When someone dies, their estate will typically go through the probate process. That is the manner in which the money and property which makes up their estate will be distributed to their heirs. But, if an estate has more debts than it does assets, the estate is considered “insolvent.” So, what happens to probate administration if the estate is insolvent? Let our Los Alamitos probate attorneys explain.
What if there aren’t enough assets?
One of the biggest components of probate administration is settling debts and paying taxes. However, if the estate does not have sufficient assets to cover those debts and taxes, then the process changes. There are a few options for dealing with estate insolvency. The first step is to distinguish between joint debts and separate debts. Joint debts will become the responsibility of the joint-debtor. Any debts that remain in the deceased’s name only must be handled differently.
One person is generally not liable for the debts of another
The general rule is that your family will not be liable for any debts you leave behind. There are a few exceptions, though. Spouses can remain liable for debts of their deceased spouse because of California’s community property laws. For instance, if your deceased spouse accumulated a significant amount of medical debt, you may be liable for those expenses. Of course, joint account holders are liable for those joint debts, such as credit cards, regardless of whether the surviving party did not actually incur the debt. The same is true if you were a guarantor for a debt, such as a co-signor on a loan.
Los Alamitos probate attorneys can help with probating an insolvent estate
For those who choose to probate an insolvent estate in order to resolve those debts, it is a good idea to seek the assistance of an attorney throughout the probate proceedings. Los Alamitos probate attorneys understand the process in a way that will help it proceed more efficiently while complying with the probate laws of your state. In many cases, the probate court will have the attorney paid out of the estate assets before the creditors get their share.
Beneficiaries are not required to pay the creditors of an insolvent estate
A common question many beneficiaries have is whether they will be required to satisfy estate debts out of their own pockets. The answer is no. You are not responsible for the deceased’s debts simply because you are a beneficiary of the estate. If that was the case, people may be inclined to incur significant debt and then leave others responsible for their debts.
A creditor may challenge asset transfers just prior to death
There are a few situations where a creditor may bring claims against a beneficiary to satisfy a debt. Usually, this happens when there is evidence that the deceased transferred a substantial amount of assets just prior to death. This may appear to be an attempt to defraud creditors and avoid paying off known debt. For example, if you use your father’s debit card to withdraw nearly all of his checking account balance a few days before his death, his creditors will likely challenge that transfer. What is important to remember is that, while making gifts is perfectly legal, giving away your assets in an attempt to avoid paying legitimate debts is illegal. If these issues arise for you as a beneficiary, then discuss your situation with one of our Los Alamitos probate attorneys.
A beneficiary may be liable for debts they assumed
There are some cases where family members voluntarily assume liability for certain expenses, such as medical care or rest home expenses of the deceased. In those situations, a beneficiary may also be liable for the legitimate debts of the deceased. The liability is based on the fact that the beneficiary promised to be responsible for the debt, not simply because they are beneficiaries of an insolvent estate.
How an insolvent estate affects inheritances
If an estate is insolvent, beneficiaries can expect to lose at least a portion of their inheritance, or possible not receive anything at all. This can also happen when debts have been paid but there are no assets left. The probate process requires that beneficiaries are only paid after debts have been paid. It may mean, for example, that real property that should have gone to a particular beneficiary may need to be sold to pay a debt. If there are any of the proceeds remaining, the beneficiary may receive that remaining amount.
If you have questions regarding estate planning, trust contests, or any other trust administration issues, please contact the Schomer Law Group either online or by calling us in Los Angeles at (310) 337-7696, and in Orange County at (562) 346-3209.
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