Lauritsen v. Wallace, — So.3d —-, 2011 WL 1195873 (Fla. 5th DCA Apr 01, 2011)

The general rule is that your heirs are last in line when it’s time to distribute your estate. Before they get theirs, the costs of administering your estate (think PR fees, accounting and legal expenses), taxes, and creditor claims all have to be paid with assets of the estate. What’s left over goes to your heirs.

For example, if your estate consists of $100,000 and the costs of administering your estate, taxes, and creditor claims all add up to $50,000, your heirs only get $50,000. Things get tricky when estates are insolvent. Assume again your estate has a value of $100,000, but the debts of your estate amount to $120,000. In that case your heirs get nothing and the estate’s administration expenses, taxes and creditor claims are paid in the order of priority listed in F.S. 733.707.

Insolvent Estates: Case Study:

The linked-to case is an interesting example of the general principal that administrative expenses and creditor claims have priority over distributions to heirs. In this case the testator’s son signed a promissory note agreeing to repay funds loaned to him by his dad. This promise of funds has value and is obviously an asset of dad’s estate. Dad’s will forgave son’s debt. This is a common clause and usually isn’t a problem. Unfortunately, in this case dad’s estate was insolvent. The issue became whether the debt forgiveness clause in dad’s will was enforceable. Here’s how the PR teed up the issue for the probate court and how the court ruled:

The personal representative filed in the probate court a Motion to Determine Ownership of the Note and Status of Forgiveness under Decedent’s Will. The personal representative argued that the decedent’s one-half ownership of the note must be utilized to pay the estate’s debts, taxes, and expenses before the balance could be forgiven. The probate court ruled that the note was forgiven at the moment of the decedent’s death.

On appeal the 5th DCA reversed the probate court in a detailed opinion that does a great job of summarizing how Florida’s Probate Code deals with insolvent estates. If you’re working with an insolvent estate, you’ll want to read this opinion in its entirety. Here’s an excerpt:

Several sections of the probate code support the conclusion that a devise cannot be elevated over administrative expenses and the rights of creditors. Section 731.201(10), Florida Statutes (2007), provides that “[a] devise is subject to charges for debts, expenses, and taxes[.]” Section 733.805(1) provides that “[f]unds or property designated by the will shall be used to pay debts, family allowance, exempt property, elective share charges, expenses of administration, and devises to the extent the funds or property is sufficient.” If no provision is made or the designated fund or property is insufficient, the statute sets forth a priority scheme on how devises abate. § 733.805, Fla. Stat. (2007). Section 733.707(1) provides that “[t]he personal representative shall pay the expenses of the administration and obligations of the decedent’s estate in the following order . . . .” The statute then identifies the eight classes of expenses and obligations and the order in which each is paid. The ruling by the lower court elevates the gift of forgiveness of an obligation to a superior status over the rights of legitimate creditors of the decedent, contrary to the priorities established in the Probate Code.

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Therefore, we hold that a decedent can release a debt owed to the decedent through a testamentary devise only to the extent that the decedent’s estate is solvent to pay all debts and administrative costs of the estate.

Lesson learned?

Times are tough. Insolvent estates are now part of the landscape. If you’re working with an insolvent estate, you need to make sure everything you do is guided by the payment priorities listed in F.S. 733.707 and the order of abatement listed in F.S. 733.805. If you’re advising the PR, when in doubt, don’t assume the risk of a wrong decision, do what the PR did in the linked-to case above: file a motion, serve it on all interested parties, and ask your probate judge for guidance.