Estate, Powers and Trusts, § 12-1.2: Order of Liability; Preferences

When you pass away the property that you leave is referred to as your estate. The assets in your estate will be distributed by your executor to your beneficiaries according to your will, or if you do not leave a will, your property will go to your legal heirs based on New York’s rules of intestate succession. However, there are several activities that your estate administrator must complete before distributing assets, including paying the debts of your estate. While estate debts are typically paid prior to asset distribution, there are occasions when a creditor is not paid prior to asset distribution. As a result, the creditor may attempt to collect the debt from the distributees. Distributees are the beneficiaries or heirs who received property from an estate. Under Estate, Powers and Trusts, § 12-1.2- Order of liability; preferences, there is a specific order to which distributees will be held liable for estate debts. To learn more about your liability with respect to debt owed by a deceased loved one, contact an experienced New York estate litigation lawyer.

Typically before a decedent’s assets are distributed during probate or estate administration, the liabilities of the decedent’s estate must be paid. Only after those bills are paid is the executor permitted to distribute the remaining assets in the estate to the beneficiaries. For example, before beneficiaries can be paid, the decedent’s funeral expenses must paid. Examples of other bills that have to be paid include:

• Costs associated with the administering of the estate such as hiring professionals and the executor’s fees
• Taxes for which the estate is liable, including federal, state, and estate taxes
• Other debts of the estate, including debts owed by the decedent at the time of death as well as other claims filed against the estate. The executor or estate administrator is only required to pay valid claims

Under § 12-1.1 of New York Estate, Power and Trust law, if the assets of the estate are distributed prior to those bills being, those who received distributions are liable for paying those bills. However, as a New York estate litigation lawyer will explain, distributees are not personally liable. A creditor would only be entitled to assets receive by the distributee from the estate.

In addition, under Estate, Powers and Trusts, § 12-1.2- Order of liability; preferences, there is an order of liability that describes which distributees must pay debts before others. Distributees are liable first. This means that distributees must use all or a portion of their distributions before residuary beneficiaries, general beneficiaries, specific beneficiaries, and the surviving spouse. The order after distributee the order of liability is:

• Residuary beneficiaries. A residuary beneficiary is a distributee who receives estate property that is not specifically left to a designated beneficiary. In other words, it is the property that a testator does not leave to a specific beneficiary in his (or her) will. It is the property that is left over.
• General beneficiaries
• Specific beneficiaries
• Surviving spouse

Under New York law, in order to collect from an estate, a creditor must file acclaim within 7 months from the date that the Surrogate’s Court judge issues letters to the executor. “Letters” is the document issued by the Surrogate’s Court giving the executor or estate administrator the legal authority to take control of the decedent’s estate. If a creditor fails to file a claim within the 7 month period, the executor is not liable to the creditor. In addition, creditor claims against an estate must be presented in a particular way. Claims must be in writing, must contain details explaining and supporting the debt, and must be mention the amount of the debt. Furthermore, the claim must be sent the executor.

If a claim is not properly filed and assets are distributed, the creditor does not have recourse against the executor. Instead, the creditor has the right to try to collect from the distributees. Collecting from a distributee is tricky and a creditor should not attempt to do so without first contacting an experienced estate litigation attorney in New York. There are several restrictions related to trying to collect from a distributee. For example, a creditor cannot hold the distributee personally liable and attempt to seize assets other than assets that were from the decedent’s estate.

1. Liability of distributes and testamentary beneficiaries: Estates, Powers and Trusts, § 12-1.1
2. Action may be joint or several: Estates, Powers and Trusts, § 12-2.2

(a) Distributees and testamentary beneficiaries are liable, as provided in 12-1.1, in the following order:

(1) Distributees.

(2) Residuary beneficiaries.

(3) General beneficiaries.  Demonstrative beneficiaries shall be treated as general beneficiaries, to the extent that the property or fund charged with a demonstrative disposition has adeemed.

(4) Specific beneficiaries.  Demonstrative beneficiaries shall be treated as specific beneficiaries if the property or fund charged with any demonstrative disposition has not adeemed, to the extent of the value of such property or fund.

(5) A surviving spouse to whom a disposition has been made which qualifies for the estate tax marital deduction.

(b) The order of liability provided in paragraph (a) shall not apply to the liability for an estate or other death tax, under the law of this state or of any other jurisdiction, with respect to any property required to be included in the gross tax estate of a decedent under the provisions of any such law.  The apportionment of such estate or other death tax, and the liability, under 12-1.1, of distributees and testamentary beneficiaries consequent to such apportionment are governed by the provisions of 2-1.8.

(c) The express or implied intention of the testator to prefer certain beneficiaries shall be effective to vary the order of liability prescribed by paragraph (a).

(d) If, in an action under this article, it is established to the satisfaction of the court that:

(1) The defendant is liable for the payment of two or more claims, preference in the payment of such claims must be given in the order prescribed by law for payment of the debts of the decedent and the obligations of his estate.

(2) An unsatisfied claim exists which is legally preferred to that of the plaintiff, the existence of such unsatisfied claim is a defense to the action if the aggregate value of the decedent's property passing to defendant and other persons in his order of liability does not exceed the amount of such unsatisfied claim;  if in excess of the amount of such unsatisfied claim, the plaintiff may recover such ratable share of the excess as the amount of his claim bears to the claims of all persons in the same order of preference as his.

If there are creditors who are still owed money from a decedent after the decedent’s estate has been distributed, the creditors have the right to try to collect the debt from estate distributees. If you are concerned about liability related to the estate of a deceased loved one, contact an experienced estate litigation attorney serving New York at the Law Offices of Stephen Bilkis & Associates. We have the experience, knowledge, and resources to ensure that your legal rights are protected. Contact us at 800-696-9529 to schedule a free, no obligation consultation regarding your case. We represent clients in the following locations: Nassau County, Bronx, Brooklyn, Manhattan, Queens, Staten Island, Long Island, Suffolk County and Westchester County.