Are Last Illness Expenses Preferred Debts

It was a frantic call. David’s mother, Evelyn, had passed unexpectedly, leaving a relatively small estate. He’d dutifully started the probate process, but a bill from a long-term care facility arrived after he’d already distributed the assets to his siblings. The bill was substantial – over $60,000 – and now the facility was threatening to sue, claiming they were a “preferred creditor.” David was devastated, facing the prospect of personally covering the debt to protect his siblings from legal action. He’d assumed, incorrectly, that everything was settled once the initial distributions were made.

As an estate planning attorney and CPA with over 35 years of experience here in Moreno Valley, I see this situation far too often. Many people don’t realize the complexities surrounding creditor claims in probate, and specifically, the nuanced rules regarding “preferred” debts. While the term is frequently used, it’s crucial to understand precisely which debts truly qualify for preferential treatment, and how that impacts the distribution of assets. It’s not a simple matter of first-come, first-served.

What Exactly Are “Preferred” Debts in Probate?

The term “preferred” isn’t just a colloquialism. It reflects a legal priority established by California law. These are debts that must be satisfied before any other creditors, including credit card companies, personal loans, or even some tax obligations. Probate Code § 11420 meticulously outlines this hierarchy, and understanding it is paramount for executors. Generally, preferred debts fall into several key categories: administration expenses (attorney fees, executor fees, court costs), funeral expenses, claims for medical care and last illness, and a family allowance for surviving spouses and dependents.

How Do “Last Illness Expenses” Fit In?

“Last illness expenses” are a specific category of preferred debt, and they are often the source of confusion. These aren’t merely the final hospital bill. They encompass all reasonable and necessary expenses incurred during the 60 days preceding death, primarily for medical care. This can include doctor’s visits, hospital stays, medication, nursing care, ambulance services, and even related travel costs. The key is that the expense must be directly connected to the final illness that led to death. A pre-existing condition being managed but not directly contributing to the final decline might not qualify.

The Potential Pitfalls and What Executors Need to Know

The issue, as David discovered, is the timing of the claim. Unlike some other preferred debts, the long-term care facility’s bill, while potentially legitimate, arrived after distributions. Even though it qualified as a last illness expense, it now falls into a different category. If the claim isn’t paid promptly – and the statute of limitations on creditor claims is strict – the executor can be held personally liable for the amount.

• Statute of Limitations is Critical: Creditors have a strict window to file a claim: either 4 months after Letters are issued or 60 days after notice is mailed (whichever is later). Once this period expires, unfiled claims are generally forever barred, protecting the heirs.
• Notice Requirements to Agencies: The executor has a mandatory duty to send specific notice to the Franchise Tax Board, Victim Compensation Board, and Medi-Cal (DHCS) within 90 days of appointment. Failure to notify these agencies pauses their statute of limitations, allowing them to claw back assets years later (Probate Code § 9202).
• Disputing Claims: If an executor rejects a creditor’s claim (using Form DE-174), the creditor has exactly 90 days to file a lawsuit in civil court (Probate Code § 9353).

As a CPA, I also emphasize the tax implications. Properly documenting and classifying these last illness expenses is crucial for establishing a correct “step-up in basis” for inherited assets. Misclassification can lead to unnecessary capital gains taxes down the road. Accurately valuing these expenses also ensures that the estate isn’t shortchanged, impacting the net inheritance for beneficiaries.

What Happens if a Claim is Rejected?

Rejecting a valid claim is a risky move. As mentioned, the creditor has a limited time to sue, but even a successful defense doesn’t necessarily absolve the estate. It simply means the claim isn’t paid from the current assets. However, the creditor retains the right to pursue the beneficiary directly, outside of probate, if the beneficiary received assets sufficient to cover the debt. This is especially true with medical debt, which often carries strong legal protections.

Why a CPA-Attorney is Invaluable

Navigating these complexities requires a unique blend of legal expertise and financial acumen. That’s why my clients benefit from my dual qualifications. I can not only ensure compliance with probate procedures and manage creditor claims effectively, but also minimize tax liabilities and maximize the inheritance for their loved ones. I’ve guided families through these challenges for over 35 years, protecting their assets and providing peace of mind during a difficult time. Don’t let a late-arriving bill derail your estate administration.

What separates an efficient California probate process from a drawn-out conflict over authority and assets?

The path through California probate is rarely a straight line; it requires precise adherence to statutory deadlines, accurate asset characterization, and strict fiduciary compliance. Without a clear roadmap, what begins as a standard administrative proceeding can quickly dissolve into a costly battle over interpretation, valuation, and beneficiary rights.

To protect against specific family risks, review heir disputes without a will, check for left-out heirs issues, and be vigilant for signs of elder financial abuse.

Ultimately, the difference between a routine distribution and a protracted legal battle often comes down to preparation. By anticipating the demands of the Probate Code and addressing potential friction points with beneficiaries and creditors upfront, fiduciaries can navigate the system with greater confidence and lower liability.

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.