Who Gets Paid First Funeral Home or IRS

I recently had a client, Mac, whose mother passed away unexpectedly. He was shocked to learn that despite his best intentions, simply covering the funeral expenses didn’t guarantee they’d be paid. A family disagreement over the estate’s value led to delays, and the funeral home threatened legal action. Mac was staring down the barrel of an additional $8,000 in late fees and potential liens—on top of the emotional toll of losing his mother. This situation highlights a common misunderstanding about probate priorities.

As an Estate Planning Attorney and CPA with over 35 years of experience, I often guide clients through these complex scenarios. Many assume that honoring immediate debts, like funeral costs, takes precedence over all others. While morally important, the law dictates a specific order of payment, and navigating that order is crucial for both executors and beneficiaries. My background as a CPA is particularly valuable here, allowing me to foresee tax implications and maximize the “step-up in basis” benefit for heirs – something many attorneys miss.

What Exactly Does Probate Priority Mean?

The question isn’t simply who you pay, but when you legally can pay. Probate Code § 11420 establishes a strict hierarchy for settling claims against an estate. It’s not a “first-come, first-served” system. Ignoring this order can expose executors to personal liability.

The Legal Order of Payment

Let’s break down the priority, and specifically address the funeral home versus the IRS dilemma. Here’s the established order:

• Administration Expenses: This includes court filing fees, attorney’s fees, and, importantly, executor/administrator compensation.
• Funeral Expenses: These are a high priority, but not the absolute first. They fall after administrative costs.
• Medical Expenses & Expenses of Last Illness: Bills incurred during the final illness are next in line.
• Family Allowance: A limited amount paid to surviving spouses and dependents for living expenses during probate.
• Wage Claims: Unpaid salaries and wages to the deceased.
• Creditor Claims (General Debts): Credit cards, personal loans, etc. These are often paid last.

In Mac’s case, administrative costs and potentially a family allowance (if applicable) had to be addressed before the funeral home could be fully satisfied. While the funeral home has a strong claim, it’s not at the very top of the list. The IRS, as a secured creditor in many instances (due to tax liens), often falls into the category of wage claims or general debts, but can have a higher priority depending on the nature of the tax debt.

What About Taxes? The IRS Priority

The IRS doesn’t operate on the same timeline as typical creditors. Probate Code § 9202 mandates that the executor has a duty to notify the Franchise Tax Board, the Victim Compensation Board, and Medi-Cal (DHCS) within 90 days of appointment. Failure to do so can essentially pause the statute of limitations, allowing these entities to pursue claims against the estate years later.

Tax debts, while often paid lower on the priority list, receive special attention due to this mechanism. Additionally, any unpaid taxes are considered a priority claim, potentially leapfrogging over unsecured debts. Ignoring tax obligations can lead to significant penalties and even personal liability for the executor.

Interest Accrues – It’s Not Just About the Principal

It’s easy to focus on the face value of a debt, but Probate Code § 11423 dictates that all debts accrue interest at 10% per annum from the date of death (or the date the claim is allowed). This seemingly small detail can significantly increase the overall amount owed, especially during a lengthy probate process. Delays in payment, even for high-priority creditors, can result in substantial interest charges eating into the estate’s assets.

How Trusts Differ: Avoiding the Probate Priority Maze

If assets were held in a trust, the rules change. The Optional Trust Claims Procedure (Probate Code § 19000) allows a trustee to essentially “cut off” creditor claims after a 4-month period. Without opting into this procedure, creditors could potentially sue the trust beneficiaries directly for up to one year after death (CCP § 366.2). This is a crucial consideration during estate planning, as trusts can offer greater control over the distribution of assets and shield them from prolonged creditor scrutiny.

Protecting Yourself as an Executor

As you can see, navigating probate priorities is a complex undertaking. A misstep can have significant financial and legal consequences. If you’re an executor, I strongly recommend seeking legal guidance to ensure you adhere to the proper procedures. Don’t hesitate to ask questions and document your decisions carefully. Remember, protecting the estate’s assets and honoring the wishes of the deceased is paramount.

What determines whether a California probate estate closes smoothly or turns into litigation?

California probate is designed to provide court-supervised transfer of property, yet cases often break down when authority is unclear, required steps are missed, or disputes arise over assets, notice, and fiduciary conduct. When the process is misunderstood, families can face avoidable delay, escalating conflict, and increased exposure to creditor issues, hearings, or litigation before the estate can close.

To manage the estate’s value, separate property types by learning probate assets, confirm exclusions through assets that bypass probate, and support valuation steps with inventory and appraisal to reduce disagreements about what is in the estate.

A stable probate administration outcome usually follows from clarity, consistency, and readiness for court review, especially when multiple stakeholders and competing interpretations are involved. When documentation supports enforcement and timelines are respected, families are less likely to face preventable escalation.

Verified Authority on Probate Creditor Claims

• The Creditor Window (4-Month Rule): California Probate Code § 9100
  This statute provides the primary protection for the estate. Generally, any creditor who fails to file a formal claim within four months of the executor receiving Letters is barred from collecting. This “clean break” is one of the main advantages of formal probate.
• Mandatory Notice to Public Agencies: California Probate Code § 9202
  Regular creditors aren’t the only concern. You MUST send specific notices to the Director of Health Care Services (Medi-Cal), the Franchise Tax Board, and the Victim Compensation Board. Missing this step keeps the liability window open indefinitely for the state.
• Priority of Payments: California Probate Code § 11420 (Debt Hierarchy)
  If an estate is “insolvent” (debts exceed assets), you cannot simply pay bills as they arrive. This code establishes the strict pecking order: funeral expenses and administration costs (lawyer/executor fees) get paid before credit cards and medical bills.
• Rejection of Claim (The “Sue or Lose It” Rule): California Probate Code § 9353
  When an executor formally rejects a claim (Form DE-174), the clock starts ticking. The creditor has exactly 90 days to file a civil lawsuit to enforce the debt. If they miss this deadline, the claim is barred, regardless of its validity.
• Personal Liability of Executor: California Probate Code § 9601
  An executor can be held personally liable for “breach of fiduciary duty” if they pay debts out of order (e.g., paying a credit card before the funeral home) or distribute assets to heirs before clearing all valid creditor claims.
• One-Year Statute of Limitations (Non-Probate): California Code of Civil Procedure § 366.2
  This is the ultimate backstop. Even if no probate is opened, creditors generally only have one year from the date of death to file a lawsuit against the decedent’s successors (e.g., trust beneficiaries). After one year, most debts expire automatically.