Who Gets Paid First from an Estate

Who Gets Paid First from an Estate?

In deciding who gets paid first from an estate, an estate planning attorney needs to know if the deceased person had an estate plan. If the deceased person had an estate plan, who were the family members, who is the personal representative, is this an estate that will involve probate court and the probate process.

The attorney will work with family members to select a personal representative and collect the estate assets. You may think that family allowances may be permitted because they will be receiving the money anyhow, but this is not always the case. State laws govern who gets paid first and the estate assets determine if personal representative can pay everyone even including family members. Another factor the estate planning attorney must consider is the administrative costs associated with the probate process and the decedent's affairs.

Issues with the order of payments from an estate are common in the probate . Generally, a duly-appointed fiduciary personal representative is vested with the authority to administer the estate. The personal representative is paying creditors, administrative costs, beneficiaries, or expenses, as determined by the state law.

The timing and order of payment must follow the state law, especially where the estate has permitted the personal representative to make family allowances. This is because there are specific laws that apply to the priority of payments from an estate when the estate is legally insolvent. The personal representative must aware of the state law involving debts or the personal representative my find themselves liable for the debts.

In these circumstances, failure to follow what the law says, or the procedures it lays down, may result in avoidable legal liability for the personal representative.

The personal representative must determine if there are sufficient assets before making family allowances.

Generally, those that should be paid first from estate assets are those whose bills were incurred in connection with the funeral and administrative costs of the probate process. If the personal representative is not sure the probate court will assist in distributing estate assets.

Those bills commonly include funeral home fees, court and attorney fees, notice costs, filing fees, estate and income taxes etc.

But, this priority payment is only important if the decedent did not have sufficient funds at death to pay all of the debts against the estate and the costs of the estate. Where the assets in the estate are sufficient to meet all expenses and pay all debts, bills should be paid promptly when received and verified. 

In any event, executors should be careful to avoid bad check charges. Verifying these charges will lead to medical debts being paid much later in order, since they may be covered by insurance and would amount to premature payments. 

This may also be the case with other outstanding balances and debt, as the decedent may have also maintained insurance to cover them.

Of note also, is the fact that the administrator’s commission is usually taken at the end of the administration process, but the pay may be taken sooner upon application and approval of the Court or upon the consent of all beneficiaries. 

Overall, every bill, debt, and expense should ideally be paid as soon as the estate has sufficient funds and the Executor has had an opportunity to determine that the bill is legitimate.

Priority payment is only important if the decedent did not have sufficient funds at death to pay all of the debts against the estate and the expenses of the estate. Where the assets in the estate are sufficient to meet all expenses and pay all debts, bills should be paid promptly when received and verified. 

In any event, executors should be careful to avoid bad check charges. Verifying these charges will lead to medical debts being paid much later in order, since they may be covered by insurance and would amount to premature payments. 

This may also be the case with other outstanding balances and debt, as the decedent may have also maintained insurance to cover them.

Of note also, is the fact that the administrator’s commission is usually taken at the end of the administration process, but may be taken sooner upon application and approval of the Court or upon the consent of all beneficiaries.

Order of Priority for payments for insolvent decedents

According to New York State law, a decedent with insufficient assets to meet all obligations must prioritize and make certain debts before other debts. The priority order in New York is as follows:

• Funeral expenses;
• Costs of administering the estate (including fees and commissions); 
• Taxes and other priority payments as specified by law;
• Wage claims; and 
• all other legitimate and unsecured debt.

Payments must be from an Estate Checking Account

To administer things like expenses, sales, and deposits, the personal representative has to open a checking account using the EIN obtained from the IRS and a certified copy of the death certificate, as well as Certificate of Letters Testamentary received from the Court. 

All of the debts and expenses should be paid out of the checking account. In practice, the account can be set up at any bank, brokerage or credit union that provides checking account services. But, the personal representative is NOT allowed to move the funds outside of New York State. Consequently, any bank or brokerage firm used by the Executor must be authorized to do business in the State of New York.

Although reimbursement for advances made by the Executor or beneficiaries is generally possible, it is not advised. Accordingly, the payment of expenses wait until the estate account is open with sufficient funds to pay them.

The personal representative owes a duty of care, even where he is also a beneficiary. Therefore discretionary decisions he will make, must be made in the best interests of the decedent. 

Knowing and following the proper timing and order of payments will be useful in completing your duties as fiduciary, without incurring legal liability in any form. 

If you are serving as a personal representative and need clarity on who should get paid first, it is best to work with an attorney well versed in state law and the probate practice.