A Personal Representative (“P.R.”) is charged with marshalling the assets of an estate, paying debts and costs, and making distributions to heirs and devisees. Debts and costs include costs such as legal and filing fees, funeral expenses, taxes and debts with preferences under federal and state law, medical and hospital expenses of the last illness, debts due to the Division of Medical Assistance (i.e. MassHealth), and other creditors’ claims (e.g. credit card debt, outstanding checks). Moreover, the P.R. must consider the estate’s exempt property and family allowances payable out of estate assets when planning to pay debts and costs.
It may occur, then, that the estate is insufficient to pay the debts and costs known to the P.R. How is the P.R. to make payments to any single creditor without prejudicing the others? How can the P.R. protect herself from incurring personal liability for a wrongful payment?
In Massachusetts, when a P.R. realizes the estate “will probably be insufficient for the payment of” the decedent’s debts, the P.R. must “represent the estate to be insolvent to the court.” MUPC § 3-807(b). In some senses, a Representation of Insolvency proceeding is similar to bankruptcy. The P.R. must give notice to all interested parties of the insolvency and, after a hearing at which all interested parties may attend, the Court will enter a Decree and Order of Insolvency instructing the P.R. to divide and pay the estate’s remaining assets to creditors “who prove their debts” in a specific order of priority. If a creditor does not attend the hearing and proper notice was given by the P.R., that creditor’s claim may be disallowed by the Court. Pending actions brought against the estate by creditors may be stayed until a determination of insolvency is made.
Where a P.R. complies with a Decree and Order of Insolvency, the P.R. is generally protected from further liability to creditors (there are limited exceptions, such as where it is later discovered that the estate did in fact have sufficient assets to pay all debts). However, the P.R. should consider seeking an Order of Complete Settlement, including an allowance of a Final Account, when closing the estate for the greatest protection possible under the MUPC.
It should be noted that, where a P.R. begins payment of debts six months after the date of death and thereafter learns of a claim that would render the estate insolvent, the P.R. is not required to represent the estate insolvent. See, MUPC § 3-807(c). Rather, the P.R. may simply pay up to the amount of remaining assets without worry of personal liability. However, if presented with multiple claims at this point, the P.R. may nevertheless wish to have the Court’s instruction on how to handle the claims by filing a Representation of Insolvency.
Payment of claims and expenses by a P.R. can be complicated and risky, particularly where the total amount of claims approaches the full amount of the estate. If you are a P.R. or heir of an estate with concerns about insolvency or payment of claims, please give us a call today.