Everything that must be addressed in settling an estate becomes more complicated when there is no will and no estate planning has taken place before the person dies. Debts are a particular area of concern for the estate and the Personal Representative or Executor. What has to be paid, and who gets paid first? These are explained in the article “Dealing with Debts and Mortgages in Probate” from The Balance.

Probate is the process of gaining court approval to manage the estate and pay bills and expenses before property can be transferred to beneficiaries. Dealing with the debts of a deceased person can usually be started 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 these 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 Personal Representative, Executor, or heirs should not pay any bills out of their own pockets. The Personal Representative or 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 attached. If the beneficiary wants to keep the house or a car, they may have to also obtain the debt. Otherwise, these payments should be made only by the estate.

The Personal Representative or Executor decides what bills to pay and which assets may be liquidated to pay final bills.

A far better plan for your beneficiaries is to create a comprehensive estate plan that includes a Will or Trust 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, your estate planning attorney will be able to explain how to make that happen, while minimizing taxes on your estate and avoiding a lot of the uncertainty that results from not having a plan in place.

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