Who Gets Paid First Funeral Home or IRS

I recently had a client, David, whose mother passed away unexpectedly. He diligently handled the initial paperwork, but quickly became overwhelmed when bills started arriving – a hefty invoice from the funeral home and a notice from the IRS regarding her outstanding taxes. He was distraught, asking if he could even choose who to pay first, fearing legal repercussions if he prioritized one over the other. This is a surprisingly common situation, and understanding the legal order of payment in a probate estate is critical to avoiding personal liability as executor.

As an Estate Planning Attorney and CPA with over 35 years of experience here in Escondido, I’ve seen firsthand how easily these situations can spiral. Many executors don’t realize debts aren’t paid on a first-come, first-served basis. It’s not about being nice or negotiating with creditors; it’s about following a strict, legally defined hierarchy. As a CPA, I also focus on minimizing tax liabilities for my clients’ estates, including maximizing the step-up in basis for assets and properly valuing property to avoid future IRS scrutiny. This dual perspective—attorney and CPA—is invaluable when navigating complex estate administration.

What Does Probate Code Say About Payment Priority?

The Probate Code § 11420 lays out the precise order in which creditors get paid. It’s not a matter of discretion for the executor. Ignoring this order can expose you to personal liability for any shortfall. Here’s the breakdown:

• Administration Expenses: These are the costs of actually administering the estate – legal fees (like mine!), executor commissions, appraiser fees, and court costs.
• Funeral Expenses: These are generally paid next, as they relate directly to the final arrangements. However, keep in mind, the funeral home can potentially file a claim against the estate, and the executor still has the right to review the charges for reasonableness.
• Medical Expenses & Expenses of Last Illness: Debts incurred for medical care or during the final illness of the deceased take priority over most other unsecured debts.
• Family Allowance: A certain amount is allocated to the surviving spouse and dependent children for their support during the probate process.
• Wage Claims: Unpaid wages and salaries earned by the deceased but not yet paid are also prioritized.
• General Debts: This is where credit card debt, personal loans, and many other unsecured debts fall. They are paid last, often receiving only a portion of what’s owed, if anything.

What Happens if the Estate Doesn’t Have Enough to Cover Everything?

Unfortunately, many estates don’t have sufficient assets to pay all creditors in full. In these cases, the statutory priority dictates who gets paid, and those lower on the list may receive nothing. The executor’s duty is to follow this order meticulously. Prioritizing a creditor outside of this order, even if it seems “fair” at the time, can have significant legal ramifications.

How Does the IRS Factor Into This?

The IRS is a unique creditor. While their claim falls into the “general debts” category, they have significant power to pursue assets even after the estate is closed. The Probate Code § 9202 requires the executor to provide specific notice to the Franchise Tax Board and Medi-Cal within 90 days of appointment. Failing to do so effectively pauses their statute of limitations, allowing them to pursue claims against the estate (or even the beneficiaries directly) years later. Furthermore, remember that debts bear interest from the date of death at a rate of 10% per annum, as outlined in Probate Code § 11423. Delaying payment to the IRS, even unintentionally, can quickly increase the amount owed.

What About Claims on Trusts – Are They Different?

This discussion focuses on probate estates. However, if assets were held in a trust, the rules can be different. The Optional Trust Claims Procedure (Probate Code § 19000) allows a trustee to opt-in to a similar claims process as probate, effectively cutting off creditor liability after four months. Without this, creditors could theoretically sue the trust beneficiaries for up to one year after death (CCP § 366.2). That’s why proper trust administration is just as critical as probate.

What causes California probate cases to spiral into delay, disputes, and extra cost?

The path through California probate is rarely a straight line; it requires precise adherence to statutory deadlines, accurate asset characterization, and strict fiduciary compliance. Without a clear roadmap, what begins as a standard administrative proceeding can quickly dissolve into a costly battle over interpretation, valuation, and beneficiary rights.

To manage the estate’s value, separate property types by learning probate assets, confirm exclusions through non-probate assets, and support valuation steps with probate inventory requirements to reduce disagreements about what is in the estate.

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.