When someone passes away, one of the first questions I am often asked is if creditors can take part of the estate assets to settle debts. Another related question is whether or not the heirs are personally responsible for paying things like credit card bills, the mortgage, phone and power bills, etc.
Probate and Trusts
First, let's talk about how probate works. When someone passes away, assets that are in the name of the deceased only and which have no beneficiary or payable on death go into probate. If the deceased had a joint bank account or joint tenant rights on a home with his or her spouse for example, then the asset pass directly to the joint account holder outside of probate.
Who pays the bills?
So now let's answer what rights creditor have against estate assets. A creditor can file a claim against an estate for payment of a debt – credit cards, mortgage, and other outstanding debts. The heirs are not directly responsible for paying the debts from their own pocket. The executor or personal representative must pay the creditors from probate assets before final distribution of money is made to the heirs. If all assets are used to pay estate debts, then the heirs receive no disbursement of funds.
Be warned that if the executor makes the mistake of distributing funds before a creditor can fil a claim or lawsuit against the heirs for the return of the money, or against the executor if the individual refuses to file a petition to have the heir turn over the money to the estate.
What if there are no probate assets?
So what happens if there is no probate money to pay creditors? This might happen if all of the assets were in joint names or had beneficiaries. In this case, a creditor may look to those non-probate assets to pay debts. Let's assume that an individual put assets into a joint bank account that would pass to the surviving spouse or heir in order to avoid payment of the debt. The creditor can file a claim for that that or creditors could demand that the heirs (beneficiaries) who inherited those assets use them to pay some or all of the debt. This is not likely to happen unless the debt is substantially enough to motivate the creditor to go down this road.
Keep in mind that not all assets are handled the same way. Retirement accounts and insurance proceeds with designated beneficiaries provide more protection from creditors. Money in revocable trusts are generally subject to creditor claims, while assets in irrevocable trusts – when structured properly – are generally exempt from such claims.
If you would like to learn more about how to protect your estate from creditors, please feel free to give us a call.