Resolving Debts
To “resolve” a debt means to pay it o or otherwise deal with it so that the estate no longer owes anything for it. To be completely safe, you should resolve all debts before distributing any assets to heirs (although in practice, you may not need to follow this strictly if the estate is clearly worth more than it owes).
Debt InvalidationFirst, note that if a creditor fails to contact the estate within the local state regulatory deadline period (typically 4-6 months after publication of the probate notice the debt is invalidated and the estate has no legal obligation to pay the debt.
Debt Payment
Eventually, the estate will have to pay all its remaining debts … unless the estate owes more than it is worth, in which case not everyone will get back all the money owed.
It may be necessary to sell certain assets in order to raise cash so that these debts can be paid. Try to avoid selling assets the will specically bequeathes to certain heirs, and in fact, it makes sense to have a plan for what you are doing with ALL the assets before you start selling o some here and there. Of course, if it’s just selling a few shares of stock or other basically liquid assets, it’s not a big deal.Aside from the big debts, there will also almost certainly be some debts it’s best just to pay as they come due, such as the electric bill.
Insolvent Estates
If the estate owes more than it is worth, it is considered “insolvent”.
You should strongly consider seeking legal help to resolve an insolvent estate, since there are a number of legal statutes governing who should be paid and how much. Fortunately, funeral expenses, compensation for your eorts as an executor, and anyone you hire to help resolve the insolvency, are generally given top priority for access to any estate funds (see IRS IRM §5.17.13.5 https://www.irs.gov/irm/part5/irm_05-017- 013#idm140392157509840 for US federal guidelines). Note, individual states sometimes vary these priorities.When an estate is insolvent (or near-insolvent), negotiation for debt forgiveness is very common, since the debt-holders may end up with nothing if they don’t agree to a lesser amount.
IRS Publication 559 (https://www.irs.gov/publications/p559#en_US_2017_publink10009)