In Maryland, when a person passes away their assets are gathered by their Personal Representative, and their debts are paid from those assets. However, if you have both a loan and a savings or checking account at a single financial institution, your bank agreements may change the disposition of your estate.
In many loan and account agreements, banks and credit unions reserve a right of “set-off.” This gives the financial institution the right to take money from your checking or savings account to satisfy your loan before the financial institution issues a check to your Personal Representative.
You might wonder how this affects your estate if the loan will be paid either way. If your estate does not have sufficient assets to satisfy all of your debts, your Personal Representative will pay your creditors in the order required by §8-105 of Estates and Trusts Article of the Maryland Code.
The first payments your Personal Representative makes are to the Register of Wills and for the costs and expenses of administering of your estate. The money paid under these categories reimburses your Personal Representative for the cost of litigation (if necessary); distributing your property to beneficiaries; selling your property; maintaining, managing and preserving property; CPA, accountant and appraiser fees; and miscellaneous expenses.
Next, your Personal Representative must pay for your funeral expenses. After funeral expenses, your estate pays the fees of your Personal Representative and any lawyers and real estate brokers.
Then, your Personal Representative allocates money to the “Family Allowance,” a statutorily-required amount for the surviving spouse and/or minor children.
The next three payment priorities are, in order, Federal and State income taxes due by the decedent, medical expenses of the last illness, rent payable by the decedent (up to three months); wages, salaries or commissions for services performed for decedent within 3 months prior to date of death; and old age assistance claims.
LASTLY, your Personal Representative pays “all other claims.” This category includes any loans that remain unpaid at the time of death. However, if a bank account agreement provides that the account must be used to offset the outstanding loan at death, the bank account will be used to pay off this loan before the Personal Representative can get her hands on it. In effect, the bank (an “other creditor”) will have jumped in line from last-place priority to first-place priority, at least with regard to that one bank account. Even the funeral bill and the Family Allowance could not be paid from that account until the loan is completely paid off!
Make sure that you read your loan agreement documents before you sign them. Ask questions at the bank. And last, consider holding your savings and checking accounts at a different bank from the one where you obtain your loans, especially if you think that you debts may outnumber your probate assets upon your death.