Are Last Illness Expenses Preferred Debts

I recently received a frantic call from Emily. Her mother passed away unexpectedly, and the estate is facing a sizable claim from the hospital for her final medical bills. Emily was understandably upset, not just by the loss, but by the fear that these expenses would wipe out what little inheritance was left for her and her siblings. She’d heard conflicting information about what constituted a “preferred” debt and was desperate to understand where these bills fell in the payment priority. It’s a common scenario, and unfortunately, one filled with potential pitfalls if not handled correctly.

As an Estate Planning Attorney and CPA with over 35 years of experience here in Escondido, I’ve seen countless estates burdened by unpaid medical expenses. My CPA background gives me a unique perspective—understanding not just the legal priority of debts, but also the tax implications of how those debts are paid. Let’s break down the rules surrounding “last illness expenses” and how they stack up against other creditor claims.

What Exactly Are “Last Illness Expenses”?

The term itself is broader than many executors realize. It isn’t just the bills incurred during the very last days of your mother’s life. Probate Code § 11420 defines these expenses as those “necessarily incurred for the care of the decedent during their last illness.” This can encompass a range of costs: hospital stays, doctor visits, medication, ambulance transport, even in-home nursing care. The key is that the expense must be related to the condition that ultimately led to death. A pre-existing condition treated years earlier would likely not qualify.

How Do Last Illness Expenses Rank Among Creditors?

Here’s where things get crucial. Debts are not paid first-come, first-served. Probate Code § 11420 establishes a strict hierarchy. Last illness expenses fall into Priority Level 3 – directly after administration expenses (like executor fees and court costs) and funeral expenses. This means they are paid before debts like credit cards, personal loans, or even taxes. This is why Emily’s concern was valid; if those medical bills weren’t addressed, they would take precedence over many other claims.

• Administration Expenses: Costs associated with administering the estate (executor fees, court filing fees, appraisal costs)
• Funeral Expenses: Costs directly related to the funeral and burial
• Last Illness Expenses: As discussed, medical care related to the final illness
• Family Allowance: Support provided to surviving spouses and children during probate
• Wage Claims: Unpaid salaries or wages owed to the decedent
• General Debts: Credit cards, loans, etc.

What Happens if the Estate Doesn’t Have Enough Cash?

This is the reality in many cases. The estate simply doesn’t have sufficient liquid assets to cover all the debts, even the preferred ones. In these situations, the executor must exercise careful judgment and make legally defensible decisions. Paying lower-priority debts when higher-priority ones (like last illness expenses) are outstanding can create personal liability for the executor. Probate Code § 11420 is clear: the executor is bound by this payment hierarchy.

The Importance of Accurate Documentation and Timely Payment

The executor must be meticulous in gathering and documenting all medical bills. Simply having a bill isn’t enough; you need proof that the services were actually rendered and directly related to the decedent’s final illness. Furthermore, delaying payment on allowed claims isn’t just unfair to creditors—it also accrues interest. Probate Code § 11423 mandates that debts bear interest at 10% per annum from the date of death (or when the claim is allowed). This can significantly erode the inheritance if payment is unnecessarily postponed.

What About Debts Owed to Public Entities?

Often overlooked, claims from agencies like Medi-Cal or the Franchise Tax Board require special attention. Probate Code § 9202 dictates that the executor must provide specific notice to these entities within 90 days of being appointed. Failing to do so can effectively “pause” their statute of limitations, allowing them to pursue claims against the estate for years after other creditors have been paid.

What if a Creditor Disagrees with the Claim?

If a hospital, for example, believes a claim is valid but the executor doesn’t, the creditor has recourse. They can file a formal rejection using Form DE-174. However, this triggers a strict deadline. The creditor then has only 90 days to file a lawsuit in civil court to enforce their claim (Probate Code § 9353). If they miss that window, the claim is extinguished.

Considering Trusts as an Alternative

For clients looking to avoid probate, a properly funded trust can offer significant creditor protection. However, it’s not a foolproof solution. While probate requires creditor notice, trusts don’t automatically. The trustee can opt-in to a similar claims procedure (Probate Code § 19000), effectively creating a 4-month cutoff. Without this opt-in, creditors could theoretically pursue claims against trust beneficiaries for up to a year after death.

How do enforcement rules in California probate court shape outcomes for heirs and fiduciaries?

California probate is designed to provide court-supervised transfer of property, yet cases often break down when authority is unclear, required steps are missed, or disputes arise over assets, notice, and fiduciary conduct. When the process is misunderstood, families can face avoidable delay, escalating conflict, and increased exposure to creditor issues, hearings, or litigation before the estate can close.

Ultimately, the difference between a routine distribution and a protracted legal battle often comes down to preparation. By anticipating the demands of the Probate Code and addressing potential friction points with beneficiaries and creditors upfront, fiduciaries can navigate the system with greater confidence and lower liability.

Verified Authority on Probate Creditor Claims

• The Creditor Window (4-Month Rule): California Probate Code § 9100
  This statute provides the primary protection for the estate. Generally, any creditor who fails to file a formal claim within four months of the executor receiving Letters is barred from collecting. This “clean break” is one of the main advantages of formal probate.
• Mandatory Notice to Public Agencies: California Probate Code § 9202
  Regular creditors aren’t the only concern. You MUST send specific notices to the Director of Health Care Services (Medi-Cal), the Franchise Tax Board, and the Victim Compensation Board. Missing this step keeps the liability window open indefinitely for the state.
• Priority of Payments: California Probate Code § 11420 (Debt Hierarchy)
  If an estate is “insolvent” (debts exceed assets), you cannot simply pay bills as they arrive. This code establishes the strict pecking order: funeral expenses and administration costs (lawyer/executor fees) get paid before credit cards and medical bills.
• Rejection of Claim (The “Sue or Lose It” Rule): California Probate Code § 9353
  When an executor formally rejects a claim (Form DE-174), the clock starts ticking. The creditor has exactly 90 days to file a civil lawsuit to enforce the debt. If they miss this deadline, the claim is barred, regardless of its validity.
• Personal Liability of Executor: California Probate Code § 9601
  An executor can be held personally liable for “breach of fiduciary duty” if they pay debts out of order (e.g., paying a credit card before the funeral home) or distribute assets to heirs before clearing all valid creditor claims.
• One-Year Statute of Limitations (Non-Probate): California Code of Civil Procedure § 366.2
  This is the ultimate backstop. Even if no probate is opened, creditors generally only have one year from the date of death to file a lawsuit against the decedent’s successors (e.g., trust beneficiaries). After one year, most debts expire automatically.