Chapter 20 — Paying Debts and Estate Expenses

Before an estate can be distributed, its debts and expenses need to be identified, checked and paid in the correct order. This is one of the parts of probate where good intentions can cause trouble. A family member may want to pay a bill immediately, or a beneficiary may want a distribution because money is urgently needed. The personal representatives must still protect the estate as a whole.

The purpose of this chapter is to explain the practical process. It does not replace advice where the estate is insolvent, a debt is disputed, a person is vulnerable, or the order of payment is unclear.

The personal representatives are responsible

Executors and administrators are responsible for collecting estate money and paying valid liabilities. They are not expected to accept every demand without evidence. They are expected to make reasonable enquiries, keep records and avoid distributing assets until known debts, tax and reasonable claims have been dealt with.

A family member who is not a personal representative can provide information or pay an urgent expense personally, but that does not give them authority to decide how the estate is administered. The personal representatives should acknowledge help, keep the receipt and decide whether reimbursement is justified.

Make one liabilities schedule

Bring the information from the earlier debt enquiries into one schedule. Record the creditor, account number, type of debt, balance at the date of death, balance now, interest or charges, evidence received, whether the debt is disputed, and the proposed payment date.

Separate the schedule into known debts, possible debts and claims that still need evidence. Keep estate expenses in a different section from the deceased's personal liabilities. Funeral costs, property insurance, necessary security, valuation fees, legal fees, tax and sale costs may all be estate expenses, but each should still be supported by an invoice or receipt.

Check that the debt is genuine

Ask the creditor for a statement and, where appropriate, the agreement or account history. Confirm that the name and address match the deceased and that the balance relates to the correct period. Check whether a payment protection policy, life policy, joint borrower or guarantor affects the amount due.

Be careful with old letters, collection demands and informal family notes. A document may show that a debt was once discussed, but not that the amount now claimed is correct. Do not ignore a demand simply because it arrives after the death. Record it, request evidence and set a review date.

If a debt is clearly wrong, write to the creditor explaining the issue and asking for the account to be placed on hold while it is investigated. Keep copies of everything sent. Do not admit liability on behalf of the estate until the position is understood.

Secured and priority payments

Some payments protect an asset or prevent a serious consequence. Mortgage payments, property insurance, urgent repairs, storage, security and essential utilities may need to continue while the estate is being administered. A failure to pay can reduce the estate's value or create a larger liability.

Other payments have a legal or contractual priority. The exact order depends on the circumstances, the nature of the debt and whether the estate is solvent. Do not rely on a general family rule such as paying the loudest creditor first. If the estate may not have enough money to pay everyone, obtain advice before making payments or distributions.

Funeral expenses

Reasonable funeral expenses are normally treated as a liability of the estate, subject to the circumstances and available funds. Keep the funeral director's invoice, cemetery or crematorium charges, order-of-service costs and any other associated receipts. Agree in advance who is ordering optional extras and whether they are intended to be paid from the estate.

A family may choose a more expensive funeral than the estate can sensibly support. That can create a dispute about the amount recoverable from the estate. The personal representatives should not promise reimbursement without checking the estate's position.

Tax and HMRC payments

Tax must be treated as a real estate liability, not as an afterthought. This can include inheritance tax, income tax on the deceased's final period, income tax on estate income, capital gains tax on certain disposals and business taxes.

Keep the calculations, returns, payment references and HMRC correspondence together. If a tax figure is provisional, show it as an estimate and retain a reserve until the position is agreed. A refund should not automatically be distributed while another tax liability remains possible.

Property and administration expenses

The estate may incur costs for insurance, locksmiths, alarms, heating, utilities, gardening, clearance, storage, valuations, conveyancing, repairs, removal, postage and travel. Some expenses protect or realise estate assets; others may be personal choices by a family member.

For every payment, record what was bought, why it was needed, who approved it, who paid and whether it benefits the estate or an individual. Keep invoices in the same order as the bank transactions. If a family member removes an item instead of paying for clearance or storage, record the arrangement and its value where relevant.

Paying a creditor

Use the estate account where possible. Confirm the account details independently, especially if payment instructions arrive by email. Fraudsters often target estates because they know that large sums may be moving and that the family is under pressure.

When a payment is made, save the remittance, bank confirmation and final statement. Ask the creditor to confirm that the account is closed or that the balance is now zero. A payment that merely reduces a balance without explaining continuing interest or charges is not necessarily the end of the matter.

Do not pay cash unless there is a compelling reason and a proper receipt. Do not make a large payment to a relative and rely on that person to pass it on. Pay the creditor directly wherever possible.

Insolvent estates

An estate is insolvent when its liabilities exceed the assets available to meet them. This changes the whole approach. The personal representatives must not choose beneficiaries, family members or sympathetic creditors over others without a proper basis.

If insolvency is possible, stop informal distributions and obtain specialist advice. Do not sell an asset cheaply to a family member, transfer property for less than value or repay a personal loan while other creditors remain unpaid. Keep the estate's money separate and explain to every interested person that payment may be limited.

An insolvent estate can involve secured creditors, funeral expenses, administration costs, preferential claims and ordinary unsecured creditors. The applicable order is technical. Use a solicitor or insolvency professional where there is any real doubt.

Disputed debts and family loans

A creditor may claim that the deceased owed money to them, while the family believes it was a gift. Another relative may say that the deceased promised to repay a loan. These issues should be recorded neutrally and supported by evidence such as bank transfers, messages, written agreements and witnesses.

Do not let a family relationship decide the result. A personal representative who is also a claimant must disclose the conflict and should not make the decision alone. Consider independent advice, a written settlement or mediation if the parties cannot agree.

Joint debts and guarantees

A joint account, joint loan or guarantee needs separate attention. The deceased's estate may be responsible for part of a joint debt, while the surviving borrower may remain personally liable for the whole contractual balance. Do not assume that a surviving partner can simply stop paying because one name on the agreement has died.

Ask the lender to explain the contractual position in writing. Keep joint liabilities separate from sole debts in the estate schedule and do not charge the estate with another person's liability without evidence.

Personal representatives' expenses and reimbursement

Executors and administrators are normally entitled to have proper estate expenses paid or reimbursed, but they should not treat the estate as a personal bank account. Record travel, postage, storage, professional fees and other costs with receipts and a short explanation.

If a personal representative is charging for professional work, or if they have a business relationship with a supplier, disclose it. A beneficiary should be able to understand why the cost was incurred and whether it was reasonable. Where family members disagree, independent approval is safer than an informal argument.

Reserves and uncertain claims

Do not distribute every pound as soon as it enters the estate account. Keep a reserve for unpaid tax, utilities, insurance, repairs, conveyancing, unresolved creditor claims and final administration costs. The reserve should be based on evidence and reviewed regularly, not chosen as a guess.

If a claim is uncertain, write down the amount reserved, the reason for it and the date on which it will be reviewed. Tell beneficiaries that the distribution is provisional if that is the case. A clear explanation is better than promising a final figure that later has to be recovered.

Advertisement for unknown creditors

In some estates, the personal representatives may consider advertising for unknown creditors under the Trustee Act 1925. This can provide protection in certain circumstances, but it has a formal process and a time period. It is not a general substitute for searching the deceased's papers and contacting known organisations.

Ask a solicitor whether an advertisement is appropriate. Keep evidence of the wording, publication dates and responses. Do not say that creditors have been dealt with simply because an advertisement was placed.

A payment approval record

For larger payments, use a simple approval note containing the creditor, amount, reason, evidence checked, person approving, date paid and remaining balance. If there are two or more personal representatives, agree whether both must approve every payment or whether a sensible threshold can be used.

The record does not need to be elaborate. Its value is that it shows how the decision was reached and makes the estate accounts easier to prepare. It also reduces the chance that the same invoice is paid twice.

Debts and estate expenses checklist

1. Create one liabilities and expenses schedule.

2. Separate sole debts, joint debts, possible claims and estate expenses.

3. Request statements and supporting evidence for every significant liability.

4. Check insurance, payment protection, guarantees and joint borrowers.

5. Keep property, funeral, tax and administration costs supported by invoices.

6. Protect the property and essential services while the estate is being dealt with.

7. Use the estate account and verify payment instructions independently.

8. Obtain confirmation when an account is settled or closed.

9. Keep a reserve for tax, claims and final costs.

10. Do not distribute if the estate may be insolvent.

11. Disclose conflicts and family loans rather than deciding informally.

12. Consider mediation for genuine disputes.

13. Obtain specialist advice where priority or insolvency is uncertain.

14. Keep approval notes, bank confirmations and receipts with the estate records.

Paying debts is not simply a matter of writing cheques until the money runs out. It is a controlled process of checking, prioritising, recording and preserving enough money to deal with what is not yet known. The personal representatives should be able to show beneficiaries, creditors and HMRC why each payment was made and why any amount was held back.

The next chapter explains how to keep complete estate accounts so that every asset, liability, expense, receipt and distribution can be reconciled.