Finding out how and when to pay claims

One of your first duties as executor (after the payment of administration expenses; see the “Prioritizing payment” section) is to pay the debts incurred by the decedent during his or her life. Some types of claims that frequently arise include:

• A lease on the decedent’s residence: Be sure to review the lease, because some may have a provision for termination upon death. In many cases, you can reach an agreement with the landlord for early termination of the lease. In any event, payments under the lease are claims against the estate, but extensions of the lease by the executor while the estate is administered are administration expenses, as are all utility bills for periods of time after the decedent’s death.
• Child support and alimony: Agreements or court orders to pay alimony and child support are claims against the estate, and you must hold back sufficient funds for future payments.

Here are a few points to keep in mind when you’re paying off the decedent’s debts:

• A debt is only considered a claim against the estate if the debt was created before the decedent died. If it wasn’t created before death, it may still be enforceable against the estate as an administration expense; administration expenses are dealt with differently than debts of the decedent. Check out the “Prioritizing payment” section, later in this chapter, to see how they’re different.
• Before you pay any debts, verify the validity of each claim. Doing so is a simple matter for most debts, such as utility bills, but you may have to investigate others more thoroughly. For instance, if a relative, friend, or nurse provided care to the decedent with an oral understanding that they would be paid from the proceeds of the estate or left all or a portion of the estate, go directly to an attorney who is expert in probate law. Your state’s legal precedents can likely help determine whether the claim is valid and can be paid. If actual services were rendered (such as living with and caring for an elderly relative for an extended period of time), the claimant is probably entitled to something from the estate.
• Check to see whether any life insurance related to the debt (such as life insurance relating to a mortgage) is intended to pay it off upon death. Also make sure that no agreements are in place that make the indebtedness vanish upon the death of the decedent. An uncle of one of us, for example, bought a new car, complete with a new car payment, shortly before he died. Fortunately, he took the additional insurance offered, which paid off the car loan upon his death.
• Consider whether the debt is legally enforceable. Debts such as charitable pledges may only be considered moral obligations.
• Frequently, your decedent’s largest obligations don’t need to be paid in full. Many are secured obligations that stay with the property they’re attached to. Mortgages and auto loans, for instance, stay with the property, and whoever inherits the property inherits it with the debt attached.

Keep in mind your state’s statutory requirements regarding claims. Unless your estate qualifies to use a small estate procedure, you’ll have to give notice to the decedent’s creditors of the estate’s deadline for filing of claims by publishing a notice in a publication approved by the probate court. You’ll receive a publisher’s affidavit, which you’ll file with the probate court. And, typically, you must also give actual notice to each estate creditor of whom you are aware within a set period of time (you must use “reasonably diligent efforts” to discover creditors). You must also give notice to the trustees of the decedent’s revocable trust. If proper notice was given, then a claimant will have a set amount of time in which to file a claim (such as four months after the date of publication). Be aware, however, that each state has exceptions to this statute of limitations, including the following:

• Federal claims, including the federal estate tax
• State estate or inheritance tax, if any
• Creditors’ liens on property
• Certain governmental and private claims for environmental damage

State statute may also provide that, after that period for filing a claim (unless you have notice of claims of a large enough amount for you to be concerned that the estate may not have sufficient funds to cover its debts), you may pay those claims that have been presented to you, and you won’t be held liable if funds are needed for later claims. Check with the probate court to see what the requirements are in the decedent’s state of domicile.

Prioritizing payment

When the estate doesn’t have enough money to pay all the claims against it, don’t start paying bills on the basis of the order received or who’s screaming loudest for the money. Every state sets its own order of priority; check with a competent attorney or with the probate court to determine in what order you must pay the claims.

The following is a list of the types of claims that typically take priority:

• Reasonable administration expenses, including attorney and other professional fees
• Reasonable funeral expenses and the expenses of last illness
• Homestead allowance
• Family allowance
• Exempt tangible property
• Debts and taxes with priority under federal law, including medical assistance payments that are subject to recovery (Medicaid liens)
• Reasonable and necessary medical and hospital expenses of the decedent's last illness, including compensation of persons attending the decedent
• Debts and taxes with priority under other laws of the state
• Federal and state taxes
• Medicaid claims

Generally, you can only pay any other claims after you’ve paid all these claims in full.

Declaring the estate insolvent

When you have more claims against the estate than assets to pay them, you must declare the estate insolvent. Before taking this step, consult with a probate attorney who has experience with insolvent estates in your jurisdiction. You’re going to need her guidance to know the procedure for declaring insolvency in your state and to figure out what you’re allowed to pay.

If the decedent had a funded revocable living trust, you can usually (depending on what state he or she lived in) use it to satisfy creditor’s claims. Hopefully, a decedent who funded a living trust made provisions in it for the payment of debts and expenses of administration by the trustees; that way, an insolvent estate doesn’t have to go through the courts to access the trust fund.

Treading slowly before distributing

When securing the decedent’s assets before you actually distribute anything to beneficiaries, you want to ensure that you tread carefully. Take your time and carefully refer to the will and its instructions before making any distributions. Keep the following in mind before you release anything:

• If the property named in a specific bequest or devise is no longer owned by the decedent at death, that bequest or devise has no effect and is considered adeemed. The legatee receives nothing, unless state law provides otherwise. For instance, if the decedent left a particular bank account to a beneficiary under the will and the bank account no longer exists, the beneficiary receives nothing.
• If a named beneficiary of a specific bequest or devise died before the decedent and the will makes no provision that the beneficiary’s heirs or another person inherits, the bequest or devise fails or lapses, unless state law provides otherwise. Massachusetts law, for example, provides that if the named beneficiary who predeceased the decedent is a child or other relation of the decedent, that beneficiary’s issue, if any, inherit unless the will provides otherwise.
• If the decedent left a will, check to see whether it contains a clause saying that all debts, expenses, and taxes are to be paid from the residue (the amount left after paying out all specific bequests and devises) of the estate. Be sure to also review any revocable living trust for similar language regarding paying expenses of the estate.
• If the decedent’s state of domicile has an inheritance tax, be sure that the tax isn’t attributed to the legatee or devisee and payable by them or from what they inherit from the estate. If the beneficiary is liable for the tax, you want to pay it from their share or have proof they’ve paid it before distributing their bequest or devise, unless the will provides that the estate pay such tax.
• If a pecuniary devise (a devise of a dollar amount) takes place more than a year after your appointment as executor, depending on state law, the estate may be charged interest on the devise, So be sure to note that date on your calendar and make distributions before then, if possible.

Making the distributions

Although in some states you have the power to make distributions under your general powers as executor, in other jurisdictions, you need to follow specific guidelines, which may include delivering a proposed distribution schedule to the beneficiaries before you make distribution. If a beneficiary doesn’t object in writing within a set period of time (for instance 28 days), he or she has waived the right to object.

As you distribute each asset, follow these important general steps:

1. Have the recipient date and sign a receipt for the property.

   Have a receipt prepared describing the property you’re distributing and, in the document, have the beneficiary acknowledge receipt of it.

2. If the distribution completely fulfills the bequest or devise to that beneficiary, and you’re using supervised administration, or another form of probate that requires notice to the beneficiaries or their consents, obtain the beneficiary’s signature on an assent to the allowance of your accounts as executor.

   That way, if and when it’s time for you to have the probate accounts allowed, you don’t have to track down the beneficiary. The receipt and assent will be filed with the probate court when you have your estate account(s) allowed (and, of course, remember to keep copies for your estate records). See Chapter 9 for more on account allowance procedures.

Under supervised administration, discussed in Chapter 6, you’ll need a court order to make partial or full distributions, and you’ll need to give notice of hearing or obtain waivers and consents. The final distribution can be contained in the petition for complete estate settlement discussed in Chapter 9.

The following sections focus on specific types of property and any unique requirements you have to meet when distributing them.

Considering tangible property

Tangible property is property you can touch or feel, such as a chair, a handkerchief, or a piece of land. Tangible property can be divided into two classifications: tangible personal property and tangible real property. Knowing these two classifications is important because, in your role as executor, these terms come up frequently and it’s helpful to know what property the court (or whomever) may be referring to. Also, tangible real property (real estate) is always handled differently than other estate assets. How it’s handled depends on the law in your decedent’s state:

• Personal property (bequests — gifts under the will of personal property): If the decedent left specific bequests of personal property, you may distribute those bequests only after you’ve been appointed as executor, the property has been appraised, the date for filing of claims, if any, has passed, you’ve made sure that you have adequate funds to pay all estate expenses, and you’ve checked the estate and income tax consequences described earlier in this chapter.
• Real estate (devises — gifts under the will of real property): In some states, title to real estate passes automatically to the heirs upon the decedent’s death, subject to any mortgage or lien on the property and to payment of debts of the decedent (including any estate taxes owed). You need take no formal action. In many other states, real estate held in the decedent’s name alone appears on the estate inventory and must pass through probate in the same manner as any other probate property. In some states, to distribute specifically devised real property, you must petition the court for approval of distribution of the real property and obtain a court order allowing the distribution and including the property description. The resulting court order is then recorded with the register of deeds in the county where the property is located to show the chain of title passing to the beneficiary. Check with your local probate register to determine the method of transfer in your state.

Looking at intangible property

Intangible property is property that has no value in and of itself but is the evidence of value, such as a stock certificate or bond. You can distribute intangibles at the same time and in the same manner as tangibles, except that, unless they’re bearer bonds (which aren’t held in any name), you may have to go through a process to reregister them in the beneficiary’s name.

To have stocks and bonds reregistered in a beneficiary’s name, either send or take the following items to the transfer agent directly for each security (the transfer agent will be shown on the face of the security), or send or take all securities to a bank or brokerage firm (each of whom will likely charge for this service):

• The bond or stock certificate.
• A form entitled “Assignment Separate from Certificate” (commonly referred to as a stock power) with your signature guaranteed (you can obtain this form from the bank or brokerage house if necessary, and they can also guarantee your signature). If you have a bank or brokerage firm with which you have a friendly relationship, one of their employees who is qualified to do so may be willing to guarantee your signature at no cost.
• A certified copy of your Letters of Authority as Executor (the certification by the court needs to be less than 60 days old). You obtain this document from the court for a small fee.
• Depending on the transfer agent and your decedent’s state of domicile, you may also need an affidavit of domicile, a waiver of state taxes (from your state taxing authority), and certified copies of the decedent’s death certificate and will.

If you’re holding the security in an estate brokerage account, you distribute to the beneficiaries by instructing your broker, in writing, of the names in which the securities should now be registered. Of course, in establishing the estate brokerage account, you’ve gone through similar transfers for each security, although the broker will have handled the paperwork.

If you’re actually reregistering physical stock and bond certificates, the new certificates in the beneficiary’s name should be returned to you. Make everything as easy as possible for the beneficiary to comply with. Send the new certificates to the beneficiary, certified mail, return receipt requested, along with a receipt for the beneficiary to sign and return in the postage-paid return address envelope that you enclose.

Fulfilling bequests of specific dollar amounts

To fulfill a bequest of a specific dollar amount, called a pecuniary bequest, simply write a check on the estate’s checking account (making sure that you have transferred funds to the account for this purpose) at the appropriate time, which is the same as for tangible personal property and, of course, obtain the necessary receipt.

For example, if the decedent left a bequest to her nephew of $10,000, after the period for filing of claims against the estate has passed, and it’s clear there’s plenty of money to pay all taxes, debts, and expenses, you may write a check to the nephew from the estate’s checking account in the amount of $10,000 and mail it to him, certified mail, return receipt requested. Be sure to send along a receipt for the bequest and an assent by him to the executor’s accounts, both for his signature to be returned for your files and for the probate court, if necessary.

Basing division on letter of intent

The best of all possible worlds is when the decedent has left a letter of intent written during his or her lifetime, where he or she listed which items of property are to go to whom. This letter may even be referred to in the will. Such a letter takes the burden of division off you as executor and, although the beneficiaries may still harbor hard feelings, they have only the decedent to blame (not each other). Although this letter doesn’t have the legal standing of a will and shouldn’t be used in place of one, it’s very effective at silencing family bickering and beneficiaries’ claims that Mother always intended for them to have the family silver.

All you have to do is follow the decedent’s clear wishes in the letter of intent and distribute the respective assets to the designated persons. Remember: Always get receipts listing each item received and assents to the accounts.

Creating a system for heirs to choose

If you’re left no guidance by the decedent, such as a letter of intent, you must create an equitable system for the beneficiaries to choose the items they want to have. So how do you do that, you’re wondering? One method is to draw the names from a hat (or whatever vessel you have handy) to establish the order in which they may choose. Each person then takes a turn choosing one item, perhaps applying color-coded stickers as they do so, until all items of interest are accounted for. Don’t be surprised if this process goes down to the last pie plate. Again, getting a receipt listing each item received by a particular beneficiary is crucial.

Disposing of unwanted personal property

As you’re distributing the personal property, you may come across some items that no beneficiary really wants. If that’s the case, you have several options. If you have enough items to attract an auctioneer, you can hold an auction, with the proceeds divided among the beneficiaries. Or you can donate the unwanted personal property to any charity that takes such property. In fact, many charities make house calls if you have large items or specific items they’re interested in. Just be sure to get a receipt if you’re thinking of taking that tax deduction, if it’s allowed.

If the will directs you to give the personal property to charity, you can deduct the amount of the gift on Form 1041, Schedule A, which is located on the back of the form. Do an Internet search of the local area or check the phone book if you aren’t familiar with charities that accept donations of personal property.