How estates are settled

If there are no assets at all, settling your parent's estate should be fairly simple. You'll send letters to the creditors explaining the situation and including a copy of the death certificate and that -- probably -- will be that, although you may still have to deal with a random debt collector who refuses to get the message.

If your parent had some assets, just not enough to pay all the debts, your state's probate court has a distinct list of what bills get priority. The details vary somewhat by state, but California's list is fairly typical:

  • Expenses for administering the estate, which can include court costs, attorney's fees and executor's fees.
  • Mortgages, tax liens and other secured debt, to the extent that the sale of the asset can pay off the loan. Leftover debt generally drops to the bottom of the priority list.
  • Funeral expenses.
  • Expenses from the last illness, including hospital, doctor, caregiver and pharmacy bills.
  • A family allowance, which is typically a stipend that allows a surviving spouse and any minor children to pay essential living costs.
  • Wage claims by any employees.
  • All other debt.

Tax debt is typically considered to be among the highest-priority debts, equivalent to a lien on any property the dead person owned. Phelps handled one case where a woman with dementia failed to file tax returns for several years, and her entire $50,000 estate was eaten up by taxes, penalties and interest.

Also, hospitals and other caregivers may be fairly aggressive about trying to collect their share, knowing that they're high on the priority list, Phelps said. She recommends trying to negotiate settlements with them once you've inventoried all the debts and available assets, particularly if your parent wasn't fully insured.

Unfortunately, the uninsured are often charged far more than an insurance company or Medicare pays for the same services.

"A doctor might charge $100 but accept $25 as full payment from an insurer," Phelps said. "You may be able to negotiate the bills down substantially . . . especially if you say something like, 'If you accept this (offer), I can send you a check today,' and then do it."

If there's anything left for the credit card companies and other creditors, you'll generally divide the remainder by the number of creditors, Phelps said.

What you can do before they die

If you or your parents find it hard to discuss finances, Phelps recommends setting up (and probably paying for) a session with an elder-law or estate-planning attorney who can review their financial situation and offer advice. Changing beneficiaries or the title to assets, for example, could help survivors better pay bills and protect property from creditors. If your folks are insolvent and struggling to pay their bills, a bankruptcy filing could be a better option than waiting to fend off creditors after their death.

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If nothing else, try to scope out your parents' wishes about funeral services, keeping costs in mind. If they'd be happy with lower-cost options, like cremation, ask them to put those preferences in writing to avoid family battles later. If your parents can't prepay their burial expenses and there likely won't be any assets to tap, talk to your siblings about sharing the costs before the inevitable happens. Otherwise, you might find yourself entirely on the hook, since burial costs aren't one of the bills that can be put off.

"The funeral home," Phelps said, "is going to want to be paid."

Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.