Avoiding Creditors Before and After Death...True or False?
By Rick Amrhein
There are many urban legends (formerly old wives’ tales) out there as to what assets are available to nursing homes and other bill collectors. For estate purposes, we customarily distinguish between “probate” and “non-probate” assets. Probate assets are those that are generally titled in the decedent’s name alone and are controlled by his or her will, or if there is no will, by the intestate laws of Pennsylvania. Whereas, “non-probate assets” are usually controlled by a contract with a bank or insurance company which have a survivorship requirement or beneficiary designation and are not controlled by the will. These are generally thought to be free from creditors’ claim. Such is not always the case.
“Living Trusts,” where a person puts his or her house and bank accounts into a trust, continue to be marketed no matter how often we caution people about them. If the creator of the trust has the right to revoke the trust, it is fully subject to his creditors both during life and after. “Irrevocable Trusts,” which, once established cannot be changed, are safe only to the extent you do not reserve any rights in them. If you reserve the right to income for life, a creditor can get that income for your life but not after.
Generally, property held by the “entireties” as husband and wife is exempt from claims against only one of the spouses but not when that other spouse passes away. However, the IRS, which often plays by different rules, believes a tax lien against only one spouse attaches to one-half of the property at least for the life of that spouse and should the other spouse die first, to the whole property. Since “entireties” property is only available to recognized married couples, property titled by couples not in recognized marriages, whether as joint tenants with right of survivorship or tenants in common, can be subject to claims of aggressive creditors during the life of both owners, and after the death of the non-debtor co-owner.
Multiple party bank accounts, whether joint or in trust for, can have unanticipated results also. During the life of the contributor of both types of accounts, the accounts are subject to collection for debts of the contributor. There is a common misunderstanding that the amount that passes to the surviving tenant or named beneficiary is free of claims of the contributing party’s creditors. They are not. Those accounts may still be available to creditors where the probate assets are insufficient. The rationale is that since the decedent had full control of those accounts up to his death, his lifetime creditors are entitled to attach them.
Other assets such as life insurance proceeds (unless payable to the owner’s estate), retirement benefits, IRA’s and annuities generally cannot be reached by creditors, except maybe in whole or in part by the federal government to satisfy federal tax liens.
So, while the use of non-probate assets continues to be a popular means of doing estate planning, a review by an attorney is necessary to avoid unanticipated legal consequences. It is always advisable to consult your Peacock Keller attorney to avoid surprises.
Peacock Keller, LLP • 70 East Beau Street • Washington, PA 15301 • 724-222-4520