Why Avoiding Probate Protects Assets.

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 which your Lake County probate attorney will be able to help you understand.  Nevertheless, within limits, non-probate
assets provide clear creditor protection advantages over probate.