As the executor, it is imperative to know of your responsibilities for paying estate claims and expenses. Tennessee law states that certain “classes” of expenses and claims must be paid in a specific order. Specifically, all claims or expenses against the estate of a deceased person shall be divided into these classifications, in order or priority: 1) costs of administration; 2) reasonable funeral expenses; 3) taxes and assessments; and 4) all other timely-filed creditor claims.
These claims and expenses are paid by the executor in the order in which they are classified. No claim or expense of one class may be paid until the claims of all prior classes are satisfied, and if there are not enough assets to pay for that entire class, then the claims in that class shall be paid pro rata. The executor must hold aside enough funds to pay each claim with interest, until it is determined whether the claim is to be paid, or until an unmatured claim has reached maturity. The executor must also hold aside enough assets to meet the expenses of any pending litigation and costs of court and any unpaid taxes.
Determining what the decedent owes in federal and state taxes can be daunting. The executor may have to file the final personal income tax return (IRS Form 1040) for the decedent’s last year of life. And the executor may have to file an estate income tax return (IRS Form 1041) to cover income of the estate from the decedent’s date-of-death to final distribution. For large estates, the executor may need to file an estate tax return (IRS Form 706). Unless the executor is experienced with tax preparation, a knowledgeable accountant can be essential to completing these tax filing requirements.
After paying the administration expenses, funeral expenses, and taxes, the executor must consider all other claims and expenses. Once a person dies, a creditor of that person must file a claim with the probate court against the decedent’s estate to receive payment. Practically speaking, however, certain expenses should be paid even without the creditor filing a claim with the court, because the claim amount is small (under $1,000) or because payment of the claim or expense is essential to maintaining the estate assets (e.g. certain utilities). Additionally, certain properly-filed creditor claims may be objected to on various grounds, and if the objection succeeds, the estate may not have to pay those claims.
Determining the taxes owed, which expenses to pay, which expenses not to pay without a properly filed creditor claim, and which creditor claims to object to can be difficult. An experienced probate attorney can add significant value by advising the executor on the claims process, helping maximize estate assets, and protecting the executor from liability.