What Happens If There Is Not Enough Cash in Your Estate to Pay Creditors?

This is an article from The Law Offices of Kobrick & Moccia (https://www.kobricklaw.com/) in Garden City, New York, that we thought others may find helpful.

When most people think about estate planning goals they focus on things such as the divisions of their estate assets upon death and ensuring that loved ones are provided for in their absence. What people often tend to overlook is the fact that creditors of an estate are also entitled to file claims against the estate during the probate process. What happens though, if there is not enough cash in your estate to pay creditors? Because this is something that occurs frequently, it is in your best interest to know the answer to that question. Even better, you should know how to make sure your estate doesn’t lack liquidity.

After your death, your estate must go through the legal process known as probate. During probate, your estate assets are identified, valued, and inventoried. In addition, notice must be given to known and potential creditors of the estate that the probate process is underway. Creditors then have a limited period of time within which they must file a claim against the estate. The Executor of your estate is charged with reviewing claims filed against the estate and approving or denying each claim. Claims that are approved are then paid out of estate assets, using liquid assets when possible. “Liquid” assets are assets that have an immediate cash value, such as cash, investment accounts, and proceeds from a life insurance policy. Because they are liquid assets, they can readily and easily be used to pay approved creditor claims.

When there are insufficient liquid assets, however, your Executor must turn to other assets in order to pay approved claims. This is what you do not want to happen because it means selling assets that you did not intend to part with from your estate. It could even mean selling sentimental and/or one-of-a-kind assets. By way of illustration, let’s assume you have $150,000 in liquid assets in your estate; however, approved creditor claims total $200,000. Along with your liquid assets, you also have a home worth $200,000, a stamp collection valued at $75,000, and family heirloom furniture valued at about $40,000. Your Executor will likely be forced to sell one (or more) of those assets in order to make up the $50,000 deficiency in liquid assets needed to pay your creditors. The problem is that you promised the stamp collection to your best friend who shares your love of collecting. You had also hoped to be able to pass down the family heirlooms to your children, along with your house. Unfortunately, that may not happen. Moreover, your Executor will be in the unenviable position of having to decide which assets to sell.