What can be Paid Out of An Estate Account?

What is the process for handling the accounts of a deceased person and the estate assets of a deceased person when there had an estate plan or had no estate plan, what is sanctioned by law and do you need probate court approval to pay bills and final bills?  Most state law, probate court, and estate planning requires a personal representative to pay for the funeral service and tax returns from the probate estate. However, people will wonder what other money can be used from the probate estate to make these payments from the account, and what withdrawals are allowed under the law? Our New York attorney explains all you should know about the process and its consequences.

What Can Be Paid Out of An Estate Account?

Losing a loved one is a difficult and bewildering experience. But having to face the probate process afterward can feel even more confusing. 

In New York, the probate process begins a few months after the death of a loved one. Whether your loved one left a will or not, their survivors (family members of the decedent) will be expected to seek the court’s assistance before they can deal with the assets of the decedent. 

The court will usually appoint one or more individuals to be primarily responsible for collecting these assets, protecting them and distributing them as the law requires. The law imposes several responsibilities on those who are eventually authorized to deal with these assets. 

The responsibilities include creating a bank account, paying debts and other expenses, and distributing assets to the beneficiaries or heirs-at-law of the deceased. But there are strict laws that regulate who can make a withdrawal out of the bank account, when a withdrawal can be made, and for what bill was paid and how spent the money. 

A personal representative New York is expected to settle the final bills of the deceased person  and work in the deceased person best interests. As a result, making the wrong withdrawals, not paying the final bills, and putting money to the wrong uses, or failing to settle what is required by law can be problematic. 

What is the process sanctioned by law to make these withdrawals, and what withdrawals are allowed under the law?

Only a personal representative is approved to deal with the bank account 

Before any person can deal with a bank account in any way they must be appointed as a personal representative by the court. The appointment is usually made by the New York Surrogate’s Court, and includes the authorization to open a bank account, deposit money, and file tax returns of the deceased person. Even if you are named as executor in the will of the decedent or are their spouse or a close loved one, you still need the court’s authorization. 

To secure this appointment, you must file a probate petition if there’s a will or an administration petition where no will was left. This will especially be the case if your loved one left real estate within New York state. If they didn’t leave any real estate, you may not need to obtain the court’s permission to deal with the estate. You should speak to an estate planning attorney to learn what your options are.

The probate or administration petition will need to be filed with the Surrogate’s Court where the decedent lived or owned real estate. The petition will be sent to the judge for final review, and if they approve, you will receive a probate grant, for a will, or a letter of administration, in other cases. 

After receiving the necessary authorization, you can then begin the process of opening an estate account, collecting the assets of the decedent and making preparations to pay all bills and expenses. 

Withdrawals that can be made from the account 

In New York, the position of a fiduciary is treated as a very special position. As a result, every action you take in this position may be subject to scrutiny, especially how you deal with the assets of the estate. 

A fiduciary’s primary job is to locate and collect all the assets that belonged to the decedent, collect them, account for them and then start to settle the estate. The process of settling the estate will include paying the debts that the decedent owed before they died, paying applicable taxes, expenses of the estate and then distributing whatever is left to the beneficiaries. 

• Creditors’ claims: Debts that a person owes will not necessarily end after they die. Under New York law, as with other states, creditors can pursue these debts against the estate of the decedent. However, creditors are required to reach out to the fiduciary and communicate the existence of the debt before the end of 7 months after court approval to deal with the estate. They must make their claim in writing, the facts on which the debt is based and the amount due. The fiduciary also has a responsibility to investigate these claims, and then pay the debts in full after investigation. 
• Taxes: The estate may owe certain taxes that may need to be paid. This may include outstanding income tax liability from when the decedent was still alive. New York does not charge an Inheritance tax. However, estates with a value above $5.25 million may be subject to an estate tax of up to 16%. It would be the responsibility of the fiduciary to pay these taxes. 
• Ordinary and necessary expenses: Even after death, the decedent’s estate will have expenses and bills to pay. These may include funeral costs, the costs of gathering the assets, maintenance of the decedent’s property before winding up and other expenses. However, these expenses are required to be “ordinary and necessary”. This means they should be no more than the usual expenses one would expect to pay, considering the activities of the fiduciary. In addition, the expenses must be no more than is necessary in the circumstances. 
• Legacies/distribution: Finally, the fiduciary is expected to distribute the assets of the estate, either in line with the will, or if there was no will, according to the procedure dictated by law. 

The fiduciary cannot treat the estate account as their personal piggy bank or a source of quick “loans” for personal use. Every cent that is taken out of the account must be recorded, because the court may require a full accounting if it believes the fiduciary is not being honest. 

The order of priority for withdrawals 

In addition to the stipulation of what withdrawals can be made from the estate account, the law also specifies what purposes these can be put to, in order of priority. Under the Surrogate Court’s Procedure Act, the priority of withdrawals is as follows: 

• Reasonable funeral and administrative expenses;
• Debts given preference by the state or federal government, including estate taxes;
• Judgment debts against the decedent;
• Bonds, sealed instruments, notes, bills, unliquidated demands and accounts;
• Gifts to beneficiaries or distribution to heirs-at-law

The purpose of this priority of payment is for instances where there are insufficient funds in the estate to meet these debts. In such a situation, the most important debts are expected to be paid first. 

What happens if you make the wrong withdrawals? 

The consequences of making a wrong withdrawal depend on the circumstances of the withdrawal. Sometimes, a payment can be made in error because the fiduciary was deceived by a fraudulent creditor, or from an unavoidable mistake. In such circumstances, there may be no real consequences for the fiduciary. 

But in other situations where wrong withdrawals were made either intentionally or negligently, the fiduciary may be personally responsible. For instance, taking money out of the estate account for personal use, outside the normal fees allowed the fiduciary, would be misconduct. The court may order the fiduciary to return the funds out of their own money. 

Failure to return the funds as ordered may lead to arrest for contempt of court, and this may in turn result in some jail time. 

Avoid possible complications. Speak to an estate attorney today 

The potential complications of the process make it necessary to be careful when dealing with a decedent’s estate in New York. Little missteps can spell a lot of trouble, both for the estate and the fiduciary. Avoid these complications by contacting an experienced New York estate attorney early in the process. Contact Attorney Jimmy Wagner at 929-477-8889 for help.