Generally, when one passes away all of the deceased assets are dealt with by a legally recognized administrator of the estate of the deceased. This is particularly easy if the deceased left a Last Will & Testament. But even if they did not and the deceased has an appreciable amount of assets in their name (cars, houses, investments, retirement accounts, etc.) Then a legally recognized administrator has to be identified by the court. (This is handled in the local Probate Court of whatever state/city/town/county the deceased was residing in at the time of their passing.)
Then the administrator of the estate does a final 1040 personal tax return for the deceased, and all of the assets of the deceased are legally transferred to the estate that was established by the estate administrator. From there, a 1041 estate return is completed. The administrator is legally responsible for ensuring that all outstanding debts of the deceased are paid, provided the estate has the means to pay those debts. Sometimes this means some assets of the estate must be sold in order to pay those debts, and that's just the way it goes. Then after the estate pays taxes on any of the estate that is taxable, all remaining assets are distributed to the heirs that are legally entitled to receive it.
Now for medical bills for the deceased, it depends on the laws of your state. I know in Florida that if a surviving person did "NOT" sign any medical documents in a way that makes them liable for the debt, then the debt just flat out does not get paid. Period. The person or entity that is due the debt is just flat out "out of luck". This even includes the spouse of the deceased. If the spouse did not sign any medical documents in a way that would make them liable, then the person or entity to whom that debt is owed, can not go after the surviving spouse to collect said medical debt of the deceased. That's the law in my state of Florida.
