Posted By Larry Tolchinsky on February 3, 2016
When someone passes away in Florida, our probate laws work to protect that person’s property on behalf of their heirs, beneficiaries, and creditors. An “estate” is created and overseen by an administrator approved by a Probate Judge.
This administrator, or the “Personal Representative” (which most people recognize as an ‘executor’), has the job of making sure that every single asset is collected, protected, and inventoried. It doesn’t matter how big or how small: the decedent’s assets must all be located and protected for their distribution to the beneficiaries who are in line to inherit – or to creditors who are in line to be paid.
Some of these assets are easy to locate and transfer to the heirs. The cars, the furniture, the TVs, the real estate: these are easy to locate and list on the inventory.
However, for many probate estates, things can be tricky — they may have accounts receivable or debts owed to them. These are assets, too. And it’s the job of the Personal Representative to determine everything that is owed to the estate and make sure those debts are collected by the estate.
1. Variety of Debts Are Owed To A Decedent
Any debt owed to the decedent is an asset of his or her estate. If there is a handwritten I.O.U., then it’s an asset of the estate no matter how informal it might be. Written on a napkin, jotted down on a piece of notebook paper — if the Personal Representative determines it’s a valid debt, it’s included in the estate.
Other kinds of debts that may be owned by the estate include notes and accounts receivable. If the decedent ran an Etsy store, for instance, or worked for themselves refurbishing furniture or repairing cars, then they would have accounts receivable that the Personal Representative is required to inventory and collect. If there is a note for a car that the decedent sold to his nephew, then that counts as a debt to be collected by the Personal Representative, too.
2. Calculating The Exact Amount Owed to the Estate
The first step for the Personal Representative related to these debts is to determine the amount owed to the decedent at the time of the death (meaning, are there any outstanding payments due?). After reviewing the debt instrument, the Personal Representative calculates the amount due and owing and determines if there is a single amount due, or if there are periodic payments to be paid. If there is a payment schedule attached to the debt instrument, then the Personal Representative needs to keep track of that information.
Additionally, if there are any past due amounts, those have to be calculated along with any late charges that might apply. Some people may assume that if the person has passed away, then their debt has been canceled and they may stop making payments on their debt. However, a legally binding debt is not automatically “paid in full” when the debtor dies in most instances (meaning the debt survives the death of the note holder) which means the money still needs to be paid.
3. Notification to the Debtors
After the Personal Representative determines all of the outstanding debts owed to the decedent, then he or she must notify each of these debtors that the estate will be the new party responsible for collecting the payments. The name and current mailing address of each debtor will be collected and a formal written notice will be sent to each debtor informing them of the name of the new creditor to whom they should be making their payment.
Included with this notice should be confirmation of the decedent’s passing, and the date of death, as well as the formal demand by the estate that the debt be paid. The name and address of the Personal Representative should be included, as well as the Personal Representative’s itemization of the debt (amount owed, dates of payment, etc.).
4. Past Due Amounts at Time of Death
If there were debtors who were already behind in paying their debts to the decedent at the time of death, then the Personal Representative may have a duty to commence collection efforts. As a fiduciary to the beneficiaries as well as the estate’s creditors, the Personal Representative has the obligation to collect all monies due and owing the estate.
5. Accounting Principles Must Be Used for Debts Owed to the Estate
When the Personal Representative has completed all of his or her tasks in administering the estate, except for distributing the assets, then it’s time for the Final Accounting to be filed with the Probate Court. In the Final Accounting, the Personal Representative will list all the debts owed to the estate and how the payments made on those debts were tallied. The allocation of receivables may be either “principal” or “income.”
There are certain accounting principles that the Personal Representative must follow here. The failure of the Personal Representative to adhere to these accounting principles may be argued as a breach of her fiduciary duty; therefore, a prudent Personal Representative will work with an accountant or CPA (certified public accountant) to make sure that all their I’s are dotted and the T’s are crossed.
These allocation principles include:
1. If they were due, but not received or paid, before the death of the decedent they are to be considered as principal of the estate. Florida Statute 738.302(l).
2. If they didn’t have a due date, then they accrue from day to day before and after death. The amount accruing before the date of death is principal; after the date of death is income. Florida Statute 738.302(2).
3. If they were due after the date of death and they were paid, they are not prorated and are determined under normal principal and income accounting rules.
4. Any payments made on income-producing assets of the estate are considered income.
5. Net profit of any business that the decedent operated (sole proprietor or partnership) is considered income to the estate.
6. Corporate dividends payable before the date of death are principal; those payable after the date of death are income.
Obviously, the task of overseeing, collecting, and properly distributing the debts owed to the decedent at the time of death can be complicated for the Personal Representative. Moreover, how those debts are valued and accounted for in the estate may make a difference in the amount of inheritance received by a beneficiary; the answer a lot of times depends upon the language of the Last Will and Testament, the Trust Agreement or other governing documents, as well as the applicable probate laws.
Questions Regarding Debts Owed to Florida Estate
There can be many questions regarding what is owed and how it is collected and accounted for after someone passes away in Florida. A debtor should not assume that they get a windfall just because the person to whom they owe money has died. Who receives the payment stream and where the payments are to be sent can be confusing.
Debtors may need help in determining their legal rights in these situations, including confirming how much they owe, or don’t owe, and who they should pay when dealing with a creditor who has died.
Beneficiaries may also have concerns over debts owed to the estate, particularly if the decedent is holding a mortgage on an income-producing property (are taxes and insurance being paid) or held a Note related to an income-producing business. They may have concerns and questions, such as:
- If there was a corporation, partnership or other legal entity, then what happens?
- Is the Personal Representative doing what should be done regarding the debt?
- Who inherits the debt?
- Who shares in the income stream from that debt?
An experienced Florida probate lawyer can be very helpful in resolving disputes between beneficiaries, heirs, debtors, and the Personal Representative regarding money owed to the estate. Many may be surprised at how reasonable it may cost to get that attorney’s help — some of these questions may be answered in a single telephone conference. Others, however, may need more legal steps; some may require intervention in the form of a hearing before the probate judge.
A good piece of advice is to at least talk with a Florida probate lawyer to learn about your rights. Most probate lawyers, like Larry Tolchinsky, offer a free initial consultation (either over phone or in person, whichever you prefer) to answer your questions.
Do you have questions or comments? Then please feel free to send Larry an email or call him now at (954) 458-8655.
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