Are Debts Paid Before Beneficiaries

Emily received a call from the bank two weeks after her mother’s funeral – her mother’s account was frozen due to a previously unknown credit card debt. The estate lawyer hadn’t mentioned any debts, and now Emily faced the prospect of a lengthy court battle, plus potential personal liability, just to access the inheritance she desperately needed for her children’s college fund. This cost her not only time and emotional stress, but also legal fees that depleted the estate’s assets before the beneficiaries even saw a dime.

As an Estate Planning Attorney and CPA with over 35 years of experience, I’ve seen this scenario play out far too often. Clients assume their inheritances will pass smoothly, only to have creditors step in and disrupt the process. It’s a painful experience, and often preventable with careful estate planning. One of the most frequent questions I get is whether debts are paid before beneficiaries receive their share, and the answer is almost always yes – but it’s rarely a simple “yes or no.”

The fundamental principle is that estate assets are used to satisfy the debts of the deceased. This isn’t a matter of choice, but a legal obligation. However, the order in which debts are paid is strictly governed by California law. Probate Code § 11420 establishes a mandatory payment order, prioritizing certain debts over others. For example, secured debts – like a mortgage on a home or a car loan – typically take precedence over unsecured debts like credit cards. Funeral expenses and administrative costs of the estate are usually paid first. Understanding this hierarchy is crucial to anticipating potential issues and protecting beneficiary interests.

The process of asserting these debts is not informal. Creditors do not simply make a demand and expect payment. Instead, they must follow the formal claims system outlined in Probate Code §§ 9000–9399. This involves filing a creditor’s claim with the probate court within a specific timeframe, typically four months after the date of death. This provides a period for the estate’s representative to review the claim and either accept or dispute it. A valid claim creates a legal obligation for the estate to address, but it also opens the door for scrutiny of the debt’s validity.

What Happens if a Creditor Misses the Deadline?

A common concern is what happens if a creditor fails to file a claim within the statutory deadline. While it seems like a simple escape, it’s not. California law imposes a strict one-year deadline for creditors to initiate a lawsuit against the estate, regardless of whether a claim was filed. This is codified in CCP § 366.2. Critically, this one-year limitation is NOT tolled by the probate process itself. Meaning the clock starts running from the date of death, and creditors can still pursue legal action even if probate is ongoing.

What About Debts Incurred After Death?

Debts aren’t always known at the time of death. Sometimes, bills arrive later or previously undiscovered obligations surface. These post-death debts are generally paid from the estate assets, following the same priority rules. However, the estate representative has a duty to manage these debts responsibly and ensure they are legitimate.

Could Beneficiaries Be Personally Liable for the Deceased’s Debts?

This is a major source of anxiety for beneficiaries. Generally, beneficiaries are not personally liable for the debts of the deceased. However, there are exceptions, particularly in community property states like California. Family Code § 910 governs community property rights, and Probate Code §§ 13550–13554 outlines the framework for spousal liability. If the deceased had community property assets, the surviving spouse may be liable for debts incurred during the marriage. Additionally, if a beneficiary wrongfully receives assets before all debts are settled, they could face personal liability.

What if the Estate is Small?

For very small estates, California offers simplified probate procedures. As of April 1, 2025, the threshold for qualifying as a “small estate” is Probate Code § 13100 = $208,850. These procedures allow for a more streamlined transfer of assets, but debts still must be paid before distribution. The process is less formal, but the obligation to address outstanding debts remains.

As a CPA as well as an attorney, I emphasize the importance of understanding the step-up in basis rule. Properly valuing estate assets at the date of death can significantly minimize capital gains taxes when beneficiaries eventually sell those assets. This valuation is often a key point of contention with creditors, and a CPA’s expertise is invaluable in ensuring accurate and defensible appraisals. Ignoring the tax implications can diminish the inheritance even further.

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

In California, a last will and testament operates within a probate system that emphasizes intent, clarity, and procedural compliance. When properly drafted, a will does more than distribute property—it creates legally enforceable instructions that guide courts, fiduciaries, and beneficiaries through administration with fewer disputes and less uncertainty.

• Leadership: Define executor duties clearly.
• Protection: Establish guardianship for minors.
• Location: Confirm domicile requirements.

When a will is drafted with California probate review in mind, it becomes a stabilizing roadmap rather than a source of conflict. Clear intent, proper authority, and compliant execution protect both families and estates.

Controlling California Statutes on Estate Debts and Creditor Claims

• Debt Priority:
  
  California Probate Code § 11420
  
  Establishes the mandatory statutory order in which estate debts must be paid before any distributions to beneficiaries.
• Probate Creditor Claims:
  
  California Probate Code §§ 9000–9399
  
  Governs how creditor claims must be formally filed in probate and why informal demands, letters, or invoices are legally ineffective.
• Creditor Lawsuit Deadline:
  
  California Code of Civil Procedure § 366.2
  
  Imposes a strict one-year deadline from the date of death for most creditor lawsuits, which is not tolled by probate proceedings.
• Surviving Spouse Liability:
  
  California Probate Code §§ 13550–13554
  
  Limits a surviving spouse’s personal liability for a decedent’s debts to the value of property received under these statutes.
• Small Estate Threshold:
  
  California Probate Code § 13100
  
  Sets the $208,850 small estate affidavit threshold for deaths occurring on or after April 1, 2025.