What If The Estate Is Insolvent?

The job of a personal representative entails many tasks. Notifying family members, making funeral arrangements, and securing the property are necessary first steps. The next step, in most cases, is probate. This is the process of taking inventory of assets, paying debts and taxes, and distributing the remaining assets to the beneficiaries as per the Will.

Part of the probate process is to contact creditors and notify them of the decedent's death and the probate proceedings. After that it is up to the creditors to file claims. The personal representative must then determine which claims are valid. There may also be continuing debts that need to be paid in the meantime, such as mortgage or rent, homeowner's insurance, etc.

If it is determined that the amount of valid debts is greater than the total value of the estate assets, then the personal representative must declare the estate insolvent. It is important to note that the estate is only responsible for legitimate debts created prior to the decedent's death. If the debt arose after death, it might not be enforceable against the estate. In addition, certain specific gifts promised to charities might be deemed unenforceable.

The personal representative may reach that crossroads where the estate funds are dwindling fast and realize that there aren't enough assets to cover all liabilities. Which debts are to be paid first?

Fortunately, Minnesota law has set priorities for estate debts to be paid. Debts must be paid in this order, not in the order claims were received, and not based on which creditor is the most vocal or forceful--the squeaky wheel does not get the oil here.

1. Expenses related to administering the estate, including attorney fees.
2. Reasonable funeral expenses.
3. Any debt having preference under federal law, including federal taxes.
4. Medical expenses related to the decedent's final illness.
5. Medical expenses incurred during the year prior to the decedent's death.
6. Any debts under state law, including Minnesota taxes.
7. Any unsecured debt, such as credit cards, utility bills, etc.

Note that the decedent's homestead is exempt from creditors' claims if it passes to the surviving spouse, children or grandchildren. However, the home is NOT exempt from claims by the mortgage lender or for state medical assistance.

Informing the beneficiaries that there is nothing left for them in the estate is just one more of the not-so-pleasant tasks of the personal representative. Carrying out the duties as personal representative is a crucially important job, but sometimes it can be a thankless job. Just remember that as a fiduciary, your duty is to the best interests of the estate, above the interests of all others.

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If you are a personal representative who is in the process of (or soon to be) probating someone's estate, it is a wise idea to contact a qualified probate attorney for help.