Handling Debts and Liabilities in Your Estate Plan
Trustors usually develop thorough plans for distribution of their estate assets, applying careful thought about who-gets-what. However, it is common for less analysis to be done in planning for how to handle outstanding debt. Here are some thoughts to discuss with your estate planning attorney (click here for ENTIRE article):
Payments for Liabilities
As a trustor, it is helpful to update your balance sheet on a regular basis. Making a comprehensive list will streamline the process of handling debts after a loved one has passed. It also helps in distribution planning.
After passing of the decedent, key responsibilities of a trustee include preparing a summary of all assets and liabilities of the estate, collecting all notices of debt, and then paying debt/loan obligations on a timely basis. No debt, liability or claim should be paid until you meet with an estate attorney; if the estate debts are not paid in the proper order, the trustee could have personal liability.
Liabilities are all financial obligations of the estate, which include funeral expenses and medical bills for the decedent, mortgages, taxes, insurance, utility bills, etc. When a business owner passes away, outstanding liabilities can be handled in many ways, so talk with your attorney about your situation.
Taxes must be paid from assets in the estate. Be aware of liens, which may exist before passing of the decedent. When an estate is insolvent, specific rules apply for the order in remunerating any claims on the estate from available funds. Also, any estate subject to probate falls under state law for payment of all debt. Again, your estate planning attorney should guide you through this process in order to be fully compliant.
It should be apparent that while cash income may cease or diminish upon second-to-die, the financial obligations of the estate continue to be immediate, no matter the status of settling an estate. So, it is important to have cash readily available to pay bills.
Loans
Loans fall into two debt categories: secured or unsecured. Secured debt is backed by collateral, such as a house and mortgage. When possible, mortgages are typically paid off when properties are sold or by converting other estate assets to cash. Unsecured debt is not backed by collateral but is still due on a timely basis, such as personal loans. Certain liabilities, such as utility bills, will need to be kept current until the estate closes. Other unsecured debt such as personal loans can wait a short time until the trustee accounts for all liabilities.
In terms of estate planning, consider all the above and also evaluate any loan encumberments for assets to be distributed.
Fairness in Distribution
If you want equal distribution and are planning on designating specific assets to individuals, in particular real property, it is advisable to plan for the net value after debt payment and taxes. Real estate holdings are a complex area that involve many considerations, including income potential, tax and valuation, so consult legal counsel.
Creditors’ Rights
There are methods to protect assets from claims of creditors in an estate, and ways of shifting the risk of unexpected death. Trustees should Inform their estate planning attorney of existing or potential debts owed, and estate plans can include how the trustee will handle paying off creditors.
Specialized Estate Planning Expertise
At Mortensen & Reinheimer, PC we have the experience and dedication to craft a personalized, creative estate plan with you. If you need an expert in developing an estate plan, please contact Mortensen & Reinheimer, PC at (714) 384-6053 to make an appointment, or use our online contact form. Our website is http://www.ocestateplanning.net.
About the author:
Tamsen R. Reinheimer, Attorney, is a Certified Specialist in Estate Planning, Trust & Probate Law (The State Bar of California Board of Legal Specialization). She has significant experience in all aspects of estate planning, trust administration, and probate. Contact Tamsen at tamsen@ocestateplanning.net.