In terms of a decedent’s own creditors, does it matter whether assets are distributed to decedent’s beneficiaries through a probate estate or by non-probate transfers?
Yes, it does, especially regarding persons other than the decedent’s surviving spouse who are not personally liable for the decedent’s debts.
Assets that are part of a decedent's probate estate are subject to creditor claims within the probate, essentially a clearinghouse for creditor claims; distributions to beneficiaries come last.
Non-probate assets – such as trusts, retirement accounts or designated beneficiary accounts or estates with a gross value under $150,000 – escape the probate clearinghouse.
In a court-supervised probate, the decedent's personal representative invites all “reasonably ascertainable creditors” to submit their claims within the first four months of probate prior to beneficiary distributions.
This even includes creditors whose claims are not yet legally established and enforceable.
While revocable living trusts are answerable to creditors for the debts of a settlor, both while the settlor is alive and he or she dies, nevertheless assets held in trust may be less susceptible to the reach of many of the decedent’s creditors.
Unlike probates, Trusts are administered for the sake of the trust beneficiaries, i.e., the deceased settlor's loved ones, according to the terms of the trust.
Unlike probates, a trustee is neither required to publish notice in a newspaper (announcing the trust administration), nor to solicit creditor claims from potential creditors whose claims are not yet legally enforceable.
Like probates, however, a trustee must contact known and reasonably ascertainable creditors of the decedent and solicit claims.
After all actual creditors are either paid, settled, and/or an adequate reserve is kept for the same, the trustee may then distribute trust assets to the trust beneficiaries.
This is true even though potential creditor claims are still being established inside the decedent's probate; which may have even been commenced by the creditors themselves in order to perfect their creditor claim against the estate prior to submission of a perfected claim to the trustee.
Oftentimes, it is only when the creditor claim is perfected inside probate and submitted to the trustee outside probate that the trustee is obliged to recognize such debts of the deceased settlor in the course of settling the trust.
If the claim arrives late after the trust assets have been distributed then the creditors must pursue the beneficiaries, who are liable to the creditors only to the extent of any assets received.
This may place the creditor at a significant disadvantage in the collection process – especially where many beneficiaries have received assets across the nation -- and may favor negotiated settlements with the beneficiaries.
Next, life insurance, retirement accounts, and joint tenancies are non-probate assets with creditor protection advantages.
Life insurance proceeds are exempt from the claims of a deceased insured’s creditors to the extent reasonably needed by the surviving beneficiary for the support of the beneficiary and/or his/her spouse and dependents.
Retirement accounts are usually exempt from the participant’s own creditors while alive and remain so after his or her death.
Lastly, assets held in joint tenancy pass to the surviving joint tenants without creating any new liability for the debts of the deceased joint tenant except those already secured against the joint tenancy property itself.
It may, therefore, seem that the law favors persons who plan to avoid paying their debts after they die through non-probate assets.
Not so. Transfers of non-probate assets – that were acquired by the decedent on the eve death – to surviving beneficiaries can be undone where the creditors prove that such planning was creditor avoidance.
Nevertheless, within limits, non-probate assets provide clear creditor protection advantages over probate.
Dennis A. Fordham, attorney (LL.M. tax studies), is a State Bar Certified Specialist in Estate Planning, Probate and Trust Law. His office is at 870 S. Main St., Lakeport, California. Fordham can be reached by e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it. or by phone at 707-263-3235. Visit his Web site at www.dennisfordhamlaw.com .