October 2012 : Open Indemnity Agreements

Last month I provided a training tip regarding Estates, referencing, in particular, the usage of Open Estate Indemnity Agreements.  The implication of my “Tip” was that if an Executor signed the Deed, then we would not need an Open Estate Indemnity Agreement executed.  In retrospect, I believe my guidance was incomplete.  My sincerest apologies.

In order to give you really good guidance, I think I need to expand a bit.  Everyone knows that an Executor’s main function is to distribute a deceased’s person’s assets upon death.  What we legal-types know — that most lay people do not realize — is that equally important to an Executor’s responsibilities is the payment of the Decedent’s debts.  The Executor has an important responsibility to determine the amounts of the Decedent’s debts and to make sure that there are sufficient assets in the Estate to pay those debts.  As an exercise of that responsibility, the Executor will advertise a Notice to Creditors, the purpose of which is to identify any debts against the Decedent.  The Executor will also likely send that notice to any known creditors.  These actions have the effect of causing claims to be filed against the estate.  The question we often receive is DO WE HAVE TO PAY CLAIMS OF THE ESTATE AT CLOSING.

That is not always an easy question to answer.  The Answer is “no”, but only technically.  (See below for further explanation).  Once the Notice to Creditors has run, the Statute of Limitations for any claimants is shortened from 2 years to 90 days.  So Creditors have 90 days to submit their claims.  Under most circumstances, the Executor should wait until the expiration of this time frame to determine the full extent of the Decedent’s debts and weigh whether there are sufficient personal property assets in the Estate to cover said debts before permitting the sale of any real estate by the Heirs.  As you all are aware, real estate is the asset of the heirs of the Decedent upon the death subject to the usage of the Executor for the purposes of paying debts.  That is to say, the equity in any real estate belongs to the heirs of the Decedent unless the Executor needs the sale proceeds because there are more debts of the Estate than personal property assets.  If the Executor needs to sell the real estate to satisfy said debts, then he or she may do so, subject to the approval of the Clerk (under most circumstances) unless otherwise explicitly permitted by the terms of a Will.  If the Executor does not need to sell the real estate than he or she will sign the Deed – along with the heirs and spouses – to the Buyer.  You would not have to pay a claim “at closing”, but we do need to determine that the claim is going to be paid in due course.  The proper sale of real estate by the Executor, whereby the proceeds are paid into the Estate, is pretty conclusive proof of that fact. . .But what if there is a claim and the real estate is NOT being sold by the Executor?

Now. . .back to the issue at hand regarding Open Estate Indemnity Agreements.  The Executor’s signature on the Deed is very probative in determining whether there are sufficient personal property assets in the Estate to satisfy any and all debts or claims.  Statutorily, the signature of the Executor on the Deed bars any Claimants of the Estate from attaching to the real property or its proceeds.  If there are no filed claims of the Estate, there is every reason to believe that the Executor has sufficient assets to close out the Estate and deal with any and all debts.  The problem for us is when there is a claim in the Estate file.  If there is – and the Executor is willing to sign the Deed — there is a strong presumption that there are sufficient personal property assets to pay the claim.  However. . .it is incumbent on all of us to make sure that the Executor understands his or her role and is not overlooking the fact that the debts of the Estate need to be resolved.  To that end, we – and more importantly, Our Underwrites – believe that the Execution of the Open Estate Indemnity Agreement puts all of that in perspective for the Executor.  The concept is that by reading, and ultimately, agreeing to give the Indemnity, the Executor will be fully aware of his or her requirements regarding the satisfaction of debts or claims of the Estate.

So, let me sum up with an example of the interplay between the Executor’s execution of the Deed and an Open Estate Indemnity Agreement.  Let’s assume that a Notice to Creditors has been run, the Estate is open and the Executor is willing to sign the Deed.  If there are no claims of creditors referenced in the Estate file, we will likely not press you to have an Open Estate Indemnity Agreement signed.  If however, there is a claim or claims in the Estate file in a significant amount we are going to insist upon the execution of an Open Estate Indemnity, if for no other reason, to focus the Executor’s attention on his or her responsibilities.  Collectively, under those circumstances, we need to be sure that the Executor understands that the claims will need to be satisfied from the personal property assets of the Estate.