If your estate lacks liquidity when you die it may cause problems during the probate of your estate. Probate is the legal process that will follow your death. Probate serves several purposes, starting with identifying and securing assets owned by the decedent and ending with the distribution of remaining assets to the intended beneficiaries and/or heirs of the estate. In between, however, claims of the estate must be paid. The Hauppauge probate attorneys at the Law Offices of Kobrick & Moccia explain what happens if your estate lacks sufficient assets to pay all claims.
Understanding Estate Liquidity
Liquidity is a term used when referring to the value of an asset. In fact, you may have heard people refer to “liquid assets” before in conversation. A liquid asset is one that can easily be converted into cash. Obviously, cash held in a checking or savings account qualifies as a liquid asset. Other assets have varying degrees of liquidity, based on how easily and/or quickly they can be turned into cash. Your home, for example, is not a liquid asset because it may take months to turn the home’s value into cash. The amount of liquid assets included in your estate is often very important when it comes time to probate your estate.
How Insufficient Liquidity Impacts Creditor Claims
Once the probate process is underway, notice must be given to all creditors of the estate and those creditors must be allowed the opportunity to file claims against the estate. Creditor claims submitted to the court are reviewed by the Executor and approved or denied. Approved claims must then be paid out of the available estate assets. If the estate has sufficient cash, either from a financial account or another source, paying those claims is a fairly simple process; however, if the estate lacks sufficient liquid assets to cover all the approved claims and the taxes that are due, the Executor of the estate will be forced to make some tough, and likely unpopular, decisions.
The law requires valid creditor claims to be paid before other assets can be transferred out of the estate to beneficiaries. Therefore, the Executor must convert non-liquid assets into liquid assets to pay claims and/or taxes. Typically, that entails selling estate assets to raise the necessary funds. Inevitably, the need to sell estate assets creates controversy because it means selling tangible assets that may have sentimental meaning to the estate’s beneficiaries. The Executor might be forced to sell your children’s childhood home or a beloved collection of artwork. This puts your Executor in a very difficult position and is also certain to make your loved ones unhappy. One way to help your Executor is to use your Will or a Letter of Instruction to let your Executor know which assets you want to be sold if the need to sell assets arises.
What If the Value of Claims Exceeds the Value of Estate Assets?
Sometimes, the problem isn’t that the estate lacks sufficient liquid assets, but that the estate lacks sufficient assets altogether. When that happens, claims must be paid in order of priority set by law. In the State of New York, §1811 of the Surrogate’s Court Procedure Act governs the payment of debts during probate, reading in pertinent part as follows:
Every fiduciary must proceed with diligence to pay the debts of the decedent according to the following order:
- Debts entitled to a preference under the laws of the United States and the state of New York.
- Taxes assessed on property of the deceased previous to his death. Any taxes so paid by a fiduciary on real property which descends to a distributee or passes to a devisee shall be a charge thereon for which the beneficiary must reimburse the estate unless in the case of wills the testator has indicated expressly or by necessary implication that such taxes be otherwise paid.
- Judgments docketed and decrees entered against the decedent according to the priority thereof respectively.
- All recognizances, bonds, sealed instruments, notes, bills and unliquidated demands and accounts.
Contact Hauppauge Probate Attorneys
Please feel free to download our FREE estate planning worksheet. If you have additional questions or concerns about the payment of claims during probate, or ensuring that your estate doesn’t lack sufficient assets to pay claims, contact the Hauppauge probate attorneys at the Law Offices of Kobrick & Moccia by calling 800-295-1917 to schedule your appointment.