Paying Estate Debts: Why Priority Matters
One of the many duties of a personal representative of an estate is to pay all legitimate debts of the estate before distributing the remaining assets to beneficiaries. But what happens if there are not enough assets in the estate to pay all the money that is owed? Are beneficiaries liable for estate debts?
As a general rule, beneficiaries of the estate of a deceased person (decedent) are not liable for estate debts. (There are some exceptions, such as if the debt was a joint one or the beneficiary of the estate co-signed for the debt.) But it’s still important to pay debt in the proper order, according to Ohio law on the priority of debts.
How Are Debts Paid From an Estate?
Under Ohio law, creditors have six months from the date of the decedent’s death to make a claim for payment against the estate. After six months, any claims against the estate are barred. Part of the reason for this rule is to provide certainty. Otherwise, a personal representative could pay known debts of the estate and distribute the remaining property, only to have a creditor appear weeks, months, or years later demanding what they are owed.
The six-month limit also protects a personal representative from paying one creditor when the debts of another creditor have a higher priority. Once the six-month period for submitting claims has elapsed, the personal representative has a clear picture of what legitimate claims there are against the estate.
What is the Order of Payment of Estate Debts?
In Ohio, the order of payment of estate debts is:
- Class 1: Costs and Expenses of Administration. This includes probate administration fees, probate attorney fees, and fees for the personal representative of the estate.
- Class 2: Funeral and Cemetery Expenses. This includes up to $4,000 for expenses billed by a funeral director or other funeral expenses approved by the probate court, and up to $3,000 in burial expenses.
- Class 3: Allowance for Support. The allowance for support is established in Ohio law so that a surviving spouse and minor children can provide for their needs during the estate administration process.
- Class 4: Debts Entitled to Preference Under U.S. Law. These are debts owed to the U.S. government, such as past-due taxes.
- Class 5: Expenses of the Decedent’s Last Illness. These include medical bills for the decedent’s last hospital stay or other end-of-life medical care.
- Class 6: Additional Funeral Expenses. If the decedent’s funeral expenses exceeded the $4,000 provided for in Class 2, an additional $2,000, up to a total of $6,000, can be paid as Class 6 expenses.
- Class 7: Nursing Home Care. This includes the cost of the decedent’s last continuous stay in a nursing home, residential facility, or hospital long-term care unit.
- Class 8: Obligations to the State of Ohio. These debts include personal property taxes and claims against the estate for Medicaid estate recovery.
- Class 9: Manual Labor Debts. A person who performed manual labor for the deceased within 12 months of their death can make a claim for up to $300 under this class.
- Class 10: Other Debts. This class encompasses all debts not referenced above, as well as funeral expenses in excess of $6,000 and debts for manual labor in excess of .
All creditors at one level of priority must be paid in full before creditors with lower priority can be paid. If there are not enough funds in the estate to satisfy all legitimate debts of equal priority, all such debts will be paid on a prorated basis. For instance, if there are $25,000 in Class 5 debts, but only $20,000 in estate assets remaining, all creditors in that class will be paid 80% of their claim.
Is the Executor of an Estate Liable for Debt?
The executor (also called “personal representative”) of an estate does not have a personal responsibility to pay estate debts out of their own pocket. However, the personal representative is responsible for paying estate debts from estate funds. If they pay debts out of order, or pay claims that are not legitimate before those that are, they could have personal liability to creditors who were wrongly denied payment.
Unfortunately, claims against an estate do not come stamped with their level of priority. Some may be obvious, others less so. To avoid making a mistake as a personal representative, it is best to retain an experienced Ohio probate attorney who can assist you with prioritizing and paying estate debts. An attorney’s services are considered a benefit to the estate; that is why they are not only paid out of estate funds, but given a high priority for payment.
If you have questions about paying estate debts, collecting debts owed to an estate, or any other duties of a personal representative, please contact Gudorf Law Group to schedule a consultation.