People often engage in transactions that result in money being owed to them. They may loan money to a friend or business partner, rent a house to a tenant, or sell property through an installment agreement.
But what happens if someone dies before receiving all the money they are owed?
The unpaid debt does not ordinarily disappear. It becomes an asset of the deceased person’s estate or trust. The person authorized to manage the estate or trust can then take steps to collect it.
If your loved one has died and you believe someone owed them money, keep the following information in mind.
Does a Debt Disappear When the Person Owed Money Dies?
No. The death of the person who was owed money does not ordinarily cancel the debt.
Instead, the right to collect the money becomes an asset of the deceased person’s estate. The estate may collect the debt as part of the probate process.
Probate is the legal process used to collect a deceased person’s assets, address valid debts and expenses, and distribute the remaining property. The property is distributed according to the person’s will or, if there is no will, under state intestacy law.
The Maryland Register of Wills describes estate administration as the process of collecting a deceased person’s assets and property, determining their debts, and distributing the assets to those entitled to inherit.
If the money was owed to the deceased person’s trust rather than to the person individually, the trust’s right to collect the debt generally continues after the trustmaker’s death.
Who Can Collect Money Owed to a Deceased Person?
The person responsible for collecting the money depends on whether the debt belongs to the estate or to a trust.
The Estate’s Personal Representative
Before someone can act for a deceased person’s estate, that individual generally must be formally appointed through the probate process.
If the deceased person had a will, the will probably nominated someone to serve as executor. In Maryland and Washington, D.C., this person is commonly called the personal representative.
If there is no will, a person with priority under the applicable probate law, often a family member, may petition to be appointed as the estate’s personal representative.
Once appointed, the personal representative has the authority and responsibility to collect assets belonging to the estate. This includes money that other people or businesses owed to the deceased person.
The Maryland Register of Wills explains that a personal representative must take possession of and marshal estate assets. The District of Columbia Courts similarly identify collecting estate assets as one of a personal representative’s responsibilities.
A family member should not assume that being named in the will is enough to begin collecting money. The person may need formal documentation confirming the appointment before a debtor, bank, or other institution will work with them.
The Successor Trustee
If the debt is payable to a trust, the successor trustee may have the authority and obligation to collect it.
Unlike a personal representative, a successor trustee does not ordinarily need to be appointed by a probate court. The trustee’s authority comes from the trust document and applicable state law.
The trustee should review the trust and obtain any documents needed to demonstrate that the trustee has authority to act.
How Can an Executor or Trustee Find Money Owed to the Deceased Person?
An executor or trustee may already know about an unpaid loan, lease, or other financial arrangement. This is often the case when the person serving is the deceased person’s spouse or close family member.
A nonspouse executor or trustee may be less familiar with the deceased person’s finances. Even someone close to the deceased should carefully review the available records.
Review the Deceased Person’s Important Documents
The executor or trustee should examine the deceased person’s financial records and important papers for evidence of unpaid debts.
Relevant documents may include:
- Loan agreements
- Promissory notes
- Mortgage documents
- Leases
- Installment sale agreements
- Business contracts
- Bank statements
- Canceled checks
- Payment records
- Accounting books
- Tax returns
Optimally, there will be a written agreement that clearly identifies the debt, repayment schedule, interest rate, and remaining balance.
Look for Emails, Text Messages, and Payment Records
A formal written contract is not the only potential evidence of a debt.
Emails or text messages may show that someone acknowledged owing money to the deceased person. Bank records, canceled checks, or bookkeeping records may also demonstrate that the debtor had been making regular payments.
For example, recurring monthly deposits from the same person may indicate repayment of a loan or payment under a lease.
Speak With People Who Knew About the Arrangement
Written evidence is generally more reliable, but witness statements may also be relevant.
A witness may have heard the deceased person and the debtor discuss the loan or business transaction. The debtor may also acknowledge the debt when contacted by the personal representative or trustee.
When the arrangement was informal or poorly documented, an attorney can help evaluate whether the available evidence is sufficient to pursue payment.
What Should the Executor or Trustee Do After Finding the Debt?
Once the executor or trustee discovers that money was owed to the deceased person, several practical steps may be necessary.
Confirm the Outstanding Balance
The executor or trustee should first determine how much remained unpaid on the date of death.
This calculation may include:
- Missed payments
- Accrued interest
- Late fees authorized by the agreement
- Payments scheduled after the date of death
- Any credits or previous payments
The debt and its value may also need to be included in the estate’s inventory or accounting records. Maryland probate materials specifically recognize debts owed to the deceased, including bonds and notes, as estate assets.
Review the Payment Agreement
The personal representative or trustee should review the agreement before demanding full payment.
The deceased person’s death does not necessarily make the entire balance immediately due. If the agreement provides for monthly payments, the debtor may have the right to continue making payments under the existing schedule.
The agreement may also contain an acceleration clause or other terms that affect what happens after the creditor’s death.
Notify the Debtor in Writing
The executor or trustee should provide formal written notice to the debtor.
The notice should generally explain:
- That the person to whom the debt was owed has died
- The deceased person’s date of death
- Whether the debt is now payable to the estate or trust
- The name and contact information of the personal representative or trustee
- Where future payments should be sent
- Whether any payments are currently past due
- What documentation establishes the representative’s authority
Payments should be made to the estate or trust, not deposited into the personal account of the executor, trustee, or family member.
Collect Past-Due and Future Payments
The executor or trustee should make reasonable efforts to collect any amount that was due before the death.
They must also monitor payments that become due later. This may include monthly loan payments, installment payments, or rent for the remaining term of a lease.
Example of Collecting a Debt After Death
Assume Bob loaned $5,000 to his friend Julie. Under their written agreement, Julie must pay Bob $250 on the fifteenth day of each month until the loan is paid in full in December 2024.
Bob dies on January 16, 2024.
Bob’s personal representative would need to determine whether Julie made the January payment and whether she was current on all previous payments. The personal representative would also need to calculate the balance remaining on the date of Bob’s death.
Julie would then be notified that future payments should be made to Bob’s estate. The personal representative would monitor those payments until the loan was paid or otherwise resolved.
What If the Debtor Refuses to Pay?
The executor or trustee will usually begin by contacting the debtor and requesting payment.
If those efforts are unsuccessful, the representative may need help from an attorney. The next steps could include sending a formal demand letter, negotiating a resolution, or filing a lawsuit on behalf of the estate or trust.
The executor or trustee should not wait too long to address the debt. A statute of limitations may restrict how much time is available to bring a legal claim. The applicable deadline depends on the jurisdiction, the type of debt, and the terms of the agreement.
The representative should also consider the practical value of collection efforts. Pursuing a small or poorly documented debt may cost the estate more than it is likely to recover. Any decision to settle, compromise, or stop pursuing a debt should be documented and made in accordance with the representative’s fiduciary duties.
Does the Money Go Directly to the Family?
Generally, no. A debtor should not simply pay the deceased person’s spouse, child, or another family member.
If the debt belongs to the estate, payments should ordinarily be made to the estate through its appointed personal representative. The funds then become part of the estate administration process.
The personal representative must collect and account for estate assets, address valid expenses and claims, and distribute the remaining property to the appropriate beneficiaries or heirs.
If the debt belongs to a trust, payments should be made to the trust through the acting trustee. The trustee will manage and distribute the money according to the trust’s terms.
What Documents May Be Needed to Collect the Debt?
The documents required will depend on the debt and whether it belongs to an estate or trust.
A debtor may request copies of:
- The death certificate
- Letters of administration or other proof of the personal representative’s appointment
- A certificate or affidavit of trust
- The loan agreement, lease, or promissory note
- A payment history
- A calculation of the outstanding balance
- Written instructions for future payments
The representative should keep copies of all correspondence and maintain accurate records of every payment received.
McDonald Law Firm Can Help
If your loved one has passed away, McDonald Law Firm can guide you through the probate process if you are the executor named in the will or wish to be appointed as the administrator of the estate.
We can also assist a successor trustee with the administration of a loved one’s trust.
An important duty of a personal representative is to collect, protect, and prepare an inventory of the estate’s assets. Those assets include debts owed to the deceased person. A trustee similarly has a duty to maintain appropriate records and take reasonable steps to collect amounts owed to the trust.
Working with an experienced estate planning attorney can help you fulfill these responsibilities during what is likely to be a stressful and emotional time.
To schedule an appointment, contact McDonald Law Firm:
- Howard County: 443-741-1088
- Montgomery County: 301-941-7809
- District of Columbia: 202-640-2133
DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONVEY LEGAL, INSURANCE, OR TAX ADVICE.
