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Insolvent estates happen and are full of minefields for all involved:

When faced with such an estate, the advisor should meet with the executor and together they should set out a plan for success. The plan should include a beginning inventory of assets and liabilities and a strategy for locating other assets and liabilities. A frank discussion should be held with the executor regarding the challenges ahead and the possibility that expenses of administration may take a backseat to certain creditors. Also, the advisor should consider strategies discussed below to keep the executor on track.

Determine the Priority of Claims

As with any estate administration, the executor has a duty to pay claims properly made against the estate. State statutes generally provide the executor with priority classes if the estate’s assets are insufficient to pay all claims. The Uniform Probate Code, on which many states model their priority statutes, provides for six classes in the following order:

  1. Costs and expenses of administration.
  2. Reasonable funeral expenses.
  3. Debts and taxes with preference under federal law.
  4. Reasonable and necessary medical and hospital expenses of the last illness of the decedent, including compensation of persons attending him.
  5. Debts and taxes with preference under other laws of the state.
  6. All other claims.

A practitioner advising an executor on an insolvent estate should frequently consult the priority statutes. Many variations can be found state to state. For example, in California, the highest priority is given to expenses of administration, except for state and federal taxes that may be given higher preference. In Georgia, a form of elective share for the spouse and minor children called a “Year’s Support” holds the highest priority, and no distinction is made between the priority of state and federal taxes. In Illinois, debts to the federal government sit three rungs on the priority ladder above state government debts.

Negotiate With Creditors

Generally, creditors are willing to negotiate. The old saying, “a bird in the hand is worth two in the bush” is accurate when it comes to the wants of creditors. Creditors are aware that administration of insolvent estates are slow and the outcome for them can be uncertain. Of course, in negotiating with creditors, the executor should always accurately represent the current state and future outlook of the administration.  Furthermore, practitioners should be responsive to calls from creditors for updates. If a settlement is negotiated, the executor should obtain a receipt and release from the creditor and once again make sure that even a negotiated payment doesn’t violate the statutory order of priorities.

Source (see for more on protecting executor): Insolvent Estates of Wealthy Decedents

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