It is possible for executors to be liable for estate debts, but it is rare.
Executors are only liable for estate debts if they:
- Commit criminal acts such as fraud, hiding estate funds, or purposeful negligence
- Make an egregious mistake with the estate accounting and/or distributions
The former is something you deserve to get caught doing, so needless to say we won’t be giving you advice on that front. For the rest of you who are afraid of making mistakes, know that it is very hard to screw up the estate settlement process so badly you open yourself up to life-altering debt. There are many people involved, including the probate judge who will help you get through probate — even if with a sometimes forceful hand.
That doesn’t mean it’s impossible, and that doesn’t mean you shouldn’t take precautions, but just know that if you act in good faith and follow the instructions, you’ll be just fine.
That being said, let’s talk a bit more about scenarios when executors could be on the hook.
Scenario #1: When an executor fails, neglects, or abuses their duties
If an executor isn’t taking any action, refusing to give certain beneficiaries their rightful inheritance, or purposely underselling probate assets to make a dime, then the probate court can take action. This can be in the form of fines or criminal charges.
If an executor’s neglect leads to increased debts and liability on the behalf of the estate, the probate judge could place that burden directly on the executor instead of allowing the estate to pay off that additional debt. Imagine a situation where an executor didn’t pay any mortgage payments for 6 months and a bank repossessed a house, leaving the beneficiaries without that asset. In this case, a probate judge may force the executor to pay the beneficiaries the estimated value of the home.
Executors can also be sued for:
- Taking too long to resolve an estate
- Making egregious decisions with regard to the estate’s assets
- Not following what the will says
- Lying to beneficiaries to pocket more cash from the estate
- Any other illegal actions
For example, let’s say out of spite or to make some cash on a kickback, an executor sells a piece of real estate for 50% of its real value to a friend of a friend, decimating the funds meant to be given to beneficiaries.
If the beneficiaries can prove that abuse in court, the executor could be liable for the legal damages, owe the difference between what the asset was sold for and the fair market value, and potentially be charged for the whole mess.
How to Prevent Liability: Step down as executor if you feel like you cannot handle the responsibility.
Scenario #2: When executors distribute inheritances too early
If an executor distributes assets to beneficiaries too early, as in before all debts and taxes are paid, and then realizes that they need to get that money back to pay those debts, they could be liable for those tax and debt burdens — especially if beneficiaries refuse to give the money back.
How to Prevent Liability: File notice to creditors early and triple-check all taxes and debts are paid before distributing any inheritances.
Scenario #3 - Solvent Estates and Missing Creditors
Solvent estates are estates that have enough assets to cover all outstanding debts and taxes after the person passes away. So if they owed $175k and you have $430k in probate assets, the estate is considered solvent.
Executors have to pay off debts and taxes before distributing anything to beneficiaries. While state order of payments differ, inheritances are always distributed last.
If an executor distributes inheritances and accidentally leaves out a valid creditor, and then that creditor appears to claim a debt, then the executor could be liable for that debt — even if it was completely by accident.
That’s why filing notice to creditors is so important. It sets a clock for how long creditors have to reach out about a debt. If they don’t contact the executor before the clock runs out (usually 2-4 months and varies by state), then that debt is forfeit and you don’t have anything to worry about.
More on filing notice to creditors correctly: 6 Steps to Filing Notice to Creditors
How to Prevent Liability: File notice to creditors as soon as you are able
Scenario #4 - Insolvent Estates and Incorrect Payments
Another case of potential liability is if you are managing an insolvent estate, a.k.a. an estate that does not have enough money to cover all taxes and debts. If this is the case, beneficiaries will not be receiving any inheritances unless a particular asset or fund passed outside of probate, or was considered a non-probate asset.
The risk with insolvent estates is paying off debts and taxes in the wrong order. For example, in some states medical debt may get higher priority than credit card debt. So if you pay off credit card debt and run out of money for medical debt, you could be liable.
Insolvent estates are really tricky. If you are settling an insolvent estate with a complex debt structure, you should hire a probate attorney and/or accountant. It’s not worth the trouble not to. At the very least, consult with some so you can get a professional read on your situation.
How to Prevent Liability: File notice to creditors early, hire a probate attorney, and pay close attention to the order of distributions in the relevant jurisdiction.
Tips for Reducing Your Risk of Liability
Here are a few other tips on making sure you aren’t on the hook as the executor.
- Avoid or abridge probate if possible
- If you ever feel over your head, consult or hire a probate attorney
- Never distribute inheritances early
- If the estate is insolvent, get help
- File notice to creditors as early as possible and set a date in the calendar when you know you are able to move forward
- Conduct all business through an estate account
- Track all executor expenses and use thorough documentation
Half of the battle of being an executor is knowing what to do and when
Once you have the understanding of the general estate settlement process and a list of executor duties/responsibilities, all you have to do is check the next thing off your list. Having this north star during estate settlement reduces the chances of you being liable for estate debts and makes the whole process feel much simpler.
Here’s one of our favorite places to get that list and understanding: Executors of an Estate: What They Do How to Succeed
