When you’ve been nominated as a personal representative in the testator’s will, after they pass away, it will fall on you to ensure that they will undergo the probate process and ensure that each named beneficiaries get their due share of the estate. However, from a strictly emotional perspective, expect to face a flurry of legal obligations as well.
This will include dealing with the necessary documentation and paperwork, planning the estate distribution, calculating debts and taxes, etc. All of this can be an overwhelming undertaking.
However, dealing with the testator’s creditors will be even more cumbersome. As an executor, you will be legally accountable for paying all the debts using the decedent’s estate during probate.
But when it comes to an insolvent estate, meaning the decedent’s state doesn’t have the necessary funds to cover the debts, the process of paying off creditors and other forms of liabilities becomes a bit different and state specific.
Understanding Debt Responsibility in Terms of an Estate
Depending on which state the testator resided in, there can be one of three ways that any debt can be held. Let’s briefly look at what those ways are.
Individual Responsibility
This involves a sole individual taking out a vehicle, a home loan, or any other type of loan in their name with the guarantee to pay it back. After that individual pass away without paying off the loan, their personal representative will be obliged to pay those debts from the testator’s estate during probate. This also includes any unpaid taxes.
Accounts that are Jointly Held or Co-Signed
This mainly pertains to any type of loan that involves two beneficiaries (both spouses) to be owned jointly. If the testator passes away, the owed amount will be deducted from the estate. However, if the estate funds aren’t enough, the other co-signee of the loan will be responsible for paying it back.
Debt that is Inherited
This is a type of debt that a named beneficiary takes upon themselves to reimburse. This can be a car or house leased by the testator. In this case, the responsibility of paying back the loan will be the beneficiaries alone.
As the personal representative of the testator, you will be responsible for considering different types of debts and evaluating each debt for its eligibility to be passed through the probate process.
A Glimpse into How Debts Can and Should be Sorted on Behalf of the Decedent
One of the most important steps to take in your pursuit to identify the debt of the decedent is to evaluate the specific type of debt in question. It will become pertinent for you to analyze the accounts and financial paperwork of the decedent to understand whether they have one or multiple types of debts to be paid. There are a couple of ways to deal with a decedent’s liabilities, but it is equally important to identify which type of debt they are dealing with.
Debts Owned by the Sole Individual
It is prudent to note that these types of debts are the responsibility of the individual who has taken them in their name. So, for instance, if the decedent took out a loan to buy a car and passed away before settling the debt, no other surviving members of the family can be held accountable for paying the debt should the estate fund not be sufficient to settle the debt.
The same will be said about personal credit card debt. Moreover, should the funds be insufficient, the individual debt(s) will be written off unless they come with a personal guarantee.
Debts Owned by Two or More People
A good example of a joint debt can be a home mortgage. If the mortgage is taken out under the names of both the husband and wife, for instance, if the testator passes away, it will be the surviving spouse’s responsibility to cover the mortgage/debt.
In this case, it is good for an executor to see whether the mortgage or any jointly owned debt is eligible to be covered by the decedent’s insurance policy. If not and if both the surviving spouse and the estate come up short, the debt can be open to negotiation where the parties involved can discuss a reduced amount or a better payment plan.
Secured Debts
If a testator’s debt is directly tied up with an asset, for instance, a marital home, the situation may get a bit more sophisticated. So, to first determine the true value of an asset, it is important for the executor to first determine how the property was bought by the decedent and the individual value of the marital home that will come under the share of the decedent.
If the property is jointly owned, the surviving spouse or significant other will have to keep making the payments. If the surviving spouse is a tenant in common and owns a particular share in the home, the bulk of the debt will be paid from the decedent’s share value in the property.
Understanding How to Prioritize Debt
It is also important to understand the priority of a debt when it comes to making payments from the estate fund. Determining the hierarchy is vital because while minor debt could be paid from the estate, it is possible that major one would not. However, how to prioritize debts mainly differs from the laws of one state to the next.
Secured debts typically top the list of debts after a testator passes away. After that, the estate will used to cover subsequent costs associated with the funeral of the testator and other miscellaneous costs related to managing the estate and the probate process.
After that, the personal representative will be responsible for paying the decedent’s tax liabilities (if any), followed by debts related to the medical expenses of the decedent. However, if the number of debts is high compared to the total value of the estate, the circuit court will instruct the executor on which debts to be covered first.