When a person dies, the executor must use the estate assets to pay off the decedent's debts as well as any estate taxes prior to distributing property to the beneficiaries. Sometimes the decedent’s debts exceed the value of the estate’s cash assets. In those instances the executor is legally forced to sell other estate assets to make up the difference. However, the process of selling estate assets can be quite complex and can vary depending on the state where the decedent lived.
The executor is required to inventory the decedent's assets and debts and present his findings to the court. Each item in the estate must be listed at its fair market value as of the decedent's death. Examples of assets included in the probate estate include real estate property titled in the decedent's name and sole bank accounts. Next, the executor must list all of the decedent's and estate's outstanding debts, including the costs of managing the estate and the funeral expenses. If this process reveals that the estate's liabilities exceed its cash assets, the executor will be forced to sell other estate property.
Court Approval To Sell
Once an executor has established that estate's debts exceed the estate's available cash, he must file a petition with the supervising probate court asking for permission to sell estate property. The petition should include a copy of the estate inventory to demonstrate why the executor must sell the property. The executor should also include copies of appraisals of the estate property and specify in the petition how the property will be sold. Once the court reviews the petition, it will issue an order permitting the executor to sell the property.
Choosing Estate Assets to Sell
Once it has been determined that estate property needs to be sold, the next step is to determine which asset to sell. The executor does not decide which assets to sell; the will or state law will normally define which assets to sell to settle estate debts. If assets that were explicitly promised to identified beneficiaries in the will must be sold to settle the estate's debts, the gift to the beneficiary is abated. This means that the asset is sold and a portion of the proceeds are used to settle the estate's debt. Whatever remains from the asset sale goes to the beneficiary who was supposed to receive the sold item.
Read More: How to Close an Estate in Debt
Court Approval of Sale
Once the executor has found a buyer for estate property, he is generally required to petition the probate court to review the potential transaction. The hearing on the transaction generally takes place a month after the petition is filed. During that time the executor must advertise the property being sold, the current offering price and the date of the hearing. During the hearing, the court reviews the offer. If any other party wants to make a bid on the property, they can during the hearing. The court will authorize the sale to whoever enters the highest bid.
Priority of Claims
If the value of the estate's property is not enough to pay the estate's debts, the executor generally must petition the supervising court to recognize the estate as insolvent. Once the estate is declared insolvent, the executor sells the estate’s assets and pays off as much of the estate's debts as possible. Generally, estates are required to pay off the estate's debts in the following order: estate administration costs; reasonable funeral expenses; federal back taxes; reasonable medical expenses tied to decedent’s last illness; debts and taxes with preference under state law; followed by all other claims.
John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.