Who Gets Paid First During Probate?
A common question that arises during probate is “who gets paid first?” There are multiple parties that need to be paid during and after probate. Creditors of the decedent, governmental entities like the IRS and FTB, attorneys, administrators, and, most importantly, beneficiaries all need to be paid from the decedent’s estate. The order in which creditors and beneficiaries of the estate are paid is important. Personal Representatives of the estate must be mindful of the statutory order of creditors, especially in situations where there is an insolvent estate. The following will provide a summary explanation of the order of payments in probate.
Probate Code Section 11420
Probate Code Section 11420 lays out the basic order in which debts of the estate must be paid. Probate Code Section 11420 stipulates that claims of the United States or California (e.g. taxes) receive top priority. After the United States and the state of California, debts must be paid in the following order:
- Expenses related to the administration of the estate (lawyer’s fees, administrator’s fees, etc.)
- Obligations secured by a mortgage, deed of trust, or other liens
- Funeral Expenses
- Expenses of last illness
- Family allowance
- Wage Claims
- General Debts, including judgments not secured by a lien and all other debts not included in a prior class.
What Happens if all Debts Cannot be Paid?
If the estate is insolvent and there are not sufficient funds to pay all debts of the estate, the Personal Representative must assure that debts are paid according to Probate Code Section 11420. The Personal Representative should first categorize the debts according to the classes laid out in section 11420. The Personal Representative will then work their way down the classes of creditors, paying each class until the money essentially runs out. There is no priority for debts within the same class, claims within the same class must be paid on a pro-rata basis. Payment of all debts in the prior category is necessary before debts in the next category may be paid. If the assets are insufficient to pay all debts in a single class, each debt in that class is given its proportionate share of the remaining funds.
Personal representatives in an insolvent estate should file a petition for approval for final distribution, including a plan for payment to creditors, before actually paying the creditors in an insolvent estate. This will protect the personal representative from liability. Thus, even if a low-level claim seems deserving of payment, personal representatives must assure debts in higher classes are paid first.
How Do I Ascertain the Debts of the Estate?
During probate, creditors will receive notice of the probate. Under Probate Code Section 9050, Personal Representatives are required to give notice of administration of the estate to all known or reasonably ascertainable creditors of the decedent. Creditors also receive notice through the publishing notice of the petition to administer the estate. Personal Representatives must give notice to creditors within four months from the date when letters are first issued.
Creditors of the estate will file “claims”, or a demand for payment when they believe they are owed money from the estate. Under Probate Code Section 9100, creditors must file a claim before the later of the following times: four months after the date letters are first issued to a general personal representative or sixty days after the date notice of administration is mailed or personally delivered to the creditor. Personal representatives will then allow the claim or reject the claim if there is a defect in the claim or a dispute over the claim’s validity. All allowed claims are paid according to the order laid out in section 11420.
How are Beneficiaries Paid?
After all administration expenses and debts of the estate are paid, beneficiaries are paid according to the terms set out in the will. If no will exists, the decedent’s heirs are paid according to the laws of intestacy. Intestate succession laws are found in sections 6400 through 6455 of the Probate Code. These statutes lay out which of the decedent’s heirs are paid when no valid will exists. Who will be paid in intestate succession depends on who the decedent’s heirs were at the time of death. For example, if the decedent died with a spouse and two children, the spouse will inherit all community property and 1/3 of your separate property, and the children will inherit 2/3 of your separate property.
It is important to consider the order in which creditors must be paid, especially when an estate is insolvent. Personal Representatives run the risk of incurring personal liability when they pay debts out of order in an insolvent estate. Contact an experienced attorney to help.
