What Happens If My Estate Lacks Funds To Pay My Bills When I Die?

An estate with insufficient funds to pay the estate’s obligations is “insolvent.”  An estate’s obligations are usually of two sorts:  1) the debts of the decedent, including the costs of administering the decedent’s probate, and 2) gifts due to the decedent’s heirs or legatees pursuant to the decedent’s Will or the intestacy statute.

Creditor Claims.  Creditors file creditor claims to commence the process of getting paid what they believe the decedent owed them; creditor claims must be filed and served within four months of first publication of notice to creditors in a local newspaper.  RCW 11.40.051.  Creditor claims that were not filed within the limitation period cannot be allowed.  RCW 11.40.090(4).  The estate’s personal representative allows or rejects such claims.  RCW 11.40.090, 11.40.100.  Creditors who believe their claim has been wrongly rejected have recourse to the superior court in which the probate has been filed.  RCW 11.40.080.

The Insolvent Estate.  If an estate has insufficient funds to pay the costs of administration and all creditors, then debtors are paid in the following order:  costs of administering the probate, funeral expenses, expenses of the decedent’s last sickness, wages for labor performed within sixty days of the decedent’s death, federal taxes, state taxes, real estate liens and mortgages in their order or priority, and all other debts.  Within any one category, if there are insufficient funds to pay all creditors in that category, available funds are pro-rated among creditors.  RCW 11.76.110.  All creditors of one category must be paid in full before creditors of a lower category receive any payment.  Within a category, creditors get paid to the extent of funds proportional to the amount of their claim.  RCW 11.76.150.

Abatement.  The gifts contemplated in a decedent’s Will are reduced (abated) to pay the estate’s costs of administration and creditors.  First, the remaining assets are categorized into four types:  intestate property, residuary gifts, general gifts, and specific gifts.  Second, in abating the gifts, all intestate property will be expended first to pay the shortfall.  If all intestate property is exhausted, then all residuary gifts will be abated to pay the shortfall; then general gifts, and finally specific gifts will be tapped.  Within any category, if funds remain when all obligations have been paid, the remaining funds will be distributed among the beneficiaries of that category of asset in the proportion specified by the decedent’s Will.  RCW 11.10.010, RCW 11.10.040, RCW 11.18.200(4).  The abatement statute shows a preference for preserving the specific gifts of a decedent over the generalized or residuary gifts.

Non-probate assets (community property, joint tenancy, payable-on-death accounts, trust accounts, takers of deeds upon decedent’s death, and trusts for the benefit of the decedent or of others, and any other asset that passes by operation of law outside probate) are subject to contribution to the costs of administering the estate and paying the estate’s creditors.  RCW 11.18.200.  Non-probate assets, if given to a specific individual, are considered specific bequests for purposes of abatement.  RCW 11.10.040(2)(a).  Beneficiaries of life insurance proceeds are not liable for the decedent’s debts, including those of his probate creditors.  RCW 48.18.410.  Pension and employee retirement benefits are not subject to the debts of the decedent, including those of probate administration and probate creditors.  RCW 6.15.020.