The estate planning process in New York involves completing many steps. One of an executor’s most important duties is resolving the debts of an estate. While this sounds simple enough, executors must know the order in which to pay creditors, the IRS and beneficiaries.
It’s imperative to know if the estate you manage has priority distributions before paying creditors. Priority distributions can mean the decedent’s surviving spouse and children receive money or other assets before creditors do. If that’s the case, an executor must subtract these family entitlements before paying creditors.
Certain estates owe debts to creditors. However, these creditors must contact an estate within a specific period. In New York, a creditor has seven months to file their claims against an estate after the publishing of an estate probate notice. If a creditor doesn’t file a claim in time, there’s no legal obligation for an estate to pay said creditor.
Most estates will also owe payments toward federal tax debts. It’s vital to take these tax notices seriously, allocating an estate’s assets toward these payments. If not, according to 31 USC section 3713, the IRS can hold an executor personally responsible for paying their managed estate taxes. Fortunately, certain family entitlements, the decedent’s funeral expenses and some estate administration costs have priority over settling tax debts.
Handling insolvent estates
Some estates accumulate more debt than the entire estate is worth. These estates are insolvent. This situation can complicate any executor’s duties. Generally, insolvent estates first pay for funeral-related then estate administration costs. Then, an executor of an insolvent estate pays its taxes followed by settling general debts.
Being an estate executor can mean dealing with complicated financial situations. It can be worth seeking assistance if you’re unsure how to handle this obligation.