In an earlier post we discussed the basics of creditor’s claims. If you’re serving as a Personal Representative in an estate with claims, please start with that post and remember these fundamental principals:
First, one of the most common questions we are asked is “Is the Personal Representative personally responsible for these debts if there is not enough money to pay them?” The answer (luckily) to this question is “No.” Accepting the role of Personal Representative does not obligate you to pay another person’s debts. If you’ve heard otherwise, it’s most likely because the Personal Representative also had another legal obligation to that debt. For example, if the parent of a minor child accepts financial responsibility for that child’s medical care then they might be liable for that debt. The fact that they later became Personal Representative for that child’s estate after death didn’t trigger that obligation, it was the parent-child relationship that did so. Another example is a co-borrower on a loan. If you sign a document agreeing to be responsible for a debt then you may become responsible for that debt if the other person dies; however, the fact that you are named Personal Representative does not obligate you. One last warning in this area, there are a lot of very shrewd creditors out there that do a fantastic job of getting people to personally assume debt they aren’t otherwise obligated to pay – don’t do it. Take all paperwork to an attorney for review and fully understand your rights before you sign anything. Doing otherwise could be a very costly mistake.
Secondly, claims that are filed must be paid according to an established priority S.C. Code §62-3-805. If the estate does not have enough assets to pay all the claims in full, this priority will guide the Personal Representative in which claims to pay first. Costs and expenses of estate administration, including attorney’s fees and reasonable funeral expenses must be paid first. Next in line are reasonable and necessary medical and hospital expenses of the decedent’s last illness and/or medical assistance paid under Medicaid to certain individuals. Then, the Personal Representative must pay debts and taxes required to be paid under federal law, then debts and taxes required to be paid under South Carolina law, and then all other claims, in that order. A large portion of these claims fall in this bottom category of “all other claims” (such as credit card debt).
The key here is that every claim in the same category should be treated equally. For example, if two doctors submit claims for medical bills generated at the same time, they should each receive the same treatment. The Personal Representative shouldn’t refuse to pay one claim while paying the other claim in full.
Lastly, please remember that it is important where you get the assets to pay these claims. Funds for the payment of claims should always be paid from the “residue” of the estate first. If there are not sufficient liquid assets (i.e. cash, stocks, etc.) to pay all claims, then other estate assets may need to be liquidated (including real estate).
Please read our previous post on selling assets to help you know how to proceed. If there are still more creditors than there are funds available, the Personal Representative may need to pay each creditor in the same category a prorated amount based on what’s left.
If you’ve read this far then chances are that you’re dealing with a difficult estate where there is potentially more debt than assets. When that’s the case, so many Personal Representatives make the mistake of assuming they can’t afford legal counsel to help when in fact, that’s exactly what they need. An experienced estate attorney can not only guide you through this process but can often rid the estate of significant debt by understanding the process, preventing many creditors who don’t play by the rules from getting paid and negotiating down the debt to leave assets for the heirs.
If you’re getting hassled by creditors, please call us for a consult today.
Despite your position on the current President, his signing of the new tax bill (“TCJA”) provides some distinct perks in the realm of estate planning.
Here are a few of the distinct perks in the realm of estate planning:
South Carolina doesn’t have an estate tax, so our clients only have to concern themselves with the federal estate tax. Although the TCJA does not eliminate federal estate, gift, and generation-skipping transfer (GST) taxes, it almost doubled the exemption. This means that an individual can now pass $10 million (indexed for inflation) through their estate without paying federal estate taxes. Married couples get to double the exemption to $20 million+. WOW! And so you don’t have to Google “indexed for inflation” we can go ahead and report that the 2018 actual amount is $11,210,00 per individual or $22,420,000 per couple. As has been the case in prior years, the unused exemption of the first spouse to die still can be “ported” to the surviving spouse. For those with estates exceeding this amount (yes, we’re jealous), the maximum tax rate remains at 40%.
On a practical level, what does this mean for our clients? It means less than 1% of Americans will ever pay an estate tax. With the exemption set this high, the vast majority of our clients are in the clear (for now). The exemption sunsets after 2025. However, those with significant family wealth or closely held businesses that could exceed the exemption need to prepare as a 40% loss could be devastating.
As we mentioned above, the new law also doubles the lifetime gift tax exemption. Originally enacted to prevent taxpayers from gifting their entire estate before death to avoid estate taxes, it makes sense that these exemptions go hand-in-hand. This means you can give your assets away during your lifetime without fear of tax consequences as long as the cumulative value of the gifts don’t exceed the $11,210,000 exemption.
ANNUAL GIFT TAX EXCLUSION:
If you aren’t aware of the gift tax exclusion, it’s the law that allows you to give away money to as many people as you wish without those gifts counting towards the lifetime exemption we just discussed. This change isn’t dramatic but it’s still an increase. The annual exclusion for gifts increases to $15,000 this year (up from $14,000 in 2017). This amount remains subject to an inflation adjustment as well.
STEPPED UP BASIS:
In more good news, the TCJA did not change the law regarding basis step-up at death. In my opinion, this impacts more of our estates than any of the items discussed above because it helps almost everyone. If you’re not familiar with a basis step-up at death, it’s worth discussing with your CPA or Estate Planning Attorney as understanding how this works might help you decide which assets to gift or sell before death and which to pass through your estate. More on that in a later post.
If you have any questions about other aspects of TCJA, please contact your CPA. If you need more information on how this specifically impacts your estate plan, please schedule a free estate planning consult with us so we can address your unique needs.