Call it fallout from today’s challenging economy. More and more beneficiaries are looking for help after a deceased loved one passes away saddled by debt. When this occurs it must first be decided who, if anyone, is obligated to pay the debt. In most cases the surviving family member may not be personally responsible for the decedent’s debt, but the Estate may be.

If a surviving loved one or next of kin has obligated themselves personally or co-signed for the debt, then they could be liable, and may or may not have a claim for reimbursement from the decedent’s estate.

If someone passes away leaving debt where the surviving family member has not personally obligated themselves, then we must look at whether this particular debt is secured. For example, if there is real estate involved and there is a mortgage, lien or line of credit on the property, then the property is encumbered and that debt is secured. And, the creditor could initiate legal proceedings against the estate assets in order to try to collect the debt that is owed. If there was not enough equity in the assets to satisfy the debt, the creditor could try to pursue the estate for any deficiency.

If a decedent died with credit card debt, typically the credit card should be cancelled (unless the card is held jointly) and the credit card company contacted to see whether any credit life insurance exists to satisfy the debt. If not, the credit card company may file a claim against any joint card owner. If there is no joint card owner, the credit card company may file a claim against the Estate.

In cases where the decedent purchased and/or obtained credit life insurance to cover an obligation or debt, it will be used to satisfy the same. In every case this inquiry should be made.

If the decedent had a life insurance policy with a designated beneficiary, then those life insurance proceeds would not have to be used to satisfy the decedent’s debt. The same goes for TOD (Transfer on Death) or POD (Payable on Death) assets. These kinds of accounts belong to the designated person. The beneficiary of such an account does not have to use these assets to satisfy estate debts. The same goes for joint accounts with rights of survivorship.

If there are medical claims involved, most medical providers will accept insurance coverage payment and may in some cases negotiate the balance due to them with the Estate. The surviving family member or next of kin are not personally responsible, but the surviving spouse may be.

If an Estate is insolvent, i.e. insufficient assets exist with which to satisfy the decedent’s debts, then under Ohio law the debts would be marshaled and prioritized and paid according to Ohio’s priority of claims law.

If there are absolutely no estate assets available to satisfy any of the decedent’s debts, then the estate is considered insolvent. If creditors of the decedent are continually harassing the surviving family members, usually the estate or probate lawyer can send a letter to the creditor stating that the estate is insolvent and to remove them from their debtor file, or attempt to negotiate the claim.

Ohio law states that all creditors having claims against an estate shall present their claims to the Executor or the Administrator in writing. Ohio law further states that all claims must be presented within six months after the death of the decedent. If the claim is not presented within six months, it must be forever barred. This obviously applies only to claims against Probate assets or claims against unsecured assets.

Also under Ohio law an Executor or Administrator may accelerate the bar against claims against the Estate by giving written notice to a potential claimant that informs them that any claim that they may have against the Estate must be presented to the Estate within 30 days after receipt of the notice, or six months after the date of death of the decedent.

When a claim against an estate has been rejected, the claimant must commence an action within two months after the rejection or be forever barred from maintaining an action on the claim.

If the decedent had a fully funded trust at death, there may be provisions in the trust that give the trustee discretion to pay debts of the decedent. If payment of the debts is discretionary, there is Ohio case law that suggests creditors cannot force the trust to pay the claim. While there is not absolute authority on this issue, the likely result in an Ohio court is that, since the decedent did not have assets subject to administration by the probate court, the trust holding non-probate assets cannot be compelled to repay the creditor. Naturally, if payments of the decedent’s debts is mandatory in the trust language, then the trust must satisfy creditors.

The estate administrator has both a fiduciary duty and obligation to the beneficiaries and to the creditors. A basic tenet of estate administration is that debts must be paid before distributions can be made to beneficiaries assuming the estate is solvent. In order to protect the fiduciary of an estate from personal liability, reasonable efforts must be made to locate and satisfy the rights of creditors of the decedent. If the estate makes distributions to beneficiaries without addressing the creditors rights, the fiduciary of the estate may be personally liable unless the beneficiaries return any improper distribution they may have received from the estate to pay for any improperly unpaid debts.

For more information about Probate/Estate Administration or Contact us.