Last week I discussed debts owed by a decedent (and accordingly, debts owed by the decedent's estate). One of the first items of business in administering an
estate is paying valid debts.
But what becomes of debts by
others, owed to the estate? How are
those debts collected? Who is responsible for collecting them?
In the case of receivable debts to the estate, which is the subject of this post, the decedent
was the original creditor, and upon the decedent's death, the debtor is not
necessarily relieved of their debt.
An estate is a legal entity, just
like a business is a legal entity. And just as accounts receivable by a business are considered
assets, so too are debts owed to an estate.
In probating an estate, the personal representative is responsible for gathering and taking inventory of all the estate assets, as well as maximizing and protecting those assets. Therefore, the personal representative has a duty to collect any debts owed to the estate. Since the personal representative also has a duty to pay debts owed by the estate, collecting on receivable debts is important, as it maximizes the value of the estate. Valid debts are paid by the estate assets, and any remaining assets are to be distributed to the beneficiaries according to the terms of the Will, or according to the laws of intestate succession, if there is no Will.
Collecting the debts.
The first question: Is there an existing contract for the debt? If so, the estate can usually enforce the contract, just as the decedent could have enforced it while alive. In this sense, the personal representative "steps into the shoes" of the decedent. If the debtor to the estate refuses or fails to pay the debt, the debtor can be subject to legal consequences. The personal representative can sue the debtor to collect.
In instances where the creditor is unable to pay the entire debt, and the family wants
to avoid a prolonged battle, it may be wise for the personal representative to negotiate a settlement, to at
least salvage some of the debt. The personal representative should make efforts to glean as much as reasonably possible from debtors.
If there is no contract, it gets murkier. The personal representative can try to collect, but it may be a case of "he said-she said," and one of those parties is gone. It doesn't hurt for the personal representative to at least try to collect such debts, but the PR may come out empty-handed.
(Pro tip: If you, the testator, are going to loan money to someone with the expectation of repayment, memorialize the loan in writing, even if the debtor is a family member.)
In some cases, such as with an insolvent estate (debts owed by the estate exceed its assets), it may be impractical for the personal representative to pursue all receivable debts, as collecting may not change the estate's insolvency status. The beneficiaries may not wish to pursue such a futile battle, preferring instead to wrap up the probate process and moving on with their lives.
The important point regarding the personal representative is that the PR has a duty to make reasonable efforts to maximize the value of the estate.
(Another pro tip: When having your Will crafted by an attorney, make sure that the attorney includes an "indemnification" clause that protects the personal representative. This will help prevent the personal representative from suffering personal liability while acting in good-faith in carrying out their duties to your estate.)
One of the important tasks of settling an estate is gathering all of its assets. Will your nominated personal representative have the tenacity to collect debts owed to your estate? This is another thing to consider when choosing someone to act as your personal representative.