Unfortunate fact: your debts do not die with you. They continue to burden your property after your death.
This is a big deal. Your creditors can go after the property that goes through your probate estate and the property that passes under beneficiary designation.
It is fair to say that your beneficiaries or heirs take their share of your property under the threat that it may be pulled back by a creditor. For that reason, they should pause for a good long while before spending their inheritance.
What Happens To My Properties After I Die ?
There are some rules about the order in which property gets pulled back into the estate. If you left a will that addresses the payment of debts and administration expenses, then the provisions in your will control those. Absent that, the statute sets out the order in which property is liable for your debts and expenses, other than estate taxes. There are six categories as follows.
First, any property that passes by intestacy (the disposition is not controlled by a will).
Second, property from your residuary estate (this is what remains in your estate after the specific bequests and devises from your will have been satisfied). Out of this, personal property is first, then real property.
Third, general bequests of personal property. An example would be: “$10,000 to my niece Lucy.”
Fourth, general devises of real property. If you think that category is confusing, then you will be happy to know that the courts agree.
Fifth, specific bequests of personal property. An example would be:” all of my shares in my Apple stock to my son.”
Sixth, specific bequests of real property, such as “all of my mineral interests to my wife.”
You Can’t Cheat The Creditor Entitlement
There is another category of property that is burdened with a mortgage or is used to collateralize a loan. The creditor is always entitled to pursue the collateral.
The property that passes by a beneficiary designation, such as a multi-party bank account, has to bear its proportionate share of estate taxes. It can also be pulled back into an estate to pay other debts if the assets of the estate are insufficient. You cannot use beneficiary accounts to cheat your creditors.
What Is The Way My Debt Gets Paid?
There is an order in which debts get paid. Costs of administering your estate, funeral expenses and widow’s allowances get priority.
Next in line, not surprisingly, are debts to the IRS. As a special incentive to make sure executors pay attention to the IRS claims, the law provides that an executor is personally liable if he or she pays any other creditors or distributes any estate assets before paying IRS debts.
That is the primary reason that estates do not get distributed immediately. As a general rule, the IRS must assess income, gift and estate taxes within three years after a return is filed. Executors who want to distribute the estate sooner than that can request an IRS closing letter four months after filing the final tax return.
Your safest bet is to leave a well-drafted will and no debt.
Virginia Hammerle is a licensed Texas attorney. Her practice includes estate planning, litigation, guardianship and probate law. See hammerle.com for her blog and newsletter sign-up. This column does not constitute legal advice.