Probate is the process that most estates undergo to distribute assets to the heirs of the deceased and to pay debts and liabilities. What happens when someone dies with more debts than assets? In a case like this, the estate is considered insolvent, and it affects how probate will be carried out.
No two estates are the same, and insolvent ones present unique challenges. It’s always best to consult a knowledgeable estate attorney. Loew Law Group can help. We can put our extensive experience with California estates to work for you and your family today.
How An Insolvent Estate Affects Probate
While we think of probate as the process by which heirs of the estate are distributed property, probate won’t work like this with an insolvent estate. Insolvent simply means there are not enough assets to pay debts of the estate, including taxes. Paying debts is a necessary part of probate. The person who makes the will (testator) cannot use that document to avoid paying creditors and save everything for his or her children or other heirs.
California has established an order of priority for paying creditors out of an estate. The highest priority goes to what are called expenses of administration. These are expenses like court costs, attorney fees, and money needed to maintain and sell certain estate assets.
After this come secured creditors, such as mortgage holders, followed by funeral expenses and costs related to the decedent’s final sickness and death. Beyond this are court-determined allowances for ongoing expenses of the decedent’s children and spouse, unpaid wages, and “general debts” which include unsecured creditors.
Working from highest to lowest priority, it’s possible for many estates to simply not have enough money to pay all of the creditors.
How Are The Debts Paid?
The above debts are considered “classes” of debt under California law. Although there is priority among the classes (e.g. expenses of administration versus secured creditors), there is no priority of debts within each class. However, all debts within each class have to be paid before moving to a lower priority class.
Let’s say the decedent passed away with two mortgages, which are secured debts. Neither has priority over the other, but both have to be paid before moving on to pay the funeral expenses. This is true even though the funeral expenses may be significantly less than either of the two mortgages. If the estate assets are insufficient to fully pay all of the debts in the class (e.g., both mortgages), then each debt within that class will be paid a proportionate share from whatever assets are available.
Can You Be Responsible For The Decedent’s Insolvent Estate?
One question that’s commonly asked is whether an heir – like a spouse or child – will be responsible for the decedent’s unpaid debts. Before answering this question, however, it will be necessary to distinguish between joint debts and separate debts. Joint debts will become the responsibility of the joint debtor after the decedent passes. Separate debts (those that are in the name of the deceased only) will then need to be handled according to the priority classes above.
Generally, the family of the deceased will not have to pay leftover debts. But there are some important exceptions. Because California is a community property state, a spouse can be obligated to pay on his or her deceased spouse’s debts. Also responsible for the decedent’s debts are joint account holders (e.g., a husband and wife who had a joint credit card). Finally, anyone who was a debt guarantor, like someone who cosigned a loan, will be liable for the debt.
Are Beneficiaries On The Hook For The Decedent’s Debts?
Typically, a person named as a beneficiary will not have to pay for the decedent’s debt out of their own pockets (unless they fall into one of the exceptions noted above). However, if you’re a beneficiary, there’s a chance you won’t receive your inheritance or will receive less of it due to the debts. The debts have to be satisfied before assets can be distributed to beneficiaries. While you won’t have to come up with anything out of your pocket, a heavily indebted estate might leave its beneficiaries with nothing.
There are cases in which creditors can challenge an asset transfer to a beneficiary that took place right before death. If the decedent gave a beneficiary a significant sum of money, for example, right before passing away, it may be considered an attempt to defraud creditors. A creditor can object to this and a court will have to examine evidence of what was intended by the transfer.
A Skilled California Insolvent Estate Attorney Is Ready To Help
You probably have a lot of questions and concerns after a loved one passes away with significant debt. How many creditors will assert a claim against the estate? Will a gift that was made to me right before the decedent’s death be challenged? Will I receive anything at all from the estate? Turn to the experienced team at Loew Law Group. We’re here to answer any questions you have about insolvent California estates. Call today to schedule a consultation.