What Happens If An Estate Doesn’t Have Enough Money To Pay Debts And Beneficiaries?

When talking about estate planning, people usually assume that there will be an estate with enough assets to be shared among heirs and beneficiaries. But, what happens when someone dies and leaves behind more debts than assets? Imagine having to handle the loss of a loved one and the fact that they left more debts than they or you realized. Such a situation is certainly not one anyone would wish to be a part of. Unfortunately, such cases, where a testator leaves more debts than assets, are common. When an estate has insufficient funds to pay debts and beneficiaries, it is said to be “insolvent.”

How Debts Are Treated in California Probate

Usually, when an individual dies in California, their estate goes through the probate process. Two of the main components of the probate process are settling debts and paying beneficiaries. Generally, before any assets can be distributed among beneficiaries, debts must be paid off. Debts such as expenses of administration, funeral expenses, medical bills, family allowance, and wage claims must all be paid after the appraisal of the probate estate. As a general rule, high-priority debts like funeral expenses need to be paid off before lower priority debts like unpaid wages.

So, what happens when an estate doesn’t have sufficient assets to cover all debts? In the case of an insolvent estate, several steps can be taken. One step is to differentiate between separate and joint debts. Joint debts become the responsibility of the joint debtor, and separate debts remain in the decedent’s name. Generally, a decedent’s family, beneficiary, or executor is not responsible for any debts a testator leaves behind. However, there are few exceptions to this rule apart from when one is a joint debtor. For example, in California, spouses can remain responsible for their deceased spouse’s debts because of the state’s community property laws.

Beneficiaries May Be Held Liable For Assumed Debts

If, for instance, a beneficiary assumed responsibility for the late individual’s medical bills, they may be held responsible for medical debt. However, it is crucial for you to note that in such a case, the responsibility would be based on the fact that the beneficiary promised to take care of the debt and not on the fact that they are a beneficiary of an insolvent estate.

A Creditor Can Dispute the Transfer of Assets

There are situations where creditors can challenge asset transfers that happened before death to satisfy debts. Often, this occurs when a creditor has reason to believe some assets were transferred by the deceased just before their death in an attempt to defraud them (the creditor) and avoid paying off debt.

What Happens When an Estate Can’t Pay Beneficiaries?

As an estate’s executor, you should know that you are not personally responsible for paying beneficiaries. However, if beneficiaries believe that mismanagement of estate funds led to insufficient benefits, they can petition the court. In the case of insolvent estates, probate courts usually decide which beneficiaries receive what. Sometimes, courts choose to reduce the intended benefits by ordering abatements.

Contact Us for Help

If you have been appointed as an estate executor, you must work with a skilled probate attorney because the probate process can be complex. For help probating a California estate, contact a California probate lawyer at the office of the Probate Guy today.

Resource:

leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=PROB&division=7.&title=&part=9.&chapter=2.&article=