How to pay estate debts

The priority order

Every state has a statutory priority order for paying estate debts. Though the exact wording varies, the pattern is remarkably consistent:

1. Administration expenses — court costs, attorney fees, executor fees, appraisal fees
2. Funeral and burial expenses (often capped at a "reasonable amount")
3. Family allowance in some states — short-term support for surviving spouse and minor children
4. Federal tax claims — IRS tax liens have extraordinary priority
5. Last illness expenses — medical bills for the final illness
6. State and local taxes
7. Secured creditors — mortgage holders, auto lenders, anyone holding collateral
8. General unsecured creditors — credit cards, personal loans, etc.

If the estate has enough to pay everyone, priority doesn't matter. When it doesn't, priority is everything.

When debts exceed assets

An insolvent estate requires careful handling. Key principles:

• Pay in priority order. Pay all of a higher class before any of a lower class. Within a class, pay proportionally if you can't pay in full.
• Do not distribute anything to beneficiaries. There is nothing to distribute. Beneficiaries receive only what's left after all debts and administration expenses are paid.
• Do not pay family debts preferentially. Paying your sibling's loan back before the hospital bill can make you personally liable for the hospital bill.
• Consider formally rejecting the executor role. In some states, if the estate is clearly insolvent, you can decline to administer it. The court may appoint a public administrator, or creditors can pursue their remedies outside probate.

Insolvent estate administration is genuinely complex. This is one area where professional help is not optional.