When There Are Not Enough Assets to Cover the Deceaseds Debts, and There Is a Will
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When someone dies and there is a Will, the Will controls that person’s financial affairs after death. It distributes his or her assets. But before any money can be distributed to beneficiaries of the Will, all the debts of the deceased must be paid, including the funeral bill, any medical bills, credit card debts, and, of course, taxes. This might require the sale of some assets if the deceased did not set aside enough in the Will to cover all of the debt. As a beneficiary, you are not directly responsible for paying the deceased’s debts. You are affected by those debts, nevertheless, if not enough money was set aside to pay them. Here is how.
Anyone who believes they are owed money from the deceased (creditors) has a certain amount of time to file a claim against the estate with the Probate Court (usually 90 - 120 days). The court will then decide if the claim is legitimate, and if so, will decide how much they're entitled to. If the deceased’s assets have to be liquidated to pay these debts, the court will order that to be done. If not enough was reserved to pay the bills, the court will take some of the gifts meant for beneficiaries to cover the debts first. What remains will go to the beneficiaries.
The court decides which beneficiaries do not get paid or who gets paid less than the amount they were bequeathed. In legal terms, this is called abatement, which simply means a reduction. So basically, abatement occurs if the deceased person did not leave enough property to fulfill all the bequests made in the Will and meet other expenses. The gifts are cut back in order to pay taxes, satisfy debts or even to take care of other gifts that are given priority under law or by the Will itself.
Suppose that even with all the assets, there is not enough to cover the debt, let alone any gifts? The situation is then regarded as insolvent. An insolvent estate is one that has insufficient assets to cover its debt. If there are any beneficiaries, they get nothing. The debt is paid to the extent it can be.
The good news is that beneficiaries will never inherit debt. They may end up with nothing if your assets do not cover everything, but they will not be stuck with the bill.
This generally works the same way if there is no Will. Your outstanding debts are still paid from your estate before anything gets passed on to your heirs, who are determined by your state’s intestacy laws.