Who gets the first payment out of a deceased person’s estate?

Determining the assets and debts of your estate after you pass away, under the supervision of a judge, is known as probate. In Texas, there is a process to follow for small estates and larger estates. Having a will makes this process much simpler. You may be able to avoid the probate process if you structure your will wisely and have nobody challenge the validity of your will after you pass away. Who helps your estate after you pass in following through with your wishes?

That person is known as the executor of your will. You will name an executor and possibly a second executor as a backup, within your will. You should think carefully about who you want to put into this position. He or she will be responsible for following the instructions of your will and/or a probate court judge. The executor should be responsible, intelligent enough to follow instructions, and not someone who is going to be swayed by other factors or people's opinions. Talk to a potential executor before naming him or her as such in your will.

Your executor oversees making sure the assets of your estate are maintained throughout the distribution process. If your estate owes debts of any kind, then he or she must pay the debts out of the body of your estate. Once debts or taxes are paid, also known as liabilities, then he or she can pay the remaining assets according to the terms of your will. In a nutshell, this is what the estate planning process looks like in Texas. Will creation, naming of an executor, liability payment, and distribution of assets.

What happens when the probate process begins?

The executor of your will would file a petition to begin the probate case and would need to be acknowledged as executor by the probate court judge. At that point, he or she would need to begin to keep track of all the assets of your estate. Potential assets include real estate, vehicles, retirement funds, a business, personal property, cash, and bank accounts. A notice to creditors must also be published stating that you have passed. This would allow a creditor to come forward with a debt amount that needs to be paid out of the body of your estate. You may owe money on a mortgage, on credit cards, or on personal debt. Federal student loans are discharged upon the death of a borrower.

Here is a bit more information on how your executor or personal representative must provide notice to creditors of your death. Notice can include public notice in a newspaper with a circulation in the county where you lived or where your estate is being administered after you pass away. He or she may also mail a notice to the Texas Comptroller of Public Accounts. Finally, notice by mail can be sent to any secured creditors like a mortgage company or vehicle finance company.

The costs and expenses of your probate case and the administration of your estate are usually where the money of your estate goes first. Your executor will pay a reasonable fee for performing all this work on behalf of your estate. Keep in mind that your executor may need to hire an attorney to assist him or her with the administration of your estate. People like property appraisers, accountants, or other professionals may also need to be brought into the case to properly pay creditors and distribute assets. Managing your estate can be a detailed process especially if it is large and/or complicated.

If you have any outstanding costs associated with your death- burial, funeral, cremation, etc. then those bills must be paid early in the process. Medical bills associated with end-of-life situations will also need to be paid. Your executor should be familiar with what is happening at the end of your life so that he or she can help when it comes to paying the people who need to be paid once you pass away.

Filing a tax return for you after you pass away is something that your executor will be responsible for, as well. Fortunately, Texas has no state taxes so that will not be an issue in your case. An executor will have to determine where to draw money from to pay taxes. The probate court will oversee this process if a case has been filed but otherwise the executor will have the final say when it comes to paying taxes and other creditors after you pass away. Therefore, it is so important to select an executor who is responsible and who possesses good judgment.

What happens if your estate has more debt than assets?

The money your estate owes may end up being more than the money that your estate possesses. This is known as an insolvent estate. Your beneficiaries will only have property distributed to them if all creditors and taxes are paid first.

Your executor will have to follow three steps to fulfill their obligations as the executor of your estate. First, the executor will need to compile a list of your assets and begin to organize everything-however he or she deems fit. Next, your creditors will have to be paid in whatever order is mandated by the court or decided upon based on the amount of debt, whether the debt is collateralized and other factors. Finally, your executor will need to distribute your remaining assets to your beneficiaries.

Debts typically do not die with us unless we are talking about federal student loans. Beginning with providing creditors notice as we discussed at the beginning of today's blog post, your executor will need to take some steps to ensure that your creditors are satisfied with having their loans paid back in full or as close to in full as the situation allows for. This is true for both unsecured and secured creditors. An unsecured creditor is one where the entity does not have any property that it can take back in the event of a default on the loan. An example of an unsecured creditor is a credit card company. An example of a secured lender is a mortgage company or auto finance company.

The Texas Probate Code requires your executor to provide notice to creditors in a certain way once you pass away. The requirements of giving someone notice in a situation involving creditors include:

1. Filing a notice in a newspaper that is widely circulated in the county where the decedent passed away or where the estate is being administered
2. Providing notice to the Texas Comptroller of Public Accounts and notice by mail to any secured creditors

Your executor has a specific period to complete all these steps and the failure to do so can open potential liability upon your executor. If your executor provides notice to unsecured creditors that means that these creditors have four months to come forward to collect their money. It will lose its right to collect from your estate if it fails to do so during the prescribed time.

What order are debts paid by an estate, ideally?

It is not required for every creditor to come forward and assert claims against your estate to be entitled to receive money out of your estate. The IRS is one creditor that does not have to come forward or risk losing out to other creditors as far as the pecking order to get paid. Rather, the IRS always has first dibs to be able to collect money out of your estate in a situation like this.

Otherwise, once the IRS has had its debt satisfied, here is a rough outline of the order in which creditors will need to be paid out of your estate. Of course, there are almost always exceptions to the rules that we are covering today. That is why you should consider reaching out to one of the experienced estate planning and probate law attorneys with the Law Office of Bryan Fagan so that we can share some perspective with you and individually analyze every situation in your case so that you and your executor would know how the money would need to be divided, at least initially.

Any funeral expenses and medical expenses related to your final illness will have to be paid first, up to $15,000. Any amounts that go over $15,000 will be treated as unsecured debt and will have to go to the back of the line to get paid. OF course, if you pay for these items in cash then there will not be any issue with debt or trying to figure out a secured/unsecured portion. If you did put those bills on a credit card or otherwise finance them then your executor will have to put them first in line after the IRS to be paid out of the funds of your estate.

Next, what I call “housekeeping” expenses will have to be paid back. This is any monies that have been paid towards administering your estate with the probate court. Court costs, attorney’s fees, expenses, and any money that went towards monitoring your assets and keeping them in good condition until distribution are all costs that will need to be paid back before other creditors as well as beneficiaries.

Secured creditors come next on the pecking order. This is going to be where companies like your mortgage company, that finance company that made you a loan for your boat, and any other lender who has some item that they can take back if your estate is unable to come up with the case to pay them back. This hopefully will not happen given that you are likely to pass away when you are in your seventies compared to earlier in life. This way the amount of debt that you own should be limited.

One party that may be relevant in your situation is your co-parent. If you are responsible for paying child support and pass away then your co-parent can potentially make a claim for past due child support and future payments, alike. Rather than go through with this step, which can be cumbersome, expensive, and time-consuming, Final Decrees of Divorce like yours may require you to purchase life insurance that names your ex-spouse as the beneficiary. This way that policy would pay out at your death a lot simpler than having to go through with the probate process and waiting for the money to come that way (if at all).

After this are claims by the State of Texas for repayment of medical assistance payments and things of this nature that frankly do not come up very much in probate matters for most people. The most common claims that come at this stage of the process are unsecured debt like the credit card companies that we mentioned earlier in today’s blog post.

Your executor may also want to notify the three credit reporting bureaus after you pass away. This can be done to get the word out that you have passed away. Any debt taken out in your name after the date of your passing would be done either erroneously or with the intent of trying to steal your identity. Additionally, your executor can use that opportunity to ask for a copy of your credit reports so that he or she can look through them and see what sort of debts you owe. You may owe people or entities a certain sum of money that you were not even aware of previously.

Another entity that your executor should contact in the event of your death is the Social Security Administration. If anyone would be able to receive benefits in your name at your passing this would trigger the SSA to be able to initiate that process.

Do you have a credit account with another person, such as a business partner or family member? Once you pass away that account should no longer be used. Or your name should be removed from the account and the authorized user should become the named person on the account, if possible. That way your estate is still liable for any purchases made on that account.

One of the major issues that come up in cases where creditors need to be paid after a person passes away is that property is distributed too quickly before all creditors can be notified of a person's passing and all debts can be paid. Your executor should make sure that he or she notifies creditors, gives them enough time to come forward, and then proceeds to divide up the property by your will.

An interesting aspect of this scenario involves your executor negotiating with the creditors on an individual basis to see if they will reduce the debt amount that they are trying to collect from your estate. If your executor is your spouse, for example, and you all have a large credit card debt then your spouse may want to call the credit card company and explain the situation and the limitations in assets that you may own. Bear in mind that in Texas your spouse will be responsible for debts that he or she may not have even known about due to this being a community property state.

Final thoughts on paying creditors and beneficiaries after a debt

Without a doubt, this is a situation that can get complicated quickly. The other thing that we must acknowledge in a situation like this is that you are not going to be around for these proceedings to occur. The only time that these issues can even become relevant is when you must pass away first. With that said, be sure that you have drafted a will as soon as possible. Working with an experienced estate planning attorney can help to ensure that your wishes are followed through with after you pass away.

Your executor may still need some help managing the probate process after you pass away. In that case, an experienced probate attorney can help him or her execute the will and limit their liability from a personal point of view. A life insurance policy can be a simple way to pay for any debts that are owed by your estate. You can make the life insurance policy out to your spouse as beneficiary and he or she can then pay your debts so that they do not become his or her debts. This is a manageable situation- especially if you plan. Working with an experienced estate planning attorney and being intentional about goal setting are two great ways to serve your family well and set your family up for success once you have passed away.

Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan

If you have any questions about the material contained in today's blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed estate planning and probate attorneys offer free of charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of estate planning and how your family may be impacted by a probate case.