Insolvent Estates
Most of us are hopeful that the beneficiaries of our estate plan will inherit something, but in these days of massive consumer debt, that's not always the case. What happens if an individual dies with liabilities that exceed his or her assets?
We can start to consider this question by considering the typical steps in the administration of a probate estate:
- Inventory and collection of property;
- Computation of debts and administration expenses;
- Payment of debts and administration expenses;
- Distribution of remaining property to beneficiaries under the decedent's Will (or, if the decedent didn't have a Will, to the decedent's heirs as defined in the Probate Act).
After undertaking steps #1 and #2, we might find (for example) that the decedent owned $200,000 in property but has $400,000 in debts and administration expenses. (We'll assume that all of these debts and expenses are valid, which is a topic for another day.) As a result, we know that step #4 won't be necessary, because there won't be any remaining property once all debts and expenses are paid.
At this point, our focus turns to step #3, and to section 18-10 of the Illinois Probate Act. Section 18-10 sets forth a classification system for claims, from first class through seventh class. First class claims have the highest priority -- this class includes funeral and burial expenses, expenses of administration, and statutory custodial claims (you can read more about statutory custodial claims in an article I wrote, here).
Two concepts are at work here: (1) all claims of a given class must be paid before moving to the next class of claims and (2) if the amount of property available to pay claims of a given class cannot pay all such claims in full, then the claims will be paid on a pro rata basis. To illustrate, if we use the numbers from the example above, and the first class claims total $200,000, then only those claims will be paid (claimants with second class or lower claims won't get paid at all). What if we use the above example, but find that first class claims total $300,000? Then each first class claimant will receive 2/3rds of their claim amount (and, once again, claimants with second class or lower claims won't get paid at all).
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