An estate plan leaves behind a legacy for family members and close friends. Many individuals take time to address their wealth and assets but fail to consider outstanding debts. Those debts can haunt your beneficiaries, distracting from your initial intentions. The experienced Arizona estate planning attorneys at Harrison Law, PLLC, can help you handle matters involving estates and creditors, and ensure your financial rights remain protected. Contact the legal team at (480) 320-2310 to learn more today.
Creditors and Beneficiaries
In many cases, the beneficiaries are not personally liable for a deceased individual’s debt unless they had co-owned or personally guaranteed the obligations. Creditors, however, could make a claim on the beneficiary’s assets received through an estate plan. In those cases, the estate trustee must sell the assets to satisfy their claims of debt. Creditors may petition the Arizona court during the probate process.
At that time, the court can order the estate to sell assets and property to satisfy these debts. The estate must settle all creditors within a year of the filing. The estate also must pay interest under the state’s laws or according to the terms of the agreement with the deceased.
The estate executor is typically responsible for addressing the creditor’s claim. All debts must be satisfied before the executor can distribute assets, property, or cash. Some debts, like taxes, take precedence over other types.
Transferring Assets To Avoid Creditors
When an estate has multiple creditors and no assets, the probate court often declares the estate as insolvent. While that can take care of the creditor issues, any beneficiaries will not receive cash or property from the estate. Any gifts left to the beneficiary in the estate plan may be subject to a creditor’s claim. For that reason, many individuals transfer assets in their lifetime to avoid these claims.
Unfortunately, transferring funds during a person’s lifetime has been under legal scrutiny in recent years, with transfers subjected to fraudulent conveyance laws. When a debtor attempts to create a transaction that defrauds a creditor, it can be an act of fraud under the law. Specifically, if the transfers rendered the estate insolvent, it might be considered fraudulent.
The transfers might not fall into the fraudulent category if an individual received a reasonable equivalent consideration for an asset transfer. These reasonable equivalent considerations in estate planning include:
- Funding a protective trust for a spouse or child
- Transferring assets for a return of interest in an LLP or LLC
- Moving to an annuity (or other interest) to protect the principal from creditors’ claims
Multiple issues may arise concerning creditors and your estate plans. Reach out to Harrison Law, PLLC, and speak to an experienced estate planning attorney about your assets and debts, and how to ensure your financial rights remain protected.
Asset Protection
It is important to always address creditors early in the estate planning process. Legal judgments by creditors often wear away at a person’s legacy as beneficiaries must fight to keep the assets. While the executor must cover valid and substantiated debts through the estate, other situations can deplete your assets without the appropriate actions. It is unfortunate when assets left to heirs become subject to claims by the creditors. Fortunately, an individual can take steps to protect their estate from creditors.
Irrevocable Trust
Setting up an irrevocable trust transfers assets to a distinct entity may help to reduce the assets subject to a creditor. Consider the trust as a legal arrangement in which the grantor transfers ownership of assets to the trust that is managed by a trustee. The trustee is responsible for administering the assets to the beneficiaries according to the estate plan. Once an irrevocable trust is established, the individual no longer owns the asset and cannot alter how the estate will distribute them after death. In this way, the irrevocable trust offers a way to protect those assets.
These types of trusts are not vulnerable to legal judgments or creditors, allowing the beneficiaries to bypass the probate process. Additionally, creditors cannot claim insurance proceeds, either. Irrevocable life insurance trusts may help protect those assets from creditors and other claimants during the probate process.
One important caveat to consider is that if the courts determine that the individual’s intent was to intentionally defraud creditors, the state may dismantle the trust.
IRA Trust
An Individual Retirement Account (IRA) trust can funnel assets to an IRA through a separate trust, helping protect those funds from creditors. At one time, creditors could not make a claim on those IRA inheritances, but that is not the case anymore.
Payable-on-Death Designations
Payable-on-death (POD) and transfer-on-death (TOD) designations allow an individual to transfer a bank account to an heir at the time of death. At that point in time, these bank accounts bypass probate, and creditors cannot make any claim to them.
While all of these options provide some type of safeguard against creditors, certain trusts and transfers might not be applicable for all situations. In addition, an estate plan’s primary purpose is to efficiently distribute assets after the individual has died—not avoiding potential creditors. Consider visiting with an experienced estate planning attorney at Harrison Law, PLLC to learn more about your legal right to potentially avoid creditors within your estate plan.
Estate Planning With Considerable Debt
A person with considerable debt must address these issues early in the estate planning process. Not addressing these financial issues only leaves the responsibility and burden in the hands of your beneficiaries. Creating an actionable plan could help mitigate financial overwhelm. Consider these steps:
- Fund a business enterprise with your assets to help keep them out of probate court.
- Give assets to your heirs while alive to avoid losing them in the probate process. However, some tax implications may occur.
- Work to pay down debt with payment plan options, allowing your beneficiaries to receive debt-free assets.
Reach Out To an Estate Planning Attorney Today
Any issues related to creditors and your estate plans are unique to your situation. While some advice may help in specific situations, not all individuals can apply it in every case. Talking to an experienced estate planning attorney and addressing your specific circumstance with regard to creditors may help prevent your beneficiaries from losing assets in the probate stage. An estate should leave fond memories and assets to your family members and loved individuals, not burden them with creditor claims. Find out about your estate planning options by setting up a consultation with Harrison Law, PLLC, by calling (480) 320-2310 today.
© 2022 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved
This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.
