When someone dies, one of the first questions that close relatives usually have is whether they are personally responsible to pay the credit card bills of the decedent. They may even start getting telephone calls from creditors asking them to pay outstanding balances. Close relatives may also want to know: Who is responsible for paying the mortgage of the decedent? If they are entitled to inherit money, can they take their share regardless of the creditor? This article will discuss estate debt issues and the more specific issue of whether a creditor has a right to attach non-probate assets of the decedent. First, let’s briefly review the process.
Probate assets are assets that are in the name of the decedent only. So if the decedent had a bank account in his or her own name and no beneficiaries are named on a pay-on-death form, the money in the account would “pass through” probate. If the decedent held the bank account jointly with another individual (such as a spouse), in the majority of cases money in the bank account would pass directly to the joint account holder outside of probate.
Likewise, if a house was in the name of the decedent only, it would pass through probate. If the decedent owned the house with someone, as joint tenants with rights of survivorship or with a spouse as tenancy by the entirety, the house would pass directly to the joint owner and outside of probate. This is also true when decedents have beneficiary designations in pay-on-death bank accounts or transfer-on-death brokerage accounts.
So, what rights do creditors have to reach the assets of the decedent to pay off the debts? A creditor can file a claim against an estate for payment of the debt. The executor or personal representative must pay the creditors from probate assets before a final distribution of money is made to heirs. If the personal representative distributes money to heirs when debt is outstanding, a creditor can file a claim or lawsuit against:
- The heir(s) for the return of the money; or
- The estate executor or personal representative if the individual refuses to file a petition to have the heir turn over the money to the estate.
What if there is no money in the estate to pay creditors? A creditor may look to non-probate assets to pay debts. This may happen if there is an indication that the assets of the decedent were large and if there was a transfer of money in order to avoid the debt.
For example, let’s say an individual owes $100,000 to a credit card company and puts assets in a joint bank account prior to death to avoid payment of the debt. The credit card company can file a claim for the money. Creditors could demand that the beneficiaries who inherited assets use them to pay some or all of the debt.
Retirement Accounts, Insurance, Trusts
When it comes to creditors, not all assets in an estate are handled in the same way. Retirement account assets and insurance proceeds with designated beneficiaries are treated differently than other assets and provide more protection from creditors. Money in a revocable trust is subject to creditor claims while assets in an irrevocable trust — when structured properly — are generally exempt from creditor claims.
Knowing the rules for limiting creditor exposure is important for those structuring their estates and for heirs of decedents with outstanding debts. Your attorney can help you with these issues.
For additional information contact a WFY tax advisor at [email protected].
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FAQs
Creditors have 60 days to file a claim from the date an estate executor notifies them that the estate is in probate. If the decedent did not name an executor for their will or trust, creditors have four months to act after an estate representative has been appointed by a California probate court.
Can creditors go after an inheritance? ›
If a creditor has already filed a claim against your inheritance and won in court, they can also go after your assets. In this case, it's best to consult with an attorney specializing in debt collection laws to help determine what steps need to be taken next and whether challenging the creditor's claim is worth it.
Which of the following assets do not go through probate? ›
Assets that name a beneficiary: Some assets can transfer directly to a chosen beneficiary, meaning they don't have to go through probate. This includes life insurance policies, retirement accounts, certain types of stocks and bonds, and payable on death (POD) or transfer on death (TOD) accounts.
Can creditors take beneficiary money? ›
When a person dies, creditors can hold their estate and/or trust responsible for paying their outstanding debts. Similarly, creditors may be able to collect payment for the outstanding debts of beneficiaries from the distributions they receive from the trustee or executor/administrator.
What assets are protected from creditors after death? ›
Retirement Accounts, Insurance, Trusts
Retirement account assets and insurance proceeds with designated beneficiaries are treated differently than other assets and provide more protection from creditors.
Can creditors go after personal assets? ›
Although it rarely happens, judgment creditors can seize a debtor's personal property to satisfy all or part of a money judgment. Exemptions set by state law protect certain personal property, a portion of your wages, and — in most states — an interest in a real property you're using as a homestead.
How can I protect my inheritance from creditors? ›
Asset protection trusts offer a way to transfer a portion of your assets into a trust run by an independent trustee. The trust's assets will be out of the reach of most creditors, and you can receive occasional distributions. These trusts may even allow you to shield the assets for your children.
Can IRS go after non-probate assets? ›
Section 6324(a)(1) establishes a federal tax lien upon the property included in the gross estate of a decedent for 10 years after the decedent's date of death. The gross estate includes probate and non-probate property.
Are beneficiaries liable for estate debts? ›
In general, beneficiaries aren't personally liable for a decedent's debts unless they specifically cosigned or are otherwise legally required to pay back the loan or debt. The rules are slightly different, however, for surviving spouses of community property states.
Which of the following is an example of non-probate property? ›
First and foremost, there are a number of asset types that typically do not pass through probate. This includes life insurance policies, bank accounts, and investment or retirement accounts that require you to name a beneficiary.
This can include vehicles, land, houses, bank accounts, investment accounts, stocks, bonds, and business interests. If your name is the only name listed on the deed, title, or account, then the items won't pass on to your beneficiaries without going through the probate process first.
Which of the following forms of ownership do not pass through probate when an owner dies? ›
State probate law determines whether property passes without probate. Depending on the state, there are ways to title a deed for joint ownership. Joint tenancy, a transfer on death deed, and tenancy by the entirety are ownership designations that avoid probate.
Can creditors touch inheritance? ›
Some types of inheritance are protected from creditors, which may include retirement or life insurance funds. However, states CreditCards.com, collectors may be able to seize certain assets to repay your debts, including money that was left to you in a will.
How long do creditors have to come after an estate? ›
Rights Afforded to Creditors During Estate Administration
Creditors must pursue legal action within two years of the date the estate enters probate. Once the deadline passes, they can't try to collect on the debt owed to them.
Can creditors take death benefits? ›
When a policyholder passes away, the death benefit is typically paid directly to the named beneficiaries, bypassing the estate. This means that creditors cannot directly claim these benefits to settle outstanding debts.
Can a beneficiary be held responsible for debt? ›
Generally, beneficiaries are not personally responsible for the debts of the deceased individual. Their liability is limited to the value of the assets they inherit. In other words, they are not required to use their own funds to pay off the deceased person's debts.
Can credit card companies go after heirs? ›
This can, in some cases, lead to family homes or other assets heirs expect to receive being sold to pay debts. If your debt exceeds the assets left behind in your estate, creditors will be likely to pursue inheritors depending on the circ*mstances of inheritance and the financial relationship to you.
Can debt collectors go after the family of deceased? ›
If you are the executor or administrator of the deceased person's estate, debt collectors can contact you to discuss the deceased person's debts. Debt collectors are not allowed to say or hint that you are responsible for paying the debts with your own money.
Do I have to pay my deceased mother's credit card debt? ›
For survivors of deceased loved ones, including spouses, you're not responsible for their debts unless you shared legal responsibility for repaying as a co-signer, a joint account holder, or if you fall within another exception.
