When your parents die broke

Then you must notify creditors, banks, brokerage firms and others of the death. For a list of your initial tasks, read "Steps you must take when someone dies." For a more complete list of an executor's duties, check out a primer like "The Executor's Guide," another Nolo Press book, by Mary Randolph.

What you shouldn't do, Randolph said, is rush to pay off bills until you have a solid idea of your parent's entire financial picture.

"A mistake people make is they pay off things too quickly," Randolph said. "A credit card bill comes in and they pay it, not realizing there won't be enough money in the estate to pay for (higher-priority bills) like funeral expenses or medical expenses."

Another mistake: counting on life insurance or retirement accounts to cover the debts. These assets typically have designated beneficiaries; if that's the case, the money goes directly to those people without passing through probate or other estate-settling processes.

The beneficiaries of these accounts "walk off into the sunset," said Pasadena, Calif., lawyer Ruth A. Phelps, a certified elder-law attorney and board member of the National Association of Elder Law Attorneys. "That money is not subject to creditors' claims."

How estates are settled

If there are no assets, settling a parent's estate should be fairly simple. You'll send letters to 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:

1. Expenses for administering the estate, which can include court costs, attorney's fees and executor's fees.

2. Mortgages, tax liens and other secured debt, to the extent that the sale of the assets can pay off the loans. Leftover debt generally drops to the bottom of the priority list.

3. Funeral expenses.

4. Expenses from the last illness, including hospital, doctor, caregiver and pharmacy bills.

5. A family allowance, which is typically a stipend that allows a surviving spouse and any minor children to pay essential living costs.

6. Wage claims by any employees.

7. 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 in which a woman with dementia had 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 recommended 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 insurance companies or Medicare pay 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 your folks are profligate spenders, you might want to read "Should you bail out spendthrift parents?" for advice on your options.

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 deaths.

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 Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Updated June 17, 2009

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