What Happens If Estate Doesn’t Have Enough Money to Pay Creditors in Washington State?
If an estate doesn’t have enough liquid funds to pay creditors, then estate assets must be liquidated, claims must be ranked by priority level, and assets “abated.” Abatement is the reduction in gifts to beneficiaries to pay estate claims. Certain assets are not subject to abatement. These issues are discussed in more detail below.
Ranking Creditor Claims
Under Washington law, if an estate does not have enough assets that may be liquidated to pay all creditor claims in total, then claims against the estate must be paid in the following order (per RCW 11.76.110):
Expenses incurred in administering the estate;
Expenses related to the decedents’ last sickness;
Wages for labor performed within 60 days immediately before the death of decedent;
Debts that otherwise have preference under federal law;
Taxes and other debts owed to Washington state;
Judgment liens and mortgages; then
All other claims against the estate.
These categories reflect “classes” of claims. If there is not enough money to pay off an entire class in full, then creditors in such class receive a pro-rata distribution based on the amount of their claim. No lower class of claims can get payment until a higher priority class gets paid in full.
Example 1: An estate had enough assets to pay all classes except the final class relating to “all other debts.” Decedent’s estate had $10,000 remaining towards decedent’s creditor card debt of $100,000 (various credit card accounts). If one credit card company possessed a $50,000 claim. Then such creditor would receive $5,000 of the $10,000 distribution to that class since its claim represented 50% of the entire class.
Abatement of Inheritances
Abatement is the procedure whereby inheritances are reduced in order to pay claims against the estate. In Washington state, unless a person’s will provides for a different order of abatement, abatement occurs in the following order, without preference to whether the asset is real property or personal property:
Intestate property is property that is not covered by decedent’s Will. Residuary property (also known as the residue of the estate), is property that is covered by a Will but is not specifically mentioned in the Will. General gifts are those of a certain quantity of an asset. Specific gifts are gifts of an identifiable asset.
Example 2: A’s Will provides that A gives $10,000 to his sister, his baseball card collection to his brother, with the residue to his children in equal shares. The $10,000 is a general gift. The baseball card collection is a specific gift. If abatement occurs, first the residue, then the gift of $10,000 to the sister, followed by the gift of the baseball card collection would get used to satisfy creditor claims.
Liability of Beneficiary of Nonprobate Assets For Estate Claims
A nonprobate asset may be used to satisfy estate claims, estate taxes or expenses of administration only to the extent that such asset could be used to satisfy decedent’s debt during decedent’s lifetime. Certain nonprobate assets, such as IRA’s or ERISA retirement accounts are exempt from creditor claims and, therefore, cannot be used to satisfy an individual’s debt during his/her lifetime.
With respect to the order of abatement of assets, the nonprobate asset is generally treated as a specific gift. The following are limited examples of nonprobate assets that may be applied towards payment of estate claims, estate taxes or expenses of administration:
Property passing under a community property agreement;
Property held as joint tenancy with right of survivorship;
Payable on death accounts, bonds, or securities;
Property titled as transfer on death deed;
Property held in trust where decedent that decedent benefited from during decedent’s life; and
Community property may be subject to claims of estate creditors to the same extent if such property passed.
Washington law defines nonprobate assets as those that pass by written instrument other than a Will (e.g., beneficiary designation form). Certain assets that seem to fit this definition are excluded from the category by statute so that the beneficiary will not lose such asset to abatement for satisfaction of creditor claims, estate taxes and/or expenses of administration. These assets include payable on death proceeds from life insurance, an annuity, or employee benefit plan. RCW 11.02.005(10).
Attorney, Chris Chicoine
Washington Estate Planning and Probate
Christopher R. Chicoine, PLLC