I just had this question myself recently when filing for my mother. Paying out the proceeds means that you need to pay whatever bills he may have from the tax return. However, they are asking you if you are going to pay out the proceeds according to your states laws. This requires some research on your part to see if you will be required by the state to pay his bills with his tax return. I still have to research to find out about my state also. If you would like some help with that please don't hesitate to respond. Just let me know what state it was that your son lived in. I'd be happy to help. My condolences to you and your family.