New York Estate Planning & Elder Law Blog
ORDER OF PAYMENT
It should not be a surprise to anyone that when someone passes away, their estate must pay for all legally binding outstanding debt owed by the decedent just prior to passing. New York as well as just about every other jurisdiction has laws that address how the estate puts creditors on notice that they must file a claim, but how the creditor must go about making a claim and getting paid from the estate. As in other areas of the law, there is an order and priority to the claims that can be paid. The administrator has a fiduciary obligation to the heirs to distribute the estate to the terms of the will. That fiduciary obligation also extends to creditors of the estate. The payment of expenses, ensuring that all disbursements are properly documented and all taxes and fees are paid are core responsibilities of the estate administrator.
To do this, the estate administrator must first understand what assets the deceased owned, the value of those assets, which in and of itself costs money. When an estate is insolvent, the creditors will surely examine every expenditure by the administrator to determine if they acted appropriately. On the other side of the ledger, the administrator must determine if the claims are valid or overpriced and inflated. The estate administrator has an obligation to dispute all claims, except properly owed, legally enforceable obligations. Since the final accounting by the estate administrator presupposes that all parties are already involved in litigation and there is a Court already scrutinizing all credits and debits, the likelihood that a party will enforce their rights, or, more specifically, object to the final accounting, is all the much greater. The balancing act that the estate administrator must engage in can be a complicated endeavor.
The legislature determined what claims have priority over others in terms of what is paid first. Most specifically, the first expense that can be paid is the funeral costs. More specifically only reasonable funeral expenses. Of course if there is more than enough funds on hand to pay all creditors and all heirs and beneficiaries are properly addressed, no one would complain if the costs for the funeral are higher than expected or anticipated. Following funeral expenses, the estate administrator must pay on the debts of all claims that are entitled to preference or priority under either state or federal law. This can refer to child support obligations or the state department of social services for monies expended on behalf of the deceased through Medicaid or Medicare.
The estate administrator also must pay the real estate taxes on any real property that will pass via the will. The heir who receives the real estate parcel in issue must credit the estate for any monies that the estate administrator pays up front for it (unless directed otherwise in the will). All valid and enforceable judgments must also be paid. In order for a creditor to get paid on any of these debts, an estate administrator must be appointed. Until that time, obligations that have a timeline to them are tolled or paused. However, in no event will a timeline toll for more than 18 months. All of these issues, from the determination of the value of an asset to the validity of a specific debt to the order in which debts are paid are important, especially when litigation is protracted. Small businesses or closely held partnerships can be very difficult matters to handle given the emotions involved as well as the ability of one person to stymie another.