Resolving Debts For Probate in Texas
As an estate executor, resolving a debt means paying it off or otherwise addressing it, so the estate no longer owes anything related to it. For your protection, you should resolve all debts before distributing any assets to heirs unless the estate’s assets are clearly worth more than its debts.
If a creditor fails to contact the estate within the local state regulatory deadline, which is typically three to nine months following the publication of a probate notice, the debt is barred, and the estate is no longer legally obligated to pay it.
Note that not all apparent debts are valid. You may be contacted by dishonest parties seeking to defraud the estate or even by legitimate organizations with poor record-keeping practices. Make sure that the decedent actually owed the payment being requested and that the debt hasn’t already been paid.
Although debt resolution usually has priority over distributions to heirs, there are some state-specific restrictions and entitlements that protect a surviving spouse and children. Typical entitlements include personal property exemptions, a homestead, a family allowance, and sometimes a surviving spouse elective share. As executor, be sure to subtract any such priority entitlements from the estate before paying debts owed.
Eventually, the estate will have to pay all of its valid debts unless the estate owes more than it’s worth, in which case not everyone will be paid the money they are owed.
In some cases, it may be necessary for the executor to sell certain assets to raise cash for debt payments. As executor, try to avoid selling assets that the will specifically bequeaths to certain heirs. Develop a plan before selling off assets piecemeal.
Pay special attention to medical debts. The estate must pay these within one year of death to be able to deduct them on the decedent’s final income tax return.
Small debts should be paid as they come due, such as utility bills.
As executor, you must be aware of IRS Publication 559. It states that the executor of an estate that is unable to pay a tax liability of the decedent is personally responsible for those taxes if they had notice of such tax obligations or failed to exercise due care in determining if such obligations existed before distribution of the estate’s assets and before being discharged from their duties.
Federal tax debts are considered senior to most other debts. The executor is personally liable for any unpaid taxes of the decedent up to the amount of any debts the executor did pay.
The courts have acknowledged that funeral expenses, estate administration costs, and some family entitlements do have priority over the payment of taxes.
An estate that owes more than it’s worth is considered “insolvent.”
If the estate you are the executor of is insolvent, there are several legal statutes governing who should be paid out and how much they should be paid. Details vary by state, but in general, an estate must pay its debts in this order:
- Funeral expenses
- Estate administration costs
- Other general debts
Assets can be distributed to heirs only after you’ve arranged to resolve all debts.
When an estate is insolvent or near-insolvent, negotiation for debt forgiveness is common. Debt-holders usually realize they may end up with nothing if they don’t agree to receive a lesser amount.
In some cases, creditors may completely forgive a debt if they believe the estate may not have the money to pay all of its debts. They may also partially forgive a debt instead of being paid nothing, particularly if other creditors will be paid first.
All agreements to entirely or partially forgive a debt should be made in writing. Be aware that the amount being forgiven is considered taxable income to the estate and that large creditors will almost certainly report these amounts to the IRS.
If you have hired a probate attorney, debt resolution may be something you delegate to them since they are usually experienced in these matters.
Debts to the Estate
Any loans the decedent made to other parties are considered assets of the estate. The executor's role is typically to obtain repayment for those loans so funds can be distributed to heirs. In some cases, transferring the debt to one or more heirs is preferable if collecting the debt isn’t practical. If the debt is uncollectible, it may need to be written off.
As executor, you must protect the estate’s assets, which may require some ongoing bills being paid, such as insurance premiums, utility bills, property maintenance, etc. Use your best judgment concerning bill payment, and be sure to always act in the estate's best interests.
Questions Concerning Probate and Real Estate?
Certain aspects of settling an estate, like handling an estate’s real estate holdings, may be outside your area of expertise or comfort zone. If in doubt, work with a professional.
If you have questions concerning probate and real estate in Tarrant, Parker, Wise, Collin, Denton, or Dallas County, contact David Pannell and Cities Real Estate. David has extensive experience helping families with their real estate needs before, during, and after the probate process.
David has been an agent/realtor since 2005. He has served as a United States Marines, City of Arlington police officer, and is a dedicated family man. You can trust him to put your interests first in any and all situations.
Call David today at (817) 797-9047 for help with your real estate and probate needs. You will be treated respectfully, and your requirements will be met efficiently and confidentially.
NTREIS data last updated December 2, 2023.