Posted by Bishop L. Toups | In Estate Planning
The Personal Representative owes a duty to the estate beneficiaries and the creditors of the decedent’s estate. The Personal Representative should diligently search to locate any valid debts the Decedent might have had. The easiest way to do this is to check the Decedent’s mail, email (if possible), and bank statements for regular withdrawals.
Once you have a general idea of the estate’s creditors, it’s helpful to categorize the debts into two categories: secured and unsecured debt. Secured debt is secured by one of the decedent’s assets (e.g., the home). Unsecured debt is where the debt is not secured by one of the decedent’s assets (e.g., credit cards). We typically advise clients to pay any creditors related to the home, such as property taxes, insurance, utilities, HOA fees, etc.
For all other creditors, we recommend that the Personal Representative hold off on reimbursing these creditors until the probate is established and we file a notice to creditors with a local newspaper. It happens when there are so many creditors that the estate becomes insolvent. That’s why it’s vital not to pay creditor claims at the beginning before knowing who all of the creditors are since creditors must be paid in a particular order when the estate is insolvent. The Personal Representative could face liability for paying some creditor claims before others.
Example: there is $10,000 remaining in Dominik’s estate. He has two creditors: the IRS, which is owed $15,000, and the local hospital, which is owed. Dominik’s personal representative decides to pay the local hospital the entire $10,000.
Result: the personal representative made a grave mistake as the IRS is a superior creditor to the local hospital under Florida Statute 733.707. The IRS should have received the entire $10,000, and the local hospital should have received $0. The personal representative may face liability for paying the wrong creditor claim.
Table of Contents
When the probate is opened, and the Court formally appoints the Personal Representative, the Personal Representative must file a notice to creditors with a local newspaper in the county where the decedent died. The local newspaper must publish the notice for two consecutive weeks to meet the statutory requirements. The notice is intended to notify any potential estate creditors that there is an open probate case—that way, it allows all creditors to file a claim within the probate estate.
Once the notice is filed, it starts a critical timeline within the probate process: the three-month creditor period. Creditors then have three months to file their creditor claim within the probate case; otherwise, their claim against the estate will be forever barred.
Example: a personal representative filed a notice to creditors on 7/1/2023. The three-month creditor period expired on October 1, 2023. An unknown creditor—Bank of America—filed a claim against the state for $55,000 on October 2, 2023. Since the claim was filed after the three-month creditor period, Bank of America’s claim will be barred.
The only exception to the three-month rule is for creditors that the personal representative should have known about due to the circumstances. For example, suppose the personal representative knows that the decedent’s car has a loan on it. In that case, the personal representative should reasonably expect the company holding the loan to be a known creditor. If a creditor is considered a known creditor, these creditors must be served with actual notice of the decedent’s death, the existence of the estate, and the nature of the claims period. Once the known creditor is served with actual notice, they have thirty days to file their claim with the court, or their claim is forever barred.
Example: George’s father died with many thousands in debt due to hospital bills. None of the creditors had filed a claim with the probate court. George served all of the creditors with formal notice ninety days after he published the notice to creditors. Only one of the creditors filed a claim within thirty days of receiving the formal notice.
Result: Only the creditor that filed a claim within thirty days will survive.
Florida has adopted a statute of repose that bars all probate claims filed more than two years after the decedent’s death. Whether a creditor was known or should have been notified doesn’t matter — once two years hit, all creditor claims are forever barred. The only exception to this two-year bar is for properly recorded mortgages or security interests.
Example: Alice died and was in a nursing home. Medicaid paid for the majority of her monthly bills for nearly three years. Alice’s estate now owes Medicaid more than $300,000. Alice’s beneficiaries did not open a probate for two years, and the creditor did not file a claim with the court.
Result: Alice’s $300,000 creditor claim will be eliminated due to the two-year rule.
Pro tip: if you believe that a decedent had a significant amount of creditors, it may be wise to wait two years after death to open the probate so that all creditor claims are barred.
If you’re unsure whether the decedent had any creditors, here are some helpful tips to consider:
Even though a creditor has filed a valid claim in Florida, it does not mean that the personal representative will need to pay the creditor claim. The personal representative can always object to a creditor claim filed in a Florida probate. Once the objection is made, the creditor must file an independent lawsuit against the estate within thirty days to enforce the creditor claim.
Example: Damien’s estate had five different creditor claims filed in the probate case totaling more than $200,000. Damien’s personal representative filed objections to all of the claims. None of the creditors filed an independent action against the estate.
Result: All creditor claims are barred since no creditors filed an independent lawsuit against the estate to enforce their claims.
The personal representative must pay all valid creditor claims within one year from the first date the notice to creditors was published. One of the biggest mistakes we see is when a personal representative pays creditor claims before knowing whether there are any other potential creditor claims. This is a mistake because Florida provides different classes of creditors that must be paid before other creditors. There can be severe consequences for the estate and personal representative if lower-priority creditor claims are settled before higher-priority creditor claims.
Here’s a breakdown of the different classes:
Class 1. Costs, administration expenses, and compensation of the personal representative and attorney’s fees.
Class 2. Reasonable funeral, internment, and grave marker expenses not to exceed $6,000.
Class 3. Debts, taxes, and claims in favor of the state for unpaid court costs, fees, or fines.
Class 4. Reasonable and necessary medical and hospital expenses of the last sixty days of the decedent.
Class 5. Family allowance.
Class 6. Court-ordered child support.
Class 7. Debts acquired after the death by the continuation of the decedent’s business.
Class 8. All other claims.
Creditors of one class must be paid in full before creditors of another class can be paid. If the estate assets are insufficient to pay one class of creditors, they are distributed to the creditors pro rata based on the value of their claims.
Example: A decedent died with $50,000 in assets. The decedent had $60,000 in valid creditor claims. One claim was $40,000 in hospital bills for the month before the decedent’s death. The other creditor claims are from three credit card companies totaling $20,000. Since the estate is insolvent, the personal representative must carefully distribute the estate assets.
Result: The hospital creditor claim for $40,000 is a Class 4 creditor. The credit card creditor claims are a Class 8 creditor. The hospital creditor will be paid in full for the $40,000 owed. The remaining $10,000 will be distributed to the credit card creditors in proportion to the amount of their claim.
IRS Bills? The Internal Revenue Service can wreak havoc on your life. This book has the information and strategies you need to confront America’s most intimidating agency.View on amazon
Create a business tax strategy that will save you time, energy and money. Getting your tax on track will free time to do what really counts - running a profitable business.View on amazon
Worried about escaping an audit intact? Then you need Surviving an IRS Tax Audit. This book explains what to say, what to do, even what to wear, so that a visit from the auditor doesn't turn into a disaster.View on amazon