In a previous column, we discussed what would happen if you died and your debts exceeded your assets. However, do you know what would happen if you did leave bank accounts or other assets? What debts would have to be paid with the assets you left?
Generally, your assets will need to be probated upon your death if they include real estate or are valued in excess of $20,000 (in 2010) AND are owned in your sole name and are not subject to joint ownership or a beneficiary or payable on death designation. The $20,000 threshold amount is adjusted annually and the 2011 amount has not been released as of the time I am writing this. Any of your assets that are probated would have to be used to pay off your debts.
When your assets are probated, your personal representative (formerly “executor”) will have to publish a notice in the local paper regarding your estate. This is a notice to all the world that you have died, that you left assets and anyone who has a claim against you must file that claim with your estate within four months of the date of publication in order to get paid. This notice must also be sent to all of your known creditors. Your personal representative then must use your probate assets to pay your debts that are valid and which you incurred during your lifetime.
Some people have the mistaken belief that their revocable living trust will be protected from their creditors both during their lifetimes and after their deaths. However, if you have full access to your revocable living trust assets during your lifetime, so do your creditors. A revocable living trust does not protect you or your assets from your lifetime creditors.
Similarly, if your trust is revocable at the time of your death, it is also subject to the claims of your creditors, as are your probate assets. The successor death trustee of your trust must publish a creditors’ notice in the local paper after your death just like your personal representative of your probate estate. Also like your personal representative, your trustee must send this notice to all of your known creditors.
If a creditor fails to file a claim with your personal representative or trustee within four months after the date of publishing, the claim expires. Your creditors would no longer be able to make a claim against your estate or trust.
If you are the personal representative of a probate estate or the successor death trustee of a revocable trust, you should be careful of when you make distributions to beneficiaries. I usually recommend that you do not make any distributions or only make minimal distributions to beneficiaries until after the four month claims period has expired.
If a creditor makes a claim after you have paid out everything to the beneficiaries, it is often very difficult to collect the money back from the beneficiary. The beneficiaries may have already spent their inheritance. If the beneficiaries do not pay back what they owe to the estate or trust, then you as personal representative or trustee may be personally liable for the debt. At the point, you may have to file a lawsuit against a beneficiary to collect. This is not a good position to be in. It would have been easier if you had not paid anything out to the beneficiaries until after the claims period has expired.
If you have a revocable living joint trust with your spouse, that trust is also liable for your debts after you are gone. Your surviving trustee spouse would also have to publish the creditors’ notice in the local paper and send the notice to your known creditors. Your creditors’ claims generally must be paid from the joint trust assets.
However, if you have set up an irrevocable trust during your lifetime, then that trust is not subject to your creditors’ claims after your death. Examples of these types of trusts would be an irrevocable life insurance trust or a Medicaid qualifying solely for benefit of spouse trust. After your death, the irrevocable trust assets would be distributed in accordance with the instructions you left in the trust, free from any claims of your creditors.
In your revocable trust, you can set up irrevocable trusts for your spouse or kids that would not be subject to their creditors’ claims. Your trust must have properly drafted lifetime trusts for the benefit of your spouse or kids that are set up after your death. Your beneficiaries would have full access to the trust assets for their needs during their lifetimes, however their creditors cannot make a claim against those assets either during the beneficiaries’ lifetimes or after their deaths.
If you do not have probate or trust assets at the time of your death, there are generally no assets available to pay your debts or other claims. In such instance, your survivors do not have to publish the creditors notice in the local paper or send the notice to your known creditors.
So, do not think that just because you have a trust that your survivors could escape all your debts. If you have assets at the time of your death, whether in your revocable trust or in your own name that must be probated, they are available to pay your creditors.
Published edited January 23, 2011 in The Times Herald, Port Huron, Michigan as: Estate assets subject to the deceased’s debts