The debts of a deceased person can wipe out the inheritance a beneficiary might have expected to receive. California has its own rules about the notification of creditors and payment of creditor claims when administering an estate. If you are trying to handle the estate of a close friend or relative, you probably have many questions, like “When do I start paying my deceased loved one’s creditors?”
A California estate planning attorney can answer your questions and help you administer the estate. Being named as the executor of a will, the trustee of a living trust, or the administrator of an estate, does not mean that you have to perform those tasks without professional help.
Step One is to Find Out All the Debts Your Loved One Had
California law requires that you promptly notify all the known creditors of the deceased person that the person died. You do not want to make the mistake of assuming that a person’s debts die with them. The estate will have to pay valid debts. You cannot distribute money to the heirs before dealing with the debts.
After you notify the decedent’s creditors, they will have 60 days to file a claim against the estate. The estate representative will then review each claim and either approve or dispute the individual creditor claims.
What Happens if the Estate Does Not Have Enough Money to Pay All the Valid Debts of the Decedent?
Usually, creditors cannot hound the relatives of a deceased person to pay the decedent’s debts. In California, however, there are two exceptions to this general rule:
- Joint debt accounts. If you were a cosigner on a loan with the decedent, you will have to continue making payments after your loved one dies. It does not matter if you ever owned the asset. Also, if the deceased person added your name to a joint account, like a credit card that had an outstanding balance, you might have to pay off that debt out of your assets if the estate lacks sufficient funds to do so.
- Some jointly held assets. California is a community property state. If the estate cannot pay off all the valid debts of your loved one, the surviving spouse might have to pay the debt on community property.
This is merely a quick overview of what you might face if the estate does not have sufficient assets to satisfy all debts of the decedent.
Who Gets Paid First?
California probate law categorizes creditors by the level of priority. You cannot distribute money or other assets to the heirs until you satisfy all the valid debts of the decedent.
Here are the seven categories of creditors, starting with the top priority (who must get paid first):
- The costs and administrative expenses to administer the estate.
- All secured debts, liens, and deeds of trusts.
- Funeral expenses.
- Medical bills from the last illness that led to the death.
- A reasonable sum for the surviving spouse or children who were not intentionally disinherited. This amount is called the family allowance, and must generally be approved by a court.
- Wage claims of employees or contractors of the decedent, within limitations.
- Any other valid debts that do not fall into categories one through six.
You may be looking for ways to protect an estate from being depleted by creditor claims. You may also be faced with frivolous claims filed by parties hoping to receive a nuisance settlement. A California estate planning attorney can help you with these situations, and many more, and explain strategies that might be beneficial to protect the estate and to protect you from liability. Get in touch with our office today.