When someone dies, their financial obligations do not simply cease to exist. Their debts become the responsibility of their estate. Any assets they have become the property of their estate. The personal representative administering the estate typically has to notify creditors about estate administration and pay them using the estate’s resources.
In some cases, collection attempts can be much more difficult than in others. For example, a creditor may discover that a debtor transferred a significant portion of their personal property to a trust. Doing so may keep those assets from passing through probate court after they die.
Does a trust integrated into an estate plan prevent creditors from securing repayment using the probate claims process?
Some transfers may not hold up under scrutiny
In theory, a trust is a separate legal entity that does not share the same financial responsibilities as the person creating the trust. However, the law recognizes the possibility of people abusing trusts to avoid financial responsibilities.
Fraudulent transfers to trusts are somewhat common. People who want to avoid financial responsibility sometimes make fraudulent transfers by giving away or transferring ownership of resources that could help repay creditors.
To determine if a transfer was fraudulent or not, a careful review of financial records is typically necessary. A transfer becomes fraudulent when it occurs after the person funding the trust has already taken on major financial obligations or is subject to aggressive collection efforts.
If an individual started a trust when they already had six figures in medical debt, for example, the transfers that occurred after accruing that debt could be fraudulent even if they kept their accounts with their creditors in good standing throughout their life. The creation of a trust to avoid financial responsibility for debt can lead to allegations of fraudulent transfers.
Complicated claims against estates often require careful review and prompt legal action. There is a limited window of opportunity for creditors to take legal action against an estate or a trust that may contain assets that should be part of an estate.
Discussing the unpaid financial obligations and the circumstances of the estate with someone familiar with state law can help business creditors determine whether probate litigation might be an option. Those who raise successful questions about fraudulent transfers may be able to secure repayment with assets that may otherwise be inaccessible after the debtor dies.