Executor compensation generally becomes a debt of the estate once the amount has been approved by the beneficiaries or set by the court on a passing of accounts. Compensation is paid from the assets of the estate as if it were any other debt owed by the estate when the estate is not bankrupt or otherwise insolvent. The priority of debts, including compensation, is somewhat different in bankrupt estates; if the estate is potentially bankrupt, speaking with a bankruptcy lawyer before considering next steps would be prudent.
How the issue of executor compensation will be resolved will likely depend on the circumstances leading to the lack of liquidity in the estate. If the lack of liquidity is temporary and eventually assets will be sold or liquidated as part of the normal administration of the estate, it may just be a matter of the Estate Trustee having to wait for such assets to be liquidated in their normal course before paying themselves the compensation which they have become entitled to. If,however, the lack of liquidity is likely permanent on account of the provisions of the will specifically directing the transfer of the largest assets of the estate (i.e., a specific bequest of real property or a bank account), the Estate Trustee may be required to consider “abatement” to generate liquidity to pay their compensation. Abatement generally provides for the order in which assets that are specifically gifted may be sold by the Estate Trustee to generate liquidity to pay estate liabilities.
Although this list is not exhaustive, the general order in which bequests “abate” to fund debts and liabilities of the estate is:
- Residuary personal property;
- Residuary real property;
- General legacies (i.e., general cash bequests);
- Demonstrative legacies (i.e., cash bequests from and/or of specific bank accounts);
- Specific bequests of personal property; and
- Specific bequests of real property.
An Estate Trustee will generally need to exhaust every asset in any earlier category before moving on to the next. If a bequest “abates” in full, the beneficiary who otherwise would have received the bequest no longer receives the bequest. Needless to say, not the ideal situation.
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