The executor of an estate has to pay the debts owed by that estate. This can include minor issues like a water bill or an electric bill, and it can include more important debts like tax bills. Which should be paid first?
Executors are wise not to pay off the minor debts first. They need to make sure there is enough money to handle any of the estate's major debts.
Unfortunately, people often make the mistake of tackling the smaller debts first just because the bills come in and deadlines keep approaching. Not wanting to miss anything or incur late fees, they'll pay off a lot of small debts to get things taken care of. This can lead to problems in the future.
For instance, one executor was dealing with an estate that, though the executor did not realize it, had a serious income tax liability at the federal level. Not knowing about the taxes, the executor took care of other debts first. When the tax debt finally became clear, the estate was out of money. There was no way to pay it off.
Experts note that IRS claims should get dealt with first. Failing to do so can make the executor personally liable for remaining debt. The IRS may settle for a lesser amount than what is owed, but not always. Plus, even a settlement means that the executor may have to pay a serious debt that he or she never expected nor personally incurred.
It is very important to understand the proper order of operations when dealing with an estate. Mistakes could lead to significant complications that drag on for months.
Source: MarketWatch, "The biggest mistakes executors make," Veronica Dagher, accessed May 04, 2018