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Paying the Debts of a Deceased Person

Settling the debts of a deceased person
When a loved one dies leaving property, debts and a mortgage, and if he did not have a living trust, probate is required to sort everything out.

Paying the debts of a deceased person is not an every day problem.  The problem usually appears a few days or weeks after someone passes away.  Bills start to arrive bearing the name of a family member who has just passed away.  There’s a sinking feeling for the surviving family, who are already dealing with the grief of losing a loved one.

What has to be paid, and who gets paid first?

The answers to those questions are explained briefly in the article “Dealing with Debts and Mortgages in Probate” from The Balance.

Probate is the process of gaining court approval of the estate and paying off final bills and expenses, before property can be transferred to beneficiaries. Dealing with the debts of a deceased person can be started, however, even before probate officially begins.

Start by making a list of all of the decedent’s liabilities and look for the following bills or statements:

  • Mortgages
  • Reverse mortgages
  • Home equity loans
  • Lines of credit
  • Condo fees
  • Property taxes
  • Federal and state income taxes
  • Car and boat loans
  • Personal loans
  • Loans against life insurance policies
  • Loans against retirement accounts
  • Credit card bills
  • Utility bills
  • Cell phone bills

Next, divide those items into two categories: those that will be ongoing during probate—consider them administrative expenses—and those that can be paid off after the probate estate is opened. These are considered “final bills.” Administrative bills include things like mortgages, condo fees, property taxes and utility bills. They must be kept current. Final bills include income taxes, personal loans, credit card bills, cell phone bills and loans against retirement accounts and/or life insurance policies.

The executors and heirs should not pay any bills out of their own pockets. The executor deals with all of these liabilities in the process of settling the estate.

For some of the liabilities, heirs may have a decision to make about whether to keep the assets with loans. If the beneficiary wants to keep the house or a car, they may, but they have to keep paying down the debt. Otherwise, these payments should be made only by the estate.

The executor decides what bills to pay and which assets should be liquidated to pay final bills. This is among their most important duties, and it may have far-reaching consequences for all of the beneficiaries of the estate.  Make sure that the executor always pays bills in a timely fashion and with the proper funds.  In some cases, the court will instruct the executor about which debts must be paid and when. Very few debts may be discharged by the death of the debtor, and sometimes a surviving spouse may be obligated to assume the debts.

A far better plan for your beneficiaries, is to create a comprehensive estate plan that includes a will that details how you want your assets distributed and addresses what your wishes are. If you want to leave a house to a loved one for example, your estate planning attorney will be able to explain how to make that happen, while minimizing taxes on your estate.  Paying the debts of a deceased person is a much simpler process when there is an estate plan that includes complete instructions for fiduciaries and a carefully-selected list of possible executors and trustees.

Reference: The Balance (March 21, 2019) “Dealing with Debts and Mortgages in Probate”


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