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April 9, 2009
DEATH AND DEBTS
After a family member or friend has passed away, there always is someone who has the task of arranging their funeral, paying their final debts and distributing their assets. When it comes to a person’s final debts, you might be surprised to learn that sometimes, these final debts do not have to be paid.
After someone’s death, where do creditors go to make a claim for a debt they are owed? The answer is the probate court. Creditors have one year from the date of death to file a claim against someone’s estate. If they wait more than one year, their claim is barred.
First some basics; A person’s will, and the Probate Court, only deal with probate assets. Probate assets are assets that are in the decedent’s name alone. When you add someone’s name to an asset, like a bank account, it is no longer a probate asset. If you do this to all of your assets, it is known as a “poor man’s will” because all of your assets pass to the co-owner automatically upon your death, without going through the probate process. Other assets like life insurance, IRA accounts, retirement funds and annuities are not probate assets because they have named beneficiaries.
So, as long as the decedent did not have any probate assets, creditors do not have anywhere to look for repayment. The same rule applies to tax obligations due the State or Uncle Sam. Here’s an example:
“Joe” didn’t have much, but he did have a $400,000 IRA. In his final days he decided to travel around the world using $100,000 from his IRA and numerous credit cards that he received in the mail. Six months later “Joe” returned home after having spent all of the $100,000 and running up another $100,000 on his credit cards. “Joe” died soon after returning and before filing his tax return that showed a balance due to the IRS of $15,000. “Joe’s” brother, the sole beneficiary of the $300,000 IRA was contacted by the IRS and the credit card companies wanting to know when they were going to be paid!
How much money do you think “Joe’s” brother had to pay to settle these debts? The answer is zero. That is because both the IRS and the credit card companies may only look to “Joe’s” probate estate for reimbursement. In this case “Joe’s” only asset was an IRA and we all now know that IRA’s are not probate assets.
Some creditors can be very persistent, to the point that they are harassing you. Before you pay any creditors for claims against a deceased person, seek competent legal advice.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Friends of the Saugus Senior Center and is a member of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions, please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org