Collecting Debts Owed To An Estate.

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.

Debts Owed By An Estate: Who Gets Paid First?

One of the first items of business in administering a decedent's estate is the paying of valid debts. In the probate process, the appointed personal representative must locate creditors of the estate and give notice to them. The creditors have a certain amount of time in which to make a claim against the estate.

Minnesota law sets forth a priority for how debts are paid by the estate, called Classification of Claims. While some creditors may be more assertive than others, the squeaky wheel does not get the oil. This is the pecking order for the payment of estate debts:

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.

If the total value of debts exceeds the estate assets, the estate is deemed insolvent. In such a case, some of the debts farther down the list may not be paid at all. And unfortunately for the heirs of the estate, they will not receive a share of estate assets.

Where's My Inheritance?

You have been named as a beneficiary in the estate plan of a family member who has recently passed away. You may have been wondering how long it will take for you to receive your inheritance.

The short answer: It depends.

The wheels of estate administration turn slowly and there are a number of factors that affect how much time it will take before estate assets can be distributed to the beneficiaries. Distributing inheritances is among the last of the tasks of estate administration, as there are many other responsibilities that take priority. Only after all the probate requirements have been satisfied can the personal representative distribute the remaining assets (residue) to the beneficiaries.  In the world of estate administration, beneficiaries are at the back of the line, not the front.

If probate is not required (small estate value and no real property in the probate estate), the process may be resolved as quickly as within a few months. But if the estate is subject to the probate process, it may take a year or more for administration to be completed.

The personal representative must be appointed by the court and then must administer the estate: collecting and securing the estate property, determining asset values, contacting creditors and paying off all valid debts, filing and paying taxes, handling any disputes that may arise, and providing accountings to the court. All of this must be completed before any inheritances are distributed.

Other factors may complicate and lengthen the administration process. Dealing with the decedent's real property, business holdings, or out of state property, are just a few issues that can prolong the process. If anyone should contest the Will, that can drag out the administration, sometimes by several years.

Some estates may become insolvent, meaning that the assets are insufficient to pay debts and taxes, leaving nothing for the beneficiaries.

If you are counting on that inheritance from a family member, it is important to understand that the administration process takes time--a lot of time. Be patient, Grasshopper.

Personal Representative's Fees.

You've been asked to be the personal representative (aka "executor") of someone's estate. Congratulations, as that means the testator has entrusted you to perform an important job. While you might feel like it's your duty to volunteer your services for free and that it's a labor of love, you may not be fully aware of what's in store for you when it's time to serve. Being a personal representative is time consuming, it can be a lot of work, and it's often a thankless job.

The personal representative's responsibilities include filing the probate application or petition, notifying creditors and beneficiaries, collecting and securing the estate assets, filing an inventory with the court, filing the decedent's final tax returns, and distributing the remaining estate assets to the beneficiaries. On top of that you may find yourself refereeing family squabbles.

Therefore, you might want to consider asking for compensation for your services, and discussing this with the testator. You may be pulled away from your job and your family for a while to perform your duties, perhaps even requiring travel. Your time is valuable. It is perfectly appropriate to ask for fiduciary compensation and you are entitled to it under Minnesota law, even if compensation is not specifically addressed in the Will.

However, compensation for a personal representative must be reasonable and the statute does not give specific guidance on what rate to bill the estate. To determine what is reasonable, the court may consider the following factors: The time and labor required, the complexity and novelty of problems involved, and the extent of the responsibilities assumed and the results obtained.

For example, charging $250 an hour to haul furniture would likely not be reasonable, when someone might ordinarily charge $25 an hour for that sort of task. On the other hand, expecting a personal representative to only receive $25 an hour to professionally prepare the decedent's tax return would also not be reasonable. You may find it best to bill the estate at different rates for different tasks. If you are responsible for both hauling the furniture and preparing the taxes, you should bill at reasonable hourly rates appropriate for each job.

Typically, $25 to $50 per hour is an equitable range for most routine services, and higher rates might be appropriate in the case of professional services. It depends on the tasks you perform, in light of the statutory "reasonableness" criteria.

When it comes time for you to serve, keep detailed notes of the services you provide. Write down the tasks performed, the time you spent on each, and the hourly rate. Don't forget to list any out-of-pocket expenses you may have incurred, such as postage, filing fees, etc. The court will require you to account for all of your billing and expenditures. The decedent's heirs may also be keeping a close eye on your fees so be prepared to explain your billing to them.

Of course, your compensation as a personal representative is considered taxable income to you.