What Happens When a Virginia Estate Does Not Have Enough Money to Pay All Its Debts?
Your debts don’t just go away after you pass. Instead, they have to be settled during the estate administration process before your remaining assets can be distributed to heirs.
However, how would an executor handle himself in the face of debts that exceed the total amount of cash and assets in an estate? This situation can become complicated if many people demand payment of their debts.
What is an insolvent estate?
Insolvency occurs in an estate where the property it possesses is insufficient to pay off all its debts and expenses.
For instance, a person may die with $50,000 in their estate but owe much more in expenses such as medical bills, credit cards, taxes, and other debts. This may leave nothing to the heirs specified in the will.
It is important to note the estate’s resources and liabilities.
Not all claims have the same priority
The executor of the estate is not allowed by law to pay off any debts in the order that they come. Virginia law specifies the order in which debts are paid.
According to Virginia Code § 64.2-528, Virginia sets several priorities of payment, including expenses of administration, funeral expenses, taxes and other governmental demands, and expenses incurred during the deceased’s last illness at a hospital, among others.
This means that knowledge of the priorities of payment will be vital for the executor of the estate. Paying lower-priority creditors could create difficulties if higher-priority debts remain unpaid.
Beneficiaries may receive less than expected
The will lays out how property will be allocated to others, but beneficiaries typically receive their inheritance only after the estate’s obligations have been met.
If paying these obligations uses up the entire estate, the beneficiaries won’t receive anything. If property remains but is not enough to distribute the allocations set out in the will, other rules apply.
This can surprise beneficiaries who think inclusion in the will ensures their inheritance.
Are family members responsible for the debt?
Families usually have no personal obligation to pay off debts left behind by a deceased family member just because they are related.
Several key exceptions apply. For example, a co-owner of a debt will continue to be liable to pay it off. Therefore, liability can vary based on how a specific debt or account is structured.
Executors must keep their personal finances separate from the estate’s. Estate liabilities should typically be settled through the estate administration process.
Executors should be careful about early distributions
Distributing assets early can be very risky when the estate’s liquidity is questionable. Once distributed, these assets can be difficult to retrieve to settle claims against the estate.
It is important for the executor to have an understanding of the estate’s financial position prior to distributing anything.
Talk to a Virginia Beach, VA, Estate Planning Lawyer Today
The Law Office of Angela N. Manz represents the interests of Virginia Beach residents who want to devise an estate plan. Call our Virginia Beach estate planning lawyers today to schedule an appointment, and we can begin discussing your next steps right away.