What’s the Difference Between a Solvent and Insolvent Estate?
The property, and debts, you leave behind after you die will all be lumped together into something called an estate. Estate planning is simply the process of anticipating what you will leave behind and deciding what you want to happen to it.
In general, the estate you leave behind will be either solvent or insolvent. Let’s take a look at these two terms more closely to see how the estate planning process applies to them.
A solvent estate is one in which the assets exceed the debts. For example, let’s say you die leaving behind a home, personal property, and investments totaling $2 million. You also leave behind some credit card bills, medical expenses, and other unpaid bills. These total about $100,000. This means that you leave behind an estate worth a total of $1.9 million. Because the assets exceed the number of debts, your estate is solvent.
An insolvent estate is one in which the debts exceed the total value of the estate. For example, let’s say you die after a prolonged illness. The medical bills, long-term care costs, and other debts associated with your illness total about $200,000. You also left behind assets worth $50,000. Because your debts exceeded the total amount of assets left behind, your estate is insolvent.
Administrators and Your Estate
Once you die, a Colorado probate court will appoint an estate administrator to represent and manage your estate. That person, called an executor or personal representative, has the responsibility of determining how valuable your estate is, and what debts you left behind. The estate debts will include anything you incurred during your lifetime, but will also include the costs associated with, for example, your funeral and the probate process itself.
Once the executor has compiled an estate inventory and determined how much you owe, he or she will then begin using estate funds to pay the unpaid bills.
When your estate is solvent, your executor will have enough money to pay all the bills the estate owes. Once these bills get paid, the executor will then begin distributing the remaining property as inheritances. If you left behind a will, the executor will distribute the property in accordance with the terms of that will. If you didn’t have the will, the executor will distribute the property in accordance with Colorado’s intestate accession laws.
However, if you left behind an insolvent estate, there won’t be enough money to pay your creditors. So, the executor will have to determine which creditors get paid, and in what order. Once all the estate funds have been depleted, some of those creditors will go unpaid. Further, there’ll be nothing left to distribute as inheritances.
If you have more questions about solvent and insolvent estates, please contact our office today.