May 26th, 2022

Sometimes You Just Have to Say “NO!”

So, Uncle Joe was a fun guy. He always called you his “favorite nephew” and promised you all of his worldly possessions when he goes to the big casino in the sky. Joe never married. He worked hard and played hard. Now Joe is gone, leaving a Will that names you as the sole beneficiary and Executor of the Estate. Joe never told you about his financial affairs. You learned that his house would probably bring $175,000. Now the monthly statements started coming to the house. Wow! He has $6,500 in a bank account and a 401(k) worth $75,000, which names you as the sole beneficiary. But now the mortgage and credit card statements start to arrive. Joe was living the good life and the legacy he promised you was less than clear. You learn that there is little equity in the house and that his credit card obligations total $150,000.00. You then realize that there are more debts than assets. The word insolvency creeps into the conversation. What should you do.?  Do you ask the Register of Wills to appoint you as Executor and administer the Estate?  How about the creditors that will not be paid? What are their rights? What happens to your rights as the sole beneficiary of the Estate? Even the IRS is owed money! Uncle Joe – You said I was your favorite nephew! Who gets paid first?

Pursuant to the Pennsylvania Probates Estates and Fiduciaries Code, the Personal Representative (aka Executor) of an Estate must pay the decedent’s debts in the following order of priority:

  1. The costs of administration;
  2. The family exemption;
  3. The costs of the decedent’s funeral and burial, and costs of medicines furnished to him within six months of the death, including medical, hospital, or nursing services performed for him within that time, services provided under the medical assistance program, and services performed for him by any of his employees within that time;
  4. The cost of a grave marker;
  5. Rents for the occupancy of decedent’s residence for 6 months before his death;
  6. Claims by the Commonwealth and its’ political subdivisions and
  7. All other claims.

20 Pa.C.S.A. § 3392.

While Personal Representatives are not required to pay the debts of a decedent, they may become personally liable for those debts if they distribute Estate assets before paying creditors in the priority enumerated above. Additionally, Personal Representatives may become personally liable if they pay debts lower in priority first, exhausting an insolvent Estate.

After payment of Uncle Joe’s funeral and any remaining medical bills, if any, the remainder of his Estate is subject to his outstanding debts. Luckily, Uncle Joe named you as the primary beneficiary of his 401(k). Individual retirement accounts and 401(k)s may be protected from creditors, so long as the Estate is not named as the beneficiary. Since Uncle Joe named his favorite nephew as the beneficiary of the account, the funds are not “probate assets” and will be distributed directly to his nephew instead of the Estate.

But how does Uncle Joe’s house and bank account get divided amongst the outstanding debt? The fiduciary code does not make any mention of IRS tax liens, so who will trump in their recovery of the Estate assets: IRS or the credit card companies?

Generally, federal tax liens must get paid first in priority to other creditors when the Estate of a deceased debtor may not be sufficient to pay all debts. However, the Federal Tax Lien Act sets forth several exceptions to this rule. One such exception grants priority to judgments that are recorded and secured against a decedent’s property, before the IRS’ issuance of its Notice of Lien. If the IRS has issued liens for unpaid taxes before Uncle Joe’s death, the IRS will take priority over his credit card debt. Upon satisfaction of those liens, if any assets remain in Uncle Joe’s Estate, the balance will be subject to collection by the credit card companies. Any debt balance that remains after Uncle Joe’s Estate is exhausted will die along with Uncle Joe.

 Unfortunately, Uncle Joe’s favorite nephew will likely inherit the 401(k) only, as the remainder of the Estate will be subject to various debts. Nephew may even consider renouncing his nomination as Personal Representative of the Estate if he is unable to carry out his duty of ascertaining all of Uncle Joe’s creditors. It is imperative that the nephew, as the nominated Personal Representative of his beloved uncle’s Estate, seeks out the professional advice of counsel to assist in the process of administering an insolvent estate and to avoid any potential liability for Uncle Joe’s debts.

The content found in this resource is for informational reference use only and is not considered legal advice. Laws at all levels of government change frequently and the information found here may be or become outdated. It is recommended to consult your attorney for the most up-to-date information regarding current laws and legal matters.