“The administration of an estate operates on the same principle that applied while the testator was alive: A person must first attend to his owns debts and expenses before he can give away what is left,” Alexander A. Bove, Jr., explains in The Complete Book of Wills, Estates & Trusts.

In other words, as we often explain to heirs of an estate, beneficiaries can take only what is left after the debts and expenses of the estate have been paid.

Of course, any assets (such as real estate) that have a mortgage will use the value of the asset itself to pay off the lien. But, for estate assets other than mortgaged property, the priority of paying expenses is as follows:

  1. Funeral expenses
  2. Administrative expenses (executor and attorney’s fees)
  3. Taxes (federal and state estate and income tax)
  4. Final illness expenses and all other debts

Only after these debts have been satisfied, can the distribution of inheritances happen.

Funeral expenses were put as #1 for a reason – there is an urgent need to dispose of the body with dignity. But these expenses must be reasonable in proportion to the entire estate.  Who decides on the reasonableness? Ultimately, the probate court. (Since the burial often takes place right after death and long before the will is probated, Bove explains, creditors would need to act quickly to challenge funeral expenses as excessive.)

Assuming there is plenty of money in the estate to cover all these costs, the question then is, which assets within the estate should be used to pay those expenses?  The answer is that they are paid out of the “residuary estate”, meaning cash and liquid assets not specifically designated to be given to named beneficiaries.  After the personal property is used, only then would real property be sold and the proceeds used to pay expenses.

In the meanwhile, as all the estate’s debts and expenses are being discovered and paid, what do you do with the estate’s money?  Should it be invested?  Should existing securities be sold?  At the very least, Bove advises, any cash or liquid funds should be deposited into interest-bearing bank accounts.  The executor’s first consideration must be the protection of principal.
– by  Rebecca W. Geyer & Associates