Insolvent estates can be tricky. In most cases, you shouldn’t open an insolvent estate. At the end of the day, all of the assets will end up with the creditors. The attorney will get paid and the personal representative may be entitled to a reasonable fee, but the decedent’s heirs or beneficiaries will not receive the assets.
But what happens if you do not know that the estate is insolvent? It is not uncommon to open an estate expecting only blue skies ahead, only to find that unexpected creditor claims exceed the value of the estate.
The answer depends in large part on the laws of your state. Many states don’t have an “early out” process that would allow you to prematurely terminate the estate proceeding. This is especially true in states that don’t provide an option for independent administration (administration without court supervision). The courts treat the personal representative as an officer of the court, with full duties to see the estate through to the end.
In most situations, the best bet is to immediately take whatever steps are necessary to close the estate. For example, under Illinois law, you would need to take the following steps to close the estate:
- Put together a list of the estate assets and their value.
- Put together a list of the creditors of the estate and the amount of the debts. (Note: Some creditors have priority over others, so be sure to categorize them by priority.)
- Prepare the final report required to close the estate. The final report should include a plan for payment of the estate debts and a representation that “all administration expenses and other liabilities of the estate have been paid and that administration has been completed, or to the extent not completed has been provided for as specified in the report.”
- File the final report with the court, then set a hearing for closing the estate. Be sure to leave at least 42 days between the date of that the final report is filed and the date of the hearing.
- Notify creditors and interested parties. A copy of the final report should be mailed to each creditor and each heir or legatee that was named in the original petition. You should mail the notice within 14 days of filing the final report. This is necessary to give all interested parties an opportunity to object to the final report.
- Attend the hearing. If all goes well, no one will object and the judge will close the estate. Otherwise you will need to sort it out before the estate can be closed.
The order closing the estate will authorize you to take whatever steps necessary to zero out the account. Creditors are paid in order of priority (with your attorneys’ fees and other administrative expenses coming off the top). Creditors of lower priority receive pennies on the dollar for their claims.
Some states allow you to pay creditor claims before the judge issues an order closing the estate and approving the creditor payments. The rationale is that, once the judge closes the estate, the personal representative doesn’t really have the power to act on behalf of the state (including paying the creditors). On the other hand, paying the creditors without prior court approval could open the personal representative up to liability if it turns out that the claims were improper.
In this situation, it is usually best to obtain an order that approves the payment of the expenses and conditions the final closing of the estate upon the personal representative’s completion of the acts anticipated by the order. In other words, the order might provide that the estate will be closed (and the personal representative discharged) only after all acts required by the order have been taken. Once all appropriate steps have been taken, the personal representative may file a statement of compliance or similar document just to finalize things with the court.