How are debts paid from assets under a will

I recently spoke with a client, Emily, whose mother passed away with a seemingly straightforward estate. She had a Will, but a crucial codicil – one adding a significant beneficiary – was never properly witnessed. The court rejected the codicil, throwing the estate plan into chaos. Ultimately, Emily faced legal fees exceeding $15,000 just to untangle the mess, a cost easily avoided with proper execution. This is a common scenario, and understanding how debts are handled before assets are distributed is paramount.

What Happens to Debts After Someone Dies?

When someone dies with a Will, an executor is appointed by the court to administer the estate. The first responsibility of that executor isn’t to distribute assets; it’s to identify and pay off the deceased’s outstanding debts. These debts fall into several categories, and the order in which they’re paid is strictly defined by law. Ignoring this order can expose the executor to personal liability.

What Types of Debts Must Be Paid?

The debts can range from secured debts like mortgages and car loans to unsecured debts such as credit card balances, medical bills, and personal loans. There are also often unexpected liabilities – outstanding taxes, judgments, or even claims against the estate. As a CPA as well as an attorney with over 35 years of experience, I’ve seen estates crippled not by large debts, but by overlooked smaller ones. It’s crucial to conduct a thorough accounting.

What Assets Are Used to Pay Debts?

The executor uses the estate’s assets to satisfy these debts. This generally starts with liquid assets – cash on hand, bank accounts, and easily sold investments. If these aren’t sufficient, the executor may need to sell other assets, like stocks, bonds, or even personal property. Real estate is often the final asset considered for liquidation. However, the process can get complicated quickly, particularly with real estate and the new rules for smaller estates.

Navigating AB 2016 and the Small Estate Affidavit

For deaths on or after April 1, 2025, California’s AB 2016 offers a simplified probate process for certain estates. Specifically, a Petition for Succession can be filed with the court if the primary residence is valued at up to $750,000 and the total estate value (excluding the residence) is below $208,850. It’s important to understand this is a Petition that requires a Judge’s Order, not an Affidavit. Conversely, the Small Estate Affidavit is strictly for real property valued under $69,625 – think timeshares or vacant land – and has different requirements. It’s a common mistake to confuse the two.

What About Property Taxes and Prop 19?

When real estate is transferred as part of an estate, property taxes are a key consideration. Under Prop 19, heirs can only keep a parent’s low property tax base if they move into the home as their primary residence within one year and the home’s value is within specific limits. Failing to meet these requirements can result in a significant property tax increase.

How Are Business Interests Handled?

If the deceased owned an LLC or other business interest, things become even more complex. As of March 2025, domestic U.S. LLCs are exempt from mandatory BOI reporting under the Corporate Transparency Act, but executors managing foreign-registered entities must still file updates within 30 days to avoid fines of $500/day – a potential landmine. Valuing a business interest can also be challenging and requires a qualified appraisal to ensure fairness to all beneficiaries.

Digital Assets and RUFADAA

Don’t overlook digital assets – online accounts, cryptocurrency, etc. Without specific RUFADAA language (Probate Code § 870) in your Trust or Will, service providers like Coinbase and Google can legally deny your executor access to these assets, leaving them stranded and potentially lost. It’s a surprisingly common issue.

What if the Estate Doesn’t Have Enough Assets?

If the estate’s assets are insufficient to cover all debts, creditors are generally paid in a priority order determined by law. Secured creditors (like mortgage holders) typically get paid first, followed by certain priority unsecured creditors (like tax authorities). Remaining unsecured creditors may receive only a portion of what they’re owed, or nothing at all. If combined ‘probate assets’ (excluding the AB 2016 residence) exceed $208,850 (the threshold effective April 1, 2025), they are subject to formal probate; a Will alone does not allow you to bypass this limit.

Protecting Beneficiaries with the OBBBA

For high-net-worth estates, the federal estate tax is a critical consideration. The 2026 ‘Sunset’ was averted by the OBBBA, which permanently increased the Federal Estate Tax Exemption to $15 million per person effective Jan 1, 2026. While this provides significant relief for many, careful planning is still essential to minimize potential tax liabilities.

Ultimately, the process of paying debts from an estate requires diligent record-keeping, a thorough understanding of probate law, and a proactive approach to identifying and addressing potential issues. A properly drafted estate plan, combined with competent legal and financial guidance, can save your loved ones significant time, expense, and heartache.

What makes a California will legally enforceable when it matters most?

In California, a last will and testament is reviewed under probate standards that focus on intent, capacity, and execution. Clear drafting reduces ambiguity, limits misinterpretation, and helps families avoid unnecessary conflict during estate administration.

For California residents, understanding how intent, authority, and compliance interact is one of the most effective ways to protect family harmony and estate integrity. A will that anticipates probate scrutiny is far more likely to be honored as written and far less likely to become the source of unnecessary conflict.

Resources for Asset Management & Transfer

• Property Tax Reassessment: California State Board of Equalization (Prop 19)
  This page details the “Base Year Value Transfer” rules. It explains that heirs can only avoid a property tax reassessment if the inherited home becomes their primary residence and the Homeowners’ Exemption is filed within one year of the date of death.
• Real Estate Probate (AB 2016): California Probate Code § 13151 (Petition for Succession)
  The specific statute for the AB 2016 process. It outlines the requirements for using a court-approved “Petition” (not an affidavit) to transfer a primary residence worth $750,000 or less (gross value) for deaths occurring after April 1, 2025.
• Small Estate Affidavit: California Probate Code § 13100 (Personal Property)
  Access the statutory language for the “Small Estate Affidavit.” This procedure is strictly for Personal Property (cash, stocks, vehicles) and is limited to estates with a total value of $208,850 or less (effective April 1, 2025).
• Federal Estate Tax Exemption: IRS Estate Tax Guidelines
  The authoritative federal resource for estate valuation. It reflects the 2026 exemption increase to $15 million per person, which is critical for high-net-worth asset planning and determining if an IRS Form 706 is required.
• Unclaimed Assets: California State Controller – Unclaimed Property
  The primary portal for executors and heirs to search for “lost” assets—such as forgotten bank accounts, uncashed dividends, and insurance benefits—that have been remitted to the State of California for safekeeping.
• Business/LLC Compliance: FinCEN – Beneficial Ownership Information (BOI)
  The official portal for corporate transparency reporting. Most domestic and foreign entities (LLCs, Corps) must file a report. Executors must verify compliance, as failure to update control information within 30 days of death can result in federal civil penalties.