Let’s say your father passed away with $200,000 in his estate and you are the only heir. If your father had owed money on the date of his death, the estate would be obligated to satisfy that creditor prior to you obtaining your inheritance. Florida law provides that a devise (distribution) owed to a beneficiary is subject to charges for debts, expenses, and taxes. In our example, if the creditor's claim was for $100,000, it would be paid first, and you would then inherit the $100,000 remaining in the estate.
However, what if your father only had $90,000 on the date of his death, yet still had the $100,000 creditor? Unfortunately, your father’s estate would be insolvent and your inheritance may be completely wiped out.
Now suppose that the person who owes the estate is a child who convinced his father to make a quick change to his last will and testament specifically forgiving the debt that is owed by the son to the decedent. What if the only funds in an estate available for distribution to the other children are to come from the child who owes money to the estate but whose obligation is now forgiven?
Prior to April of this year, no Florida court had addressed the issue of whether the release and forgiveness of an obligation (debt) in a will operates to defeat the payment of obligations and expenses of an estate. In other words, are debt forgiveness clauses in wills enforceable? The court in Lauristen v. Wallace—So.3d.—2011, WL 1195873 (Fla. 5th DCA Apr 01, 2011), addressed the issue when the will of a father had a provision that forgave the debt of his son. However, the only estate asset was this debt owed to the decedent; the estate was otherwise insolvent and could not pay for other debts and expenses. The court held that a decedent can release a debt owed to the decedent through a will only to the extent that the decedent’s estate is solvent to pay all debts and administrative costs of the estate. Therefore, such clauses may not be enforceable when the estate lacks the funds to pay its debts and expenses but maybe enforceable if debts and expenses are paid but still leaving nothing to disburse to the beneficiaries.
You must always be wary of the solvency of the estate when making decisions on strategy and how expenses and distributions are to be made from the estate. Florida courts have made yet another distinction between solvent and insolvent estates and all parties, especially the personal representative, must be aware of these distinctions.