Commonwealth and (6) all other claims.
When real estate is involved, the question might be not only whether there are enough funds to go around but also when the house might sell. Timing is also important in resolving an estate. If you have questions, seek help. Resolving an estate, especially with devalued assets, can be more of a challenge today than in times past.
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.