How To Handle Secured And Unsecured Debts During An Estate Administration
Administering a loved one’s estate involves more than just divvying up furniture, clothing, and personal effects and distributing them to family members and friends. The personal representative of an estate has many responsibilities. Among these obligations is the duty to pay the debts of the decedent and the estate. It is important to understand the different types of debt that may be encountered during this process.
Types of Estate Debt
What are some of the common categories of debt that may exist as part of an estate administration? The following is an overview:
- Secured debts. A secured debt is one where a person gives the creditor the right to take certain property in the event that he does not repay the debt he owes. This property serves as collateral for the loan. Common examples include home loans, car loans, and business loans. During the estate administration process, secured debts are either passed along with the property to the beneficiary or are paid off prior to distribution. The terms of your loved one’s will should dictate whether the debt is to be paid off on behalf of the beneficiary. If the will is silent or if it directs that the beneficiary receive the asset subject to the debt, the beneficiary has the choice of selling the asset to repay the debt and keeping any remaining proceeds.
- Unsecured debts. An unsecured debt is one in which the debt is not collateralized by certain property. Common examples include credit card bills, utility bills, and medical bills. If there are sufficient assets in the estate, you must repay these debts during the estate administration process. In some cases, the terms of the will include specific instructions as to how and in what order these debts are to be paid.
- Debts incurred after death. After your loved one dies, additional debts may accrue as well. There are many types of debt that come about after death. These may include the costs of a funeral, the costs of probate administration, and the costs of hiring a tax advisor to prepare and file final tax returns. Some individuals plan ahead for these expenses and make arrangements through their estate plan for how they should be paid off.
- Debts associated with death taxes. In addition, your loved one’s estate may have been large enough that estate or inheritance taxes accrue. Whether an estate is subject to these estate taxes requires a careful assessment by an experienced and knowledgeable attorney. If taxes are owed, they are typically paid proportionately out of the estate’s liquid assets. Examples of liquid assets include bank accounts, money market accounts, and marketable securities. This may mean that some beneficiaries ultimately receive less than others, depending on who was to receive which assets of the estate. If your loved one made prior arrangements for the payment of death taxes, however, they may be paid in a different fashion, such as through the proceeds of a life insurance policy.
If there are insufficient assets to pay the debts of an estate, the estate’s personal representative may need to sell assets or involve the probate court for assistance. Knowing what to do during this process is not easy unless you have previous experience administering an estate. Fortunately, we can help. We encourage you to get started by checking out our free report, The Insider’s Guide to California Probate and Trust Administration.
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