Every estate is different from the next. Estates consist of all of the property that belongs to a deceased individual. In addition to having responsibility for the assets owned by the decedent, estates also assume their financial obligations.
In some cases, personal representatives reviewing financial records quickly come to the uncomfortable realization that the estate is likely insolvent. They may then need to proceed with caution to protect themselves from personal liability.
What is an insolvent estate?
An insolvent estate is an estate that has more financial obligations than resources. The combination of personal debts, unpaid taxes and possibly Medicaid estate recovery efforts may amount to more than the total value of the assets in the estate. When an estate is insolvent, personal representatives must take care to ensure they manage financial matters carefully to minimize their liability.
What are the risks of handling an insolvent estate?
Personal representatives may face liability in cases where they mismanage estate resources. Typically, that means making distributions to beneficiaries when creditors have not received payment in full. Unpaid creditors could hold a personal representative accountable for the improper distribution of assets.
Creditors can also take action against personal representatives who fail to send direct notice or publish notice for unknown creditors. Paying creditors in the wrong order of priority could also lead to legal exposure for a personal representative.
Finally, the failure to properly manage estate resources could lead to liability. If a personal representative makes mistakes that diminish the value of the estate, such as selling assets for less than their fair market value, that could expose them to liability during the administration of an insolvent estate.
Thankfully, even insolvent estates often have enough resources to cover the cost of securing legal representation. Hiring an estate administration lawyer can help a personal representative protect themselves and limit their exposure when administering an insolvent estate. Appropriate support and guidance can reduce the likelihood of personal representatives making mistakes that have legal and financial consequences.