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When the time comes to administer a person’s estate, family members typically focus on distributingproperty according to the deceased’s wishes. But it’s also critical to deal with any debt the deceased has left.

Debt doesn’t disappear aftera person dies (with some exceptions, such as certain student loan debt). And managing it can be complicated, especially if the estate is insolvent — that is, its debts exceed the value of its assets. Here are answers to some common questions about the process.

Who’s responsible for handling debt?

An estate’s executor is responsible for managing the deceased’s assets and debts.A personal representative can also carry out this task.

With respect to debt, the executor should take inventory of the deceased’s debts,evaluate their validity and order of priority, and determine whether they should be paid in full or allow them to continue to accrue during the estate administration process. In some cases, debt that’s tied to a particular asset — a mortgage, for example — may be assumed by the beneficiary who inherits the asset.

Are executors or beneficiaries personally liable for the debt?

Generally, no. The estate itself is legally liable for the deceased’s debt. However, executors or beneficiaries may be personally liable if they co-signed for a loan, jointly owned a credit card or bank account,or otherwise assumed joint liability for a debt. Also, executors may potentially be held liable if, for example, their mismanagement of the estate’s assets caused them to lose value or if they paid low-priority creditors at the expense of high-priority creditors.

Note that in community property states, a surviving spouse may have to satisfy the deceased’s spouse’s debts out of any community property.

Which assets can be used to satisfy debt?

Generally, a deceased’s debt must be paid by the estate. This is true regardless of whether the estate goes through probate or a revocable (or “living”) trust is used to avoid probate. Contrary to popular belief, assets held in a revocable trust aren’t shielded from creditors’ claims.

Certain assets are exempt, however. These include most retirement plan accounts, life insurance proceeds received by a beneficiary and jointly held property with rights of survivorship that passes automatically to the joint owner. Also, assets held in certain irrevocable trusts, such as domestic asset protection trusts, may be shielded from creditors’ claims. The extent of this protection depends on the type of trust and applicable law in the jurisdiction where the trust was created.

Assuming the deceased had a will, the estate’s assets generally are used to payany debts in this order:

1. Assets that pass under the will’s residual clause — that is, assets remaining after all other bequests have been satisfied,
2. Assets that pass under general bequests, and
3. Assets that pass under specific bequests.

Note that some states have established homestead exemptions or family allowances that prohibit the sale of certain assets to pay debts. These provisions are designed to give a deceased’s loved ones a minimal level of financial security in the event the estate is insolvent.

Which debts have priority?

If an estate’s debts exceed the value of its assets, certain debts have priority and must be paid first. Although the rules vary from state to state, a typical order of priority is as follows:

• Estate administration expenses (such as legal and accounting fees),
• Reasonable funeral expenses,
• Certain federal taxes or obligations,
• Unreimbursed medical expenses related to the deceased’s last illness,
• Certain state taxes or obligations (including Medicaid reimbursement claims), and
• Other debts.

Secured debts, such as mortgages, usually aren’t given high priority. This is because the recipient of the property often assumes responsibility for the debt and the creditor can take the collateral to satisfy its claim.

Get professional help

Managing debt in an estate can be complex, especially if the estate is insolvent. We can help guide executorsthrough the process and help themavoid personal liability.

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