When it comes to distributing the assets of a deceased person, tensions can arise between creditors and beneficiaries. Both parties may have a claim to a portion of the estate, but who takes priority? This is where the concept of “priority of payment” comes into play. In this article, we will explore the legal principles and guidelines that determine whether creditors take precedence over beneficiaries or vice versa.
Understanding the Priority of Payment: Creditors vs. Beneficiaries in Estate Settlements
When someone passes away, their estate must go through a legal process known as probate. During this process, the estate’s assets are distributed to creditors and beneficiaries according to a specific order of priority. It is important to understand this priority of payment to ensure that all debts and obligations are properly settled.
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Creditors
Creditors are individuals or entities to whom the deceased owed money. They have the highest priority in estate settlements and must be paid first. This includes any outstanding debts, such as mortgages, credit card balances, medical bills, and taxes. If the deceased had a will, the executor is responsible for paying off these debts using the assets in the estate. If there are not enough assets to cover the debts, the estate may need to sell property or other assets to pay the creditors.
Beneficiaries
Beneficiaries are individuals or entities who are named in the deceased’s will to receive assets from the estate. They have a lower priority than creditors and are only entitled to receive assets after all debts are paid. However, if the estate has enough assets to cover all debts, beneficiaries will receive their designated assets according to the terms of the will.
It is important to note that there are certain assets that are not subject to probate and are not included in the estate’s assets. These assets include life insurance policies, retirement accounts, and assets held in a trust. These assets typically pass directly to the designated beneficiaries without going through probate.
Example:
John passed away and left behind an estate worth $500,000. He owed $100,000 in outstanding debts, including a mortgage, credit card balances, and medical bills. John’s will named his sister as the sole beneficiary of his estate. After the debts are paid off, there is only $400,000 left in the estate. John’s sister will receive the remaining $400,000 according to the terms of the will.
Understanding the priority of payment in estate settlements can be complicated, especially if there are multiple creditors and beneficiaries involved. It is important to seek the guidance of a knowledgeable estate planning attorney to ensure that all debts and obligations are properly settled.
Understanding the Hierarchy of Creditors’ Priority in the US
When it comes to bankruptcy proceedings, it’s important to understand the hierarchy of creditors’ priority in the US. This determines the order in which creditors are paid back and can greatly affect the outcome of a bankruptcy case.
Secured creditors
Secured creditors are at the top of the hierarchy. They have a security interest in the debtor’s property, meaning they have the right to seize and sell the property if the debtor defaults on the loan. Examples of secured creditors include mortgage lenders and car loan providers.
Unsecured creditors
Next in line are unsecured creditors. These are creditors who do not have a security interest in the debtor’s property. Examples of unsecured creditors include credit card companies and medical bill collectors.
Priority unsecured creditors
Priority unsecured creditors have a higher priority than regular unsecured creditors. These creditors are entitled to be paid back before other unsecured creditors. Examples of priority unsecured creditors include tax authorities and employees who are owed wages.
Subordinated creditors
At the bottom of the hierarchy are subordinated creditors. These creditors have agreed to take a lower priority in exchange for higher interest rates or other benefits. Examples of subordinated creditors include some bondholders and shareholders.
Example:
Let’s say a person files for bankruptcy and owes money to several creditors. They have a mortgage, a car loan, credit card debt, and owe back taxes to the IRS.
The mortgage lender and car loan provider would be first in line to be paid back as secured creditors. The IRS would have the next priority as a priority unsecured creditor. Credit card companies would come after them as regular unsecured creditors.
It’s important to understand the hierarchy of creditors’ priority in the US in order to navigate bankruptcy proceedings and understand the potential outcomes.
Understanding the Liability of Beneficiaries: Can Creditors Pursue Them?
When it comes to estate planning, one important consideration is the liability of beneficiaries. Beneficiaries are individuals who receive assets from a trust or will. But can creditors pursue them?
The answer is, it depends. In some cases, beneficiaries may be held liable for the debts of the deceased person. However, there are certain factors that determine whether creditors can pursue beneficiaries for payment.
Factors that Determine Beneficiary Liability
- Type of Asset: The type of asset that the beneficiary receives can affect their liability. If the asset is considered exempt from creditor claims, the beneficiary may not be held liable.
- Timing: The timing of when the debt was incurred can also play a role. Beneficiaries are generally only liable for debts that were incurred by the deceased person before they passed away.
- State Laws: Each state has its own laws regarding beneficiary liability. Some states have laws that protect beneficiaries from creditor claims, while others have more lenient laws.
It’s important to note that beneficiaries are not automatically liable for the debts of the deceased person. Creditors must go through the probate process to make a claim against the estate. If the estate does not have enough assets to pay off all debts, creditors may then try to pursue beneficiaries for payment.
Example
Let’s say John had a will that left his house to his daughter, Sarah, and he had $50,000 in credit card debt. When John passed away, his estate had $30,000 in assets, which were used to pay off some of the debt. The remaining $20,000 could not be paid off, so the credit card company sued Sarah for the remaining balance. However, if John’s will had left the house to a trust that was exempt from creditor claims, Sarah may not have been held liable for the debt.
The Probate Lawyer’s Guide: Understanding the Correct Order of Payment from an Estate
As a probate lawyer, it is important to understand the correct order of payment from an estate. This determines the priority of payment for creditors and beneficiaries.
First Priority:
- Funeral expenses: Funeral expenses are the first priority and must be paid before any other expenses. This includes the cost of the funeral, burial or cremation, and any other related expenses.
- Administration expenses: These are the expenses incurred during the administration of the estate, such as court fees, attorney fees, and executor fees.
Second Priority:
- Debts and taxes: Debts and taxes are the second priority and must be paid before any distributions are made to beneficiaries. This includes any outstanding debts, such as credit card debt, medical bills, and personal loans. Taxes owed by the deceased or the estate must also be paid.
Third Priority:
- Specific bequests: Specific bequests are gifts of specific items or amounts of money left to beneficiaries in the will. These must be paid before any other distributions are made.
- Residuary bequests: Residuary bequests are gifts of the remaining assets of the estate after all other expenses and bequests have been paid. These are typically distributed to the beneficiaries in proportion to their share of the estate.
It is important to note that if there are not enough assets in the estate to pay all of the debts and expenses, the beneficiaries may not receive the full amount of their bequests. In this case, the bequests would be reduced proportionally.
As a probate lawyer, it is crucial to understand the correct order of payment from an estate to ensure that the process is handled correctly and fairly for all parties involved.
Example:
For example, if an estate has $100,000 in assets and $50,000 in debts and expenses, the funeral expenses and administration expenses would be paid first, leaving $40,000. The debts and taxes would then be paid, leaving $10,000. If there were specific bequests totaling $5,000, those would be paid next, leaving $5,000 for the residuary bequests. If there were two beneficiaries, one entitled to 60% of the estate and the other entitled to 40%, they would receive $3,000 and $2,000 respectively.