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CREDITOR CLAIMS AGAINST A DECEDENT

One of the most common questions asked regarding an estate is “Am I liable for the decedent’s debts?”

The short answer is No. Normally, a person is not responsible for a deceased individual’s debts. Below is an overview of how debts of a decedent are to be paid under Arizona law and when a person may be liable to pay the debts of a decedent.

1. What debts must be paid by the Estate?

All valid claims against the estate must be paid. If an estate does not have sufficient assets to pay all claims in full (an insolvent estate), payment must be made based on the priority of the creditor claim as provided under Arizona law. Such priority is as follows:

• Expenses of administration;
• Funeral expenses;
• Federal income taxes;
• Expenses of last illness;
• State income taxes;
• All other debts.

If there are multiple creditor claims that have the same level of priority and the estate is insolvent, the claims must be prorated among the creditors who have priority of payment.

2. Are Non-Probate Assets Liable to Pay Decedent’s Debts?

If it is determined the estate is insolvent, the next question is whether the beneficiaries of the decedent’s non-probate assets are responsible for the payment of the debts.
A. Surviving Spouse. If the decedent was married, the surviving spouse may be responsible to pay the Estate’s debts. For a separate debt of the deceased spouse, up to one-half of the community property (representing the deceased spouse’s one-half) may be used to pay the debt, along with the separate property of the deceased spouse. For a community debt, all of the community property, and potentially even the separate property of both spouses, is available to pay the debt. Remember, a community debt is a debt incurred during the marriage and benefitted the family directly or was used to care for family property. A separate debt is a debt incurred prior to the marriage or any debt not incurred for the benefit of the family.

B. Beneficiaries of Non-Probate Assets. A creditor can request payment from persons who inherited an asset outside the probate process, such as a paid-on-death beneficiary designation of a bank account. However, the creditor would have to deliver a written demand to the Estate’s personal representative. The personal representative may then request that the beneficiary return the entire amount received from the bank account to the Estate. If the beneficiary refuses, the personal representative or creditor may be able to obtain a judgment against the beneficiary.

C. Guarantor of Decedent’s Debt. Normally no else is responsible for payment of the decedent’s debts. However, there is exception to this rule. If another person agreed in writing to be responsible for payment of the debt, such as a guarantor or co-signer, then that person continues to be liable for the entire payment. This is especially common for student loan debts or auto loans, as we’ve seen in the news.

3. What assets are exempt from creditors?

If it is determined the estate is insolvent, the next question is whether the beneficiaries of the decedent’s non-probate assets are responsible for the payment of the debts.
A. A. Statutory Allowances and Exemption. There are certain statutory allowances and exemption for the surviving spouse and minor children of the decedent. These allowances and exemption take priority over all creditors except the expenses of administration.

B. Retirement Accounts. The Decedent’s 401(k) or 403(b) retirement account may be transferred outside the reach of the deceased person’s creditors. Individual retirement accounts (“IRAs”) paid to Arizona resident beneficiaries are also exempt under Arizona law.

C. Life Insurance. Death benefits from life insurance policies are protected as well from creditors under Arizona law.

Normally, the payment of creditors is a simple administrative matter. However, determining the validity of creditor claims and the payment of such claims may become complicated when the Estate is insufficient to pay the decedent’s debts. It is recommended that a person obtain advice from a licensed attorney before paying or entering into any agreements to pay a decedent’s debts.

Laura M. Trujillo
ltrujillo@mclawfirm.com

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