Count Creditors Among Estate's Survivors

While most of us understand that debts we owe at the time of our death do not disappear, what is commonly misunderstood is the extent to which your creditors have a priority right to be paid before our beneficiaries are entitled to property we leave behind.

A complex set of rules dealing with creditor's rights to be paid out of a deceased individual's estate are well established under the law, and it is imperative for survivors and creditors to be familiar with them.

By not following the law carefully during the probate process, survivors may subject themselves to personal liability for the debts, while creditors may jeopardize their right to payment.

The process of administering a deceased individual's estate through the probate courts may be summarized in three steps: collecting the decedent's assets; paying the decedent's debts; and distributing the remaining assets to the decedent's beneficiaries or heirs.

The individual or entity appointed by the probate court as the personal representative of your estate - either the executor or administrator - is responsible for carrying out these steps.

The Texas Probate Code requires the personal representative to give certain notices to all individuals or companies having claims against a decedent's estate, requesting that the creditor present its claim to the personal representative within the time prescribed by law.

One such notice is by publication in any newspaper in the county where the estate is being administered. This must be given within one month after the personal representative's appointment and qualification to act. Also within one month, notice must be given to the Texas Comptroller of Public Accounts if the decedent remitted or should have remitted taxes administered by that office.

Within two months, notice must be given by mail to every individual or company who has a claim against the estate that is secured by real or personal property.

If the required notices are not given in a timely manner, the personal representative may be held personally liable for any damages suffered by the creditor.

The personal representative also is given an option to provide notice by mail to unsecured creditors at any time before the estate administration is closed, stating, among other things, that the creditor has four months to present its claim against the estate or the creditor may be barred from ever collecting the debt.

Once a creditor's claim has been legally established as a debt of the estate, the Texas Probate Code classifies the debt for payment according to the following priority system:

Class 1 - Funeral expenses and expenses of last illness not to exceed $15,000, with any excess to be classified as unsecured debt.

Class 2 - Administration expenses and expenses incurred in preservation, safekeeping and management of the estate.

Class 3 - Secured claims to the extent they can be satisfied out of the proceeds of the collateral.

Class 4 - Claims for the principal amount of an accrued interest on delinquent child support and child support arrearages that have been reduced to judgment.

Class 5 - claims for taxes, penalties and interest due the state of Texas.

Class 6 - Claims for the cost of confinement in the Texas Department of Criminal Justice system.

Class 7 - Claims for repayment of medical assistance payments made by the state of Texas on behalf of the decedent.

Class 8 - All other claims.

The Texas Probate Code does not address debts owed to the United States government. However, under federal law, a claim of the United States - such as for unpaid taxes - must be paid before other claims against the estate.

A personal representative who fails to give priority to claims of the United States also may be held personally liable to the extent of the unpaid debt. Further, under the Internal Revenue Code, federal estate taxes are secured by an automatic 10-year lien arising at death against the property of the decedent's estate until the taxes are paid.

It is not uncommon for estate beneficiaries to take possession of or even sell estate property and keep the proceeds without first paying the estate creditors. In those instances, the creditor has a claim against the beneficiaries to the extent of the value of the property received by them, and the beneficiaries also may be held personally liable to the creditor for the value of the property if it is sold.

This article is provided as a service by the Probate, Trusts & Estates Section of the Houston Bar Association. Louis M. Ditta is an attorney and CPA and practices law with the firm of Cenatiempo & Ditta, L.L.P., Houston, Texas. He is board certified as an estate planning and probate law specialist by the Texas Board of Legal Specialization.