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What does it mean if an estate is insolvent?

On Behalf of | Nov 19, 2019 | Estate Administration |

An estate plan allows individuals to make their wishes clear and provide for their family when they are gone. However, a lot of financial planning goes into this process to ensure one’s family members will be protected and provided for after their passing.

This is essential because, unfortunately, financial responsibilities do not disappear – even after someone passes away. And if a loved one does not set aside money to handle these financial responsibilities, their surviving family members might not receive anything from their lost loved one.

Too much debt can make an estate insolvent

Before anything from a loved one’s estate can be distributed among beneficiaries, there are two steps the probate court and the personal representative must complete under California law:

  1. They must appraise the probate estate and calculate its value; and
  2. Then they must pay off any remaining debts, bills and expenses in the loved one’s name. These debts commonly include expensive medical or nursing home bills for end-of-life care, remaining mortgage payments or other loan payments, credit card balances, and funeral expenses.

If there are not enough assets within the probate estate to pay these debts in full, then the estate is insolvent. This means that beneficiaries will likely not inherit from the estate, despite what their loved one’s will says. On the other hand, if their loved one names beneficiaries in their retirement account or life insurance account, those beneficiaries may still receive assets even if the estate is insolvent.

Is the family liable for these debts?

If creditors do not obtain full payments from an insolvent estate, it is possible they might try to take legal action to recover payments, even if there is nothing left in the estate to cover these debts.

Many beneficiaries – and personal representatives, for that matter – might worry about whether or not they are responsible for paying their loved one’s remaining debts. Thankfully, it is unlikely.

There are some cases where surviving family members could be liable to pay remaining debts, including:

  • If the loan is connected to a joint account with a surviving spouse; or
  • If someone co-signed the loan with their now passed loved one.

However, beneficiaries are generally not required to pay any debts that the probate estate cannot cover.

Managing the stress of an insolvent estate on top of the grief of losing a loved one can be overwhelming. It is often helpful for families to consult an experienced attorney to ensure they know how to protect their rights and their loved one’s legacy.

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