Ask the Probate Judge—Creditor Priorities
Rudd, appeared March 27, 2003, Albuquerque Journal, Business Outlook
Reprinted with permission
Editor's note: This column may not be quoted or reproduced in whole or part without express written permission of the author.
Q: If there are not sufficient assets in an estate to pay all debts, what happens regarding the decedent's debts? A.T., Ruidoso
New Mexico's laws address your question. If assets of the estate are insufficient to pay all claims in full, the personal representative shall pay claims in the following order, from highest to lowest priority:
1st costs and expenses of administration, including compensation of personal representatives and of persons employed by the personal representatives, such as attorneys, accountants, appraisers, and others; 2nd reasonable funeral expenses;
3rd debts and taxes with preference under federal law;
4th reasonable medical and hospital expenses of decedent's last illness, including compensation of persons attending the decedent; 5th debts and taxes with preference under other laws of New Mexico; and
6th all other claims, such as utility and credit card bills.
The personal representative must pay claims in the order of priority listed, after making provisions for family and personal property allowances, if applicable. Generally, personal representatives who act in good faith as fiduciaries for the estate are not individually liable for decedent's debts. But a personal representative can be personally liable if he or she pays a lower priority creditor instead of a higher priority creditor.
The personal representative should not give preference to paying one claim over any other claim of the same class. To the extent that funds are not available to pay all claims within one class in full, the creditor is entitled to receive payment of an equal proportion of his claim.
Creditors can also recover funds needed to pay claims from property that passes outside of probate, such as payable on death accounts and joint tenancy property. If the total assets are insufficient to pay all claims, creditors with a lower priority claim are out of luck.
For example, Juan, who is divorced, dies leaving an eight-year-old son. Juan's total assets are $60,000. Costs and expenses of administration are $2,000. Funeral costs are $5,500. Federal taxes are $1,500. Hospital expenses not covered by insurance or Medicare are $30,000. No state taxes are due. Credit card debts total $10,000.
Juan's minor son receives the first $45,000 to satisfy the family and personal property allowances. The $45,000 will be managed by a conservator until the son reaches the age of majority. The personal representative should then pay the first three claims totaling $9,000. This leaves only $6,000 toward the hospital bills. Twenty percent of each medical bill will be paid. The credit card companies receive nothing and will have to "write off" the debt.
In very small estates, if the value of the entire estate, less liens and encumbrances, does not exceed the family allowance, personal property allowance, cost and expenses of administration, decedent's reasonable and necessary medical and hospital expenses, and reasonable funeral expenses, the law allows the personal representative to immediately distribute the estate assets without giving notice to creditors. This is called a summary administration.
© 2003, Merri Rudd & Albuquerque Journal, All Rights Reserved