A probate can be like a bankruptcy proceeding for a surviving spouse. If the net worth of a decedent and his or her surviving spouse is less than $125,000.00, it is possible to protect part of the estate for the benefit of the surviving spouse or the minor children of the decedent.
The process for barring the creditors requires publishing notice to creditors in the newspaper once a week for three weeks. Creditors have the later of four months after Notice to Creditors was originally published or 30 days after they receive actual notice to file a proper creditor claim. At the three month mark, after notice to creditors is published in the newspaper, actual notice is mailed to the reasonably ascertainable creditors. If a creditor fails to file a claim, they are barred from collecting from the estate. Even if a creditor files a creditor claim, it may still be rejected if the creditor does not properly file the creditor claim or if the debt is not a legitimate debt of the decedent.
The probate process can be used to bar the separate property creditors of the decedent and the community property creditors of the decedent and his or her surviving spouse.
Even if a will states that everything goes to the surviving spouse, a surviving spouse may want to file for a family allowance to protect at least $125,000.00 if paying all of the properly filed creditor claims in the decedent’s estate make it so that the surviving spouse and minor children will receive less than $125,000.00. One of the conditions to a family allowance is that the administration expenses, funeral expenses and expenses of last illness have to be paid or provided for. Once a family allowance is awarded, it is immune from all debts including judgment and judgment liens of the decedent and the surviving spouse existing at the time of death.
For example, David and Martha own a house worth $400,000.00 with a mortgage on it of $150,000.00. In addition, David and Martha have a bank account with $5,000.00 and a vehicle worth $5,000.00. David had debt in his own name of $150,000.00 and community credit card debt of $80,000.00. Martha has $20,000.00 in credit card debt in her own name. David dies. If Martha files for the family allowance, then she could receive a family allowance award of $125,000.00 which would consist of the $5,000.00 in the bank account, and protection of at least $120,000.00 of the equity in the house. So even if the credit card companies and the other creditors properly filed their creditor claims, they would be barred from collecting from the family allowance awarded to Martha. In addition, even Martha’s creditors at the time of David’s death would not be allowed to attach the family allowance award that Martha received.
If there is not enough assets to pay all of the creditors, there is a statutory system for the payment of creditor claims.
1. The costs of administration.
2. Funeral expenses as approved by the court.
3. Expenses of last illness as approved by the court.
4. Wages due for labor performed within 60 days immediately before the decedent’s death.
5. Debts having preference by the laws of the United States.
6. Taxes or any debts or dues owing to the state.
7. Judgments rendered against the decedent during his or her lifetime which are liens upon real estate on which executions might have been issued at the time of death, and debts secured by mortgages in the order of their priority.
8. All other demands against the estate.
Note that the family allowance is paid after the costs of administration, funeral expenses and expenses of last illness that are approved by the court. The surviving spouse would either be required to continue paying any debt that is secured by estate property or sell the asset to be able protect the equity in the asset. A creditor that has a secured interest in an asset can foreclose on the asset if payments are not made.
For example, David and Martha own a house worth $400,000.00 with a mortgage of $150,000.00. Martha received a family allowance protecting $100,000.00 of the equity in the house. If Martha fails to pay the monthly mortgage payment, then the mortgage company could foreclose on the residence. However, if Martha sold the residence before the mortgage company foreclosed on the residence, then she could protect the $100,000.00 of equity that she was awarded as part of the family allowance.
If a decedent is survived by children who are not also the children of the surviving spouse, then the award could be divided between the surviving spouse and the children of the decedent.
For example, David is married to Martha. David had two children from a prior relationship, Chris and Pat. If Martha petitions for a family allowance, then the family allowance could be divided between Martha, Chris and Pat.
Therefore, a surviving spouse in a second marriage might want to consider how much he or she is going to receive if no family allowance petition is filed in comparison to how much he or she might receive if the family allowance petition is filed and has to be shared with the children from the former relationship.
Only if there is no surviving spouse of the decedent, may the minor children of the decedent petition for a family allowance award. Adult children cannot petition for a family allowance award. An adult child of the decedent from a prior relationship can only ask for the family allowance award to be divided after the surviving spouse has petitioned for the family allowance.
Utilizing Notice to Creditors and the Family Allowance can increase the amount that a surviving spouse can maintain if there is debt that would reduce the amount that the surviving spouse would otherwise receive to less than $125,000.00. Publishing Notice to Creditors and mailing actual notice to creditors to all reasonably ascertainable creditors can be used by a personal representative to bar creditors that fail to timely file a proper creditor claim. The family allowance can then be used to make sure that the surviving spouse and children of the decedent can maintain up to $125,000.00 after the administration, funeral and expenses of last illness approved by the court are paid.