Introduction to Obligations To Creditors After Death

Obligations to Creditors After DeathCarrying out the duties of an executor or trustee can be challenging to those who are not prepared for the job. Depending on the particular state, the probate process can be complicated and time-consuming for executors – even those who are familiar with the laws governing their jobs. Administering a trust can be just as (if not even more) complicated a task. To make matters even more stressful, executors and trustees who fail to carry out their duties can face legal repercussions and/or cause legal troubles for others. This is especially true when it comes to handling the creditors of the decedent.

Death Does Not Extinguish the Rights of Creditors

Just because a person has died does not mean that the person’s creditors no longer have any rights or legal recourse. Unless there is an agreement to the contrary wherein the creditor agrees to forgive any outstanding debt of the debtor in the event he or she dies, the executor or personal representative of the decedent’s estate has an obligation to pay or settle the decedent’s debts and affairs. Setting up a trust does not do away with this requirement, either: Even if the decedent established a living trust and pour-over will so that all of his or her property and assets would be transferred to the trust upon his or her death, creditors of the decedent still have their legal rights and are still entitled to be paid if they present a timely and valid claim.

The rights of creditors of the decedent include the right to be timely notified of the decedent’s death through appropriate service. Where the executor, representative, or trustee (referred to hereafter simply as the “representative”) is aware of the creditor’s identity and location, the representative must cause notice of the decedent’s death to be served upon the creditor directly along with notification of the timeframe within which the creditor can file a claim. For other potential or unknown creditors, notice is usually published in an appropriate local newspaper for several weeks.  See the article on Debt.org concerning debt of deceased relatives.

Failing to Pay Creditors Can Create Headaches for the Representative and Heirs

Obligations to Creditors After Death and headaches for beneficiariesCreditors who have a lawful claim against the decedent’s estate are entitled to have that claim paid – even before heirs or beneficiaries of the decedent are paid. It is the representative’s responsibility to ensure this important duty is carried out. Beneficiaries or heirs that are paid before the lawful claims of the creditors are paid can be sued by the creditor and be required to pay the creditor back the amount the creditor should have received. The representative themselves can also be sued – either by the creditor or by the heirs and beneficiaries – for violating his or her obligations.

For example, suppose Tim dies with a valid will in place (in other words, Tim dies testate). He names his brother Rick as his executor and directs that his assets and property be distributed in equal shares to his two grown children. Tim’s estate is valued at $50,000 and he dies with $60,000 in debt. Rick would need to resolve Tim’s debts before distributing any of the assets to the children. He could either pay the full value of the debts or he could attempt to settle the debts for less than they are worth. (Because Tim’s debts exceed the value of his estate’s value, Rick may be able to encourage the debtors to settle the estate for less than the obligations are actually worth.) If Rick failed to do so, Rick and/or the children might find themselves named as defendants in lawsuits filed by the creditors to recover the value of the distributions from the children.  For more information call to speak directly with an experienced estate planning lawyer in Tucson.