Creditor Issues and Estate Administration
| Publication year | 2009 |
| Pages | 0016 |
| Citation | Vol. 50 No. 2 Pg. 0016 |
2009 Fall, Pg. 16. Creditor Issues and Estate Administration
Volume 50, No. 2
Fall 2009
I. INTRODUCTION
A rapidly declining real estate and securities market hurts every aspect of society. The administration of probate estates is no exception. This article discusses the payment of creditors in the ordinary solvent course, when the value of estate assets exceeds estate liabilities, and in the insolvent course, when estate liabilities exceed the value of estate assets. More and more often a fiduciary will discover that an estate that was solvent at inception has suddenly become insolvent. In such a case, the fiduciary must act swiftly to properly administer and settle the estate. However, determining what is "proper" under the circumstances is often not intuitive and, as a result, the fiduciary must seek out probate court instruction.
When an estate includes volatile investments which can be easily liquidated, such as marketable securities, the fiduciary must act quickly to liquidate those assets in order to preserve and conserve the estate value and to avoid being held liable for a solvent estate becoming insolvent.(fn 1 ) Since estate assets currently receive a step-up in basis at death, for capital gain tax purposes, there is no capital gain tax reason not to liquidate.(fn2 ) While real estate and closely held businesses may also need to be sold to pay estate debts, it is not always easy to sell such assets, particularly in a down market.
A. Solvent Estates
In the ordinary course of administering a solvent estate, the fiduciary (whether an executor, administrator or personal representative) focuses his attention on collecting estate assets and paying debts, without regard to priority of claims or the order of payment. No one complains because all estate creditors are paid and there are sufficient assets remaining for distribution to the estate beneficiaries. In a rapidly declining market, however, the fiduciary must be especially careful to collect assets and pay debts in accordance with state law. If he does not, the fiduciary could be held personally liable to the creditors and/or the heirs of the estate.
R.S.A. 554:19 sets forth the priority in which estate debts and expenses must be paid by the fiduciary:
I. The just expenses of administration (including taxes, legal, appraisal, accounting and fiduciary fees);
II. The necessary expenses of the funeral and burial of the deceased;
III. The reasonable allowance to the surviving spouse, if any;
IV. The just debts owed by the deceased, including the necessary expenses for the decedent's last illness;
V. The support of the deceased's minor children until age 18;
VI. The total amount paid for old age assistance and disability assistance and, under certain circumstances, charges pursuant to R.S.A. 166:19.
VII. The legacies given by the will of the deceased
The fiduciary has a duty to pay the "just debts owed by the deceased" under R.S.A. 554:19, IV. These are debts owed by the decedent at the time of the decedent's death and include any real estate taxes assessed as of April 1st of a decedent who dies later in that tax year.(fn 3 ) If a fiduciary fails to pay such debts, the failure is a breach of a condition of his fiduciary bond and the unpaid creditor could recover on the bond.(fn 4 )
Coming after the support of minor children, but before the payment of legacies on the priority list, are amounts "paid for old age assistance or aid to the permanently and totally disabled and, under certain circumstances, charges pursuant to R.S.A. 166:19."(fn 5 )
R.S.A. 166:19 provides that "[a]ny county furnishing any assistance to any person within 6 years preceding his death, shall be entitled to recover from the estate of such person the sum or sums paid out for such assistance, the same to be a preferred claim against his estate, after the payment of his funeral charges, expense of last sickness and expenses of administration, provided he leaves no widow or minor children living at his decease." This topic (the ever changing methods by which the state and counties pursue estates of decedents who have received government assistance) could be the subject of an entire Bar Journal article. It is noteworthy, however, that fiduciaries must be mindful of this category of creditors and should be advised to actively investigate whether the decedent received such government assistance prior to his death.
Despite his duty to pay debts, the fiduciary also has a duty to compromise creditor claims if it is reasonable to do so and beneficial to the estate.(fn 6 ) Accordingly, the fiduciary cannot blindly pay all creditor claims submitted to him. Rather, the fiduciary must carefully examine the accuracy and validity of such claims and, if appropriate under the circumstances, compromise and settle such claims. Prior court approval of a settlement may be requested but it is not always required.
For example, in Burtman v. Butman,(fn 7 )the New Hampshire Supreme Court held that where a fiduciary entered into a verbal settlement agreement with the decedent's surviving spouse who had elected against the decedent's will, the agreement was binding and enforceable even though the fiduciary did not obtain prior court approval of the agreement.(fn 8 )
If a fiduciary is also a creditor of the estate, however, he cannot compromise or settle his own claim against the estate without prior court approval.(fn 9 )
In some instances, as a result of a mistake or the failure of a creditor to pursue payment, some creditors may go unpaid. R.S.A. 556 governs the statutory time periods for suits by and against a fiduciary. The statute is intended to protect creditor rights while ensuring the efficient administration of probate estates.
R.S.A. 556:3 provides that a creditor's claim against an estate is barred unless the creditor files a notice of claim and demand with the fiduciary within six (6) months of the grant of administration.(fn 10 ) R.S.A. 556:5 provides that a creditor's claim is barred unless the creditor files suit against the estate within one...
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