The Decedent’s Debts: Who’s on First?

Estate planning attorneys are used to family members who, for some reason, determine that credit card bills need to be paid off first, when a loved one dies. It’s not the first thing to pay, advises The Mercury its article “There is a priority of debts when you die.”

In fact, credit card debt is unsecured debt. It is, therefore, on the bottom of a list of priorities in many states. Paying debts is an important part of executor responsibilities, but there is an order to what debts must be paid first. If there are cash flow issues for the estate, this is critical information.

First, the funeral home, nursing home and unreimbursed medical bills should be paid within six months of the death, as well as administrative expenses. Administrative expenses include the cost of probate, which is filing the will and professional fees, including the attorney’s fees, executor’s fees, account fees for final tax returns, etc. Don’t ignore the funeral bill.

Nursing home and medical bills incurred within six months of death are also important to pay. If the executor believes the medical bill is to be paid by health insurance, Medicare or Medicaid, get this in writing. If Medicaid paid for care, there may be a claim under Estate Recovery. In Pennsylvania, the Department of Human Services; Third Party Recovery, could become a creditor of the estate, when a large asset like the home is sold.

This is a time when an attorney experienced in elder law and trusts and estates can help sort through what needs to be paid and when and where the money should come from.

There are times when an executor pays for administrative expenses or the cost of the funeral from their own pocket. Anyone who does this must maintain careful records and be sure to be repaid by the estate, after an estate account is established. That also applies for any expenses paid from a joint account with the decedent.

The responsibility of the executor is to pull together the assets that will pass through the will and the bills or debts that need to be paid, then to pay the debts, including taxes and expenses of probate, then distribute the remaining funds to beneficiaries, as directed by the will.

Some assets do not pass through the will, like joint bank accounts, payable on death and transfer on death accounts, life insurance and retirement funds. With the exception of life insurance, they may be subject to inheritance taxes, if the decedent’s state of residence has such a tax.

If there are not enough assets to pay the bills, states have lists of the order of distribution. At the top of the list: costs of the administration of the estate and funeral expenses. Medical bills from the most recent six months are given higher priority than older medical bills. Credit card bills are at the bottom of the list.

Secured debt, like the mortgage on the house or a loan on a car need to be addressed. These may be sold to pay off the debt.

Executors or family members who are contacted by creditors demanding payment need to know whether they are responsible or not. An experienced estate planning attorney will be able to help you work your way through the debts and financial responsibilities of the decedent.

Reference: The Mercury (June 18, 2019) “There is a priority of debts when you die”