Probate is the process of settling a decedent's estate under court supervision. State law may establish an informal probate process for small estates. The executor named in a person's will -- who may be called a personal representative in some states, or an administrator if court-appointed -- must gather and preserve the estate assets and then pay the decedent's debts and taxes before distributing any remaining assets of the estate to the beneficiaries, once the creditors are paid.
Notice and Administration
Once the probate process has been started and executor acknowledged, or administrator appointed by the court, the executor must begin to gather and preserve the estate assets. He must also notify creditors and beneficiaries. State law may require that the executor publish a notice to creditors in the legal notices section of the local paper; she must also diligently look for and contact all known creditors such, as credit card companies and other entities that are owed money by the decedent. The costs and expenses of administering the estate are usually the first priority to pay out of the estate's assets. This would include reasonable compensation for the executor, as well as payment to any attorneys, appraisers and accountants that the executor hired to help with the management of the estate.
Although state laws vary regarding identifying the order of priority in which estate debts must be paid, typically, the executor must pay the decedent's burial and funeral costs after the expenses of estate administration. Any homestead exemption or family allowance amounts that are exempted by state law are then removed from the pool of assets available to other creditors, although these amounts may be far less than any bequests the deceased person left to his family in his will. Paying the medical bills for the decedent's last illness, or for his hospitalization or hospice care, is usually the next payment priority, although taxes given priority by federal law may need to be paid ahead of these bills for a last illness.
Taxes and Creditors
The executor must file the decedent's last tax return and make any tax payments due -- and on large estates -- the executor must also file state and federal inheritance as well as estate tax returns with payment. The probate court may not allow the executor to access the estate assets for other payments until approval is received from state tax agencies. If the estate has enough assets to pay all taxes and outstanding bills, the executor may have to exercise her judgment to determine which estate assets to draw from to make those payments. The executor is usually authorized to make those decisions, including selling estate assets, such as real estate or jewelry, without probate court approval. Creditors are not permitted to cut side deals with people who owe money to the estate, but all estate assets and debts must be dealt with in the probate process.
Beneficiaries only receive their bequests after the estate debts have been paid. If there are not enough assets in the estate to pay all the creditors, the beneficiaries will receive nothing, unless state law permits payment of a family allowance ahead of the creditors. The probate court may oversee administration of an insolvent estate, or the executor may need to file a special estate insolvency action in a different state court, depending on state law. The court will direct the executor as to the priority for payment of creditors, handling the estate in a manner similar to a bankruptcy proceeding. This process helps relieve the executor of personal liability for failing to pay creditors in full.