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It's The Law: Beneficiaries Come Last

Question: I am a beneficiary under my dad's will, but he has a lot of debts. Do the debts have to get paid before I get my share?

Answer: In probate, expenses of administration and creditors of a decedent get paid first. The beneficiaries get what is left after the bills are paid. If your dad had an estate worth $100,000.00, but costs of administration and claims total $50,000.00, there would be only $50,000.00 for distribution to beneficiaries. If costs and claims are more than the value of the estate, the beneficiaries may get nothing. The only good news in that scenario is that the beneficiaries won't have to contribute anything, as it is only the assets of the decedent that are applied to pay the bills.

The person administering the probate estate, known as a personal representative, is not required to pay all bills. The personal representative is only required to pay creditors of the decedent who file timely claims. The personal representative must give actual notice of probate to all known creditors in addition to publishing notice in the newspaper.

A creditor claim is not enforceable unless it is filed in the probate case on or before the later of three months after the first publication of notice in the newspaper or thirty days after service of actual notice to the creditor. All claims are barred if not filed within two years after death of the decedent.

In some estates, the debts exceed assets. For those cases, Florida statutes establish priority for payment of claims. Payment of the highest priority class is made first and, if there is not enough money to pay all of the claims in a class, the claims in that class are paid in proportion to the respective claims.

The statutory classes, from highest priority to lowest, are as follows:

  1. Class 1: Costs and expenses of administration, personal representative fee and attorney's fees.
  2. Class 2: Funeral and burial expenses, not to exceed $6,000.00.
  3. Class 3: Debts and taxes with preference under federal law.
  4. Class 4: Medical and hospital expenses of the last 60 days of the last illness of the decedent.
  5. Class 5: Family allowance (temporary support for the decedent's spouse and family, not to exceed $18,000.00).
  6. Class 6: Arrearage from court ordered child support.
  7. Class 7: Debts acquired after death by continuation of the decedent's business, but only to the extent of assets of that business.
  8. Class 8: All other claims.

When there are enough assets to pay all of the claims, but not enough left to

make all of the distributions directed by the will to beneficiaries, Florida statutes

also establish the order in which distributions are abated. Distributions are reduced or eliminated in the following order:

  1. Property passing without direction under the will.
  2. Property left over after specific gifts have been made, commonly known as residuary.
  3. Property not specifically or demonstratively devised.
  4. Property specifically or demonstratively devised. A demonstrative devise is a bequest of a specific amount of money or quantity of property payable from a clearly identified source. A specific devise is a bequest of specific real property or a partial interest in real property.

These rules were recently applied to the detriment of Brian Wallace in the case of Lauritsen v. Wallace. In that case, Brian's fathers estate had only one asset, a ½ half interest in a note and mortgage from Brian. The father's will directed that the debt be forgiven. Several of the father's children challenged the will, which resulted in lengthy and expensive litigation. Several claims were also filed against the estate.

The appellate court ruled that the note could only be forgiven to the extent it is not needed to pay the estate's debts and expenses. It referenced Article I of the will, which instructed the personal representative to pay all of the father's debts and expenses. It also concluded that Florida's probate statutes provide that a devise cannot be elevated over administrative expenses and the rights of creditors.

Brian argued that another case was controlling. In the Whitley case, a different appellate court allowed cancelation of a debt, even though the estate lacked assets to pay all claims. However, the note in Whitley contained language which provided that the note would cancel upon the decedent's death. Because the note itself provided cancelation, the estate only took what interest in could accept under the note and that interest was nothing.

The difference in approach for debt forgiveness in the Wallace and Whitley cases emphasizes the importance of complete review and structure of estate plans by an experienced attorney. The current economic climate likely makes attorney advice in this area even more important. I recommend your father meet with an experienced estate planning attorney to maximize protection of family in the event of his death.

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