Payments & Taxes

1. How Are Creditors Against An Estate Handled?

Prioritize creditors before the estate’s assets and property are distributed to beneficiaries or heirs. Therefore, part of the probate process requires notifying creditors of the death. It involves publishing notices in the local newspaper or sending letters to each California creditor. Newspaper is a better option; it satisfies the obligation conveniently.

After the notification, creditors have limited time, around four months, to file claims against the estate. After that, creditors send a bill. The claims approved by the personal representative or executor get paid from the estate. The personal representative can reject claims they believe are invalid, so the creditor must sue. It works well in many cases to conserve money; feel free to call if you have any Qs.

If the estate does not have enough money to pay legitimate debts, they can sell the property to satisfy obligations. There are tons of agencies out there who lend money to estates. They usually are costly, but it helps the estate to get the payments made. Afterward, the personal representative or executor will determine which creditors get paid first.

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2. Do Beneficiaries And Executors Have To Pay Creditors Out-Of-Own Pocket If The Estate Is Insolvent?

The executor is not responsible for paying creditors except with estate assets. There are some exceptions, however. For example, an executor could be liable for debts if they cosigned a credit card or loan jointly with the decedent. Executors can also be responsible for debts if they mishandled the estate’s assets and caused them to lose value.

Surviving spouses are responsible for debts incurred with the decedent. However, for debts the decedent incurred alone, the surviving spouse may or may not be liable depending on state laws and how the property is held.

3. How Are Taxes Handled In Probate?

When someone dies, taxes are owed for their last tax year. Upon death, an estate is also created, a separate tax entity. Depending on the estate’s income and size and the decedent’s income, a final federal income tax return will need to be filed and potentially a Federal Fiduciary Income Tax return for the estate, a Federal Estate, and a Federal Gift Tax return. The executor also needs to file the final state income tax return.

Along with state and federal taxes, the personal representative or executor may also need to pay other final taxes such as real estate taxes, personal property taxes, business taxes, and special assessments.

4. How Does An Executor Know Which Creditors To Pay?

Probate goes through specific steps. First, creditors must be notified of the decedent’s death and given time to make a claim. The personal representative must pay legitimate claims from the estate before distributing assets and property. Even without an actual claim for repayment, pay legitimate debts if the personal representative receives informal claims in the form of bills.

Funeral and final expenses. There may be a cap on the allowable expenses for burial and funeral costs in some states. This includes the cost for cremation, urns, internment, and a funeral service.
Government debts. This includes income taxes, property taxes, and estate taxes.
Final medical expenses. Next are the medical costs associated with the decedent’s final illness or injury, prioritizing other unsecured debts like credit card debt.
Other claims. In most states, there is no priority for other unsecured debts. However, sometimes debts are paid based on the date of the claim, or debts may be prorated.

5. When Must Creditors Be Paid?

6. What Is The Difference Between A Formal And Informal Claim By A Creditor?

Most claims by a creditor on an estate are informal and in the form of bills. Sometimes creditors make formal claims during probate. However, they must still inform all creditors of their right to make a legal claim.

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