If you’ve been made the beneficiary of a will or trust, then you’re set to receive inheritance in the form of cash or other types of assets. However, an insolvent estate may put your inheritance at risk.
In this blog, we’re going to discuss estate insolvency and whether or not there’s anything you can do to prevent your inheritance from being reduced.
What is an Insolvent Estate?
Definition:
An insolvent estate is an estate that does not have enough money to pay off its debts.
Explanation:
Your loved one has passed away, but they might have debts and liabilities that need to be paid. These include:
- Taxes
- Funeral expenses
- Estate expenses (including legal fees, court fees, and executor fees)
- Year’s Support
- Loans and other debt
Neither you nor the other beneficiaries are responsible for paying off these debts. The debts will be paid by money from your loved one’s estate.
Sometimes, estates do not have enough money to pay off their outstanding debt.
If the estate has high-value assets, like real estate or luxury vehicles, these may be sold by the administrator to pay off estate debt.
However, if the estate’s total value is less than the debt owed, the estate will not be able to pay all of its debts and expenses – meaning the estate is insolvent.
Related Blog: Rules & Responsibilities for an Estate Administrator in Georgia
What Happens When the Estate Runs Out of Money?
In Georgia, creditors have up to 3 months to make a claim on the estate. If a creditor doesn’t make a claim in 3 months, then they might forfeit any preference they have to be paid ahead of other creditors.
Related Blog: What is the Process for Probate in Georgia?
What if There’s Not Enough Money to Pay Beneficiaries?
When an estate lacks funds to pay its debts and expenses, assets must be sold to generate cash to make those payments. Beneficiaries are only entitled to an inheritance after the debts and expenses of the estate have been paid. If there is not enough money to pay all of the debts and expenses, some beneficiaries will likely inherit less than they expected. When an asset bequeathed to a beneficiary must be sold to pay debts and expenses of the estate, that asset is no longer available for distribution to the beneficiary. This is called abatement.
Who’s Responsible for Paying Estate Debts?
Beneficiaries are not responsible for paying off the estate’s debts—the debts are paid from the estate’s assets. But there are two exceptions:
- You co-signed a loan with the deceased.
- If you shared a credit card with the deceased you will be responsible for paying the remaining debt.
- You inherit assets on the condition that you assume any outstanding debt secured by the asset.
- Example: You are inheriting real estate from the deceased that has an outstanding mortgage, the proceeds of which were not used to build or improve the real estate. Your inheritance will be subject to the outstanding mortgage.
Related Blog: Estate Planning Tips for Avoiding Will Disputes
What Debts Are Prioritized?
In Georgia, estate debts are paid off in order of importance, as mandated by state law. The debts are prioritized in the following way:
- Year’s Support
- Funeral expoenses
- Expenses of estate administration
- Expenses of the decedent’s last illness
- Unpaid taxes or debts due to the United States
- Judgments, secured debts, liens created during decedent’s lifetime
- All other claims
If there’s not enough money to pay off each creditor, assets are sold to pay the debts and expenses. The first assets sold are those in the estate residuary. Next are assets that are the subject of general bequests. Last are assets specifically bequeathed.
What Assets Are Protected for Beneficiaries?
Worst-case scenario:
Once the estate has paid off all its debt—or as much debt as it can pay off—there will be nothing left over to distribute to you or the other beneficiaries.
This can be truly disheartening.
Your loved one might have worked hard to build an inheritance for you, and it can seem unjust to have this inheritance taken away from you.
However, , non-probate assets cannot be used to pay estate obligations. These assets include:
- Life insurance policies with beneficiary designations
- Certificates of deposit with beneficiary designations
- Joint accounts and bank accounts with a payable on death/transfer on death designation
- IRAs or 401Ks with beneficiary designations Real estate titled jointly with rights of survivorship
What Caused the Estate Insolvency?
Sometimes, the person who creates a will or trust dies unexpectedly and is not able to leave the estate in good financial health. This is often the cause of an insolvent estate.
However, there may be situations in which the estate becomes insolvent or the beneficiaries suffer abatement because the executor/trustee was fraudulent or incompetent.
For example, the person administering the estate might have been stealing money from the estate or unlawfully diminished the value of the estate.
If you feel like you were deprived of an inheritance due to fraud or mismanagement, you can petition the court to remove the executor/trustee and reexamine the actions that might have led to insolvency or abatement.
Related Blog: Can a Beneficiary Sue the Executor of an Estate?
Should You File a Lawsuit Over the Insolvent Estate?
If you did not receive your intended inheritance due to fraud or mismanagement by the executor/trustee, then you should consider filing a lawsuit. This might be the only way to ensure that your loved one’s final wishes are honored.If you’re going to pursue estate litigation in Georgia, contact Gaslowitz Frankel as soon as possible. Our award-winning legal team has decades of experience in estate litigation and securing strong outcomes for our clients. We can help you navigate this stressful time in your life and see you through to better days.
