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 info@cpa-wfy.com.
© Copyright 2017. All rights reserved. Brought to you by: Wright Ford Young & Co.
FAQs
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.
Can creditors come after a POD account? ›
If you're a high-net-worth individual utilizing credit shelter trusts, marital trusts or generation-skipping trusts, transferring assets with a POD may result in a loss of tax advantages for your heirs. Creditors may still have claims on POD assets.
Can creditors go after beneficiaries? ›
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.
Can creditors take inheritance money? ›
A creditor can only get a limited part of the inheritance while it is in your trust. What is needed for your son's support is protected. Over and above that, creditors may be able to get up to 25% of any payment made to your son. The same holds true if you believe your son is in a marriage that could end in divorce.
Can debt collectors come after beneficiaries? ›
California law does allow creditors to pursue a decedent's potentially inheritable assets.
Can creditors go after a POD beneficiary? ›
So if you don't leave enough other assets to pay your debts and taxes or to support your spouse and minor children temporarily, a POD bank account (or any other asset that passes outside probate) may be subject to the claims of creditors or your family. Your spouse may also have rights.
What assets are protected from creditors after death? ›
Living trusts allow you to pass on property to your heirs and avoid probate. Assets held in a living trust are protected from creditors. Brokerage accounts, which are taxable investment accounts held with an investment firm or brokerage, can't be taken by creditors.
Do I have to pay my deceased mother's credit card debt? ›
If there's no money in their estate, the debts will usually go unpaid. 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.
Can IRS go after non-probate assets? ›
Trusts: Non probate assets held within a belief can be issued to IRS series moves if the faith is determined to owe taxes. The IRS can area liens on faith assets or pursue different series of actions to satisfy any tax liabilities associated with the trust.
Can creditors go after family members? ›
Debt collectors know that family members have no obligation to pay off their dead loved one's debts, but that doesn't stop them from trying to collect anyway.
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 debt collectors collect after 10 years? ›
Debt collectors may not be able to sue you to collect on old (time-barred) debts, but they may still try to collect on those debts. In California, there is generally a four-year limit for filing a lawsuit to collect a debt based on a written agreement.
Do debts get paid before inheritance? ›
Before the executor can distribute assets out to the family, the debts of the person who died have to be paid off. This includes things like paying credit card bills or for somebody who had a last illness, paying the hospital bill.
What debts are not forgiven at death? ›
Additional examples of unsecured debt include medical debt and most types of credit card debt. If you die with unsecured debt, repayment becomes the responsibility of your estate. Your legal estate refers to all the assets, property and money left behind by you or another deceased person when they die.
What happens if you don't pay a deceased person's debt? ›
If the deceased was the primary borrower, the estate will be responsible for the debt. If the estate cannot pay it, though, the cosigner will be responsible. This is one of the reasons many financial planners advise clients to avoid cosigning financial documents.
Can you pay bills from a deceased person's account? ›
The short answer is no. In most cases, heirs are not held responsible for paying off the debts of someone who has died. That debt typically falls to the estate. As long as the value of the estate is greater than the total debt, the estate is considered “solvent” and all outstanding bills will be paid from it.
Does a will override a pod account? ›
POD accounts override a last will and testament. The named beneficiary on a POD account will receive the assets no matter whom they're designated to in the will.
What are the disadvantages of a POD account? ›
POD Accounts Can't Set Aside Cash for Estate Expenses
If all your money goes directly to beneficiaries when you die, there won't be funds specifically set aside to pay your estate's taxes and debts. Not having money reserved for this purpose could leave other assets, like your home, subject to your creditors.
Can a Pod bank account be contested? ›
A common question among account holders concerning designating beneficiaries and mapping out a financial legacy is—“Can a POD account be contested?". In short: “yes,” though the rules can sometimes vary depending on your state. There are specific steps you can take to make this a less likely possibility.
