When a person dies, the affairs of his estate must be wrapped up or administered. This process is called estate administration.
The person who administers an estate is called the executor, if the person died with a Will, or an administrator, if the person who died did not have a Will. The executor of an estate has several major duties—he must submit the Will to probate, gather up the assets of the estate, pay all the debts of the estate, file the appropriate tax returns, account to the beneficiaries of the estate, and distribute the assets of the estate to the beneficiaries of the estate.
Sometimes an estate has insufficient assets with which to pay all the debts of the decedent. An estate with insufficient assets to pay its debts is said to be insolvent.
When an estate is insolvent, the executor must file an action in court to have the estate declared insolvent. So, if you are named as the executor of an estate and if the estate has insufficient assets with which to pay its debts, then one of the first questions you might want to ask yourself is, Do you want to become the executor of the estate?
Handling an insolvent estate can be quite tricky. As stated, you have to file an insolvency action. The creditors of the estate will be contacting you and will be demanding payment. You might try and negotiate with the creditors in order to reduce the debt. In the end, though, some creditors might not get paid and the creditor might not understand why they aren’t being paid in full.
Even if you are named as executor in a Will, you do not have to accept the role of executor. The nomination in the Will is simply that, a nomination. You would not officially become the executor of the estate until such time as you submit the Will to probate before the appropriate surrogate of the county in which the decedent died domiciled and qualified as executor before the surrogate, which entails signing a few forms.
Until you are officially appointed as the executor of the estate, you are not the executor, so you have no duties or obligations to the estate. On the other hand, once you qualify, you are the executor and you must faithfully performs the duties and obligation of the executor. With an insolvent estate, that means paying the creditors in a certain manner.
If the decedent were married, you might ask yourself if the decedent’s surviving spouse is responsible for his debts. The answer is, she is to the extent that the debt is a necessity, such as a medical expense that the decedent incurred during his life. But the surviving spouse is only liable after the assets of the estate have been exhausted. To that end, you are back to filing an insolvency action and paying those debts that you can pay with the assets of the estate.
An insolvency action is filed in the Superior Court of New Jersey. You file the action no sooner than nine months after the death of the decedent, because creditors have nine months after the death to present their claims to the executor. The action is filed with an accounting.
There is a certain order in which debts must be paid. For instance, funeral expenses and expenses associated with the administration of the estate are paid first and second. Debts with the same priority are paid proportionately if there are insufficient assets to pay all the debts within the same debt class.
At some point in time, a debt might not be paid at all or it may only get paid in part. The court will enter an order approving a payment plan that the executor submits to the court. Once the court approves the payment plan, the executor can pay the creditors in the manner that the court has directed. No other payments from the estate will be made, and the executor will released from any liability for not paying a debt of the estate.
Insolvent assets can be much harder to manage than solvent ones. If you think an estate might have insufficient assets with which to pay its debts, you might want to think twice before qualifying as executor.