The residue of the estate is used to pay debts before specific gifts

It's hard to accept that someone would leave a bequest to a beloved family member, only to have that bequest eaten up by the deceased's debts. However, it's very common that inheritances are cancelled out or reduced by debts. Whether or not the asset left to the beneficiary specifically or as part of the residue can affect what happens to that bequest. A reader recently asked me about this:

"If someone passed away and leaves their house (say to a grand-daughter who is not the executor) but has a huge amount of credit card debt, is the house sold to pay the debt? Leaving the grand-daughter with nothing?"

As a general rule, all debts of an estate must be paid before beneficiaries receive an inheritance. In this case, it is quite possible that the house would be sold to pay the debts even if the beneficiary gets nothing.

However, there is more to it than that. Once we get beyond the general rule, there are other guidelines to help an executor determine what is to be sold for debts. A more specific answer would depend on two things: a) whether the will specifically leaves the house to the grand-daughter or whether it leaves her the entire estate, and b) what else is in the estate to pay off debts.

The residue of the estate is used first when there are debts. And within the residue, personal property, as opposed to real property, is to be used first. This means that other assets such as bank accounts, vehicle, household goods, and investments must be used for debts first. You mentioned a huge amount of credit card debt, and of course there are funeral expenses and taxes as well, so it may be impossible to pay off that much debt using other assets. So if the house is in the residue of the estate, as it would be if the entire estate were left to the granddaughter, once any personal property was liquidated, the house most likely would be sold.

If the will specifically leaves the house to the granddaughter, it cannot be sold until all of the residue is used up first. This wording in the will may provide more protection for the granddaughter if there are other assets. However, in an estate where the house is the only asset, it likely will make no difference to the outcome. 

As disappointing as it may be, you may end up with nothing. It's possible that if the full sale proceeds of the house are not needed for debts, you may end up with the cash left over, depending on the wording of the will.