Many estate planning clients wonder if credit card and other debt will haunt their family members and beneficiaries when they die. Not to worry, federal and state rules of estate law, provide protections from outstanding debts. The caveat is that estates without trust or will testamentary documentation giving directives for debt settlement, may be subject to probate court proceeding. Outstanding debts can be attached to an estate, trust, or will if a creditor files a lawsuit against a decedent in court. An estate owner can protect their estate and loved ones from creditor attachment by taking precautionary measures to restrict debt collectors from forcing an estate’s trust assets into probate court distribution. Planned giving specialists will want to read on about estate creditor attachment for purposes of planning a nonprofit charitable giving strategy.
The main fear when discussing estate obligation to an estate owner’s debts, is whether a surviving spouse, children, or other loved one will be liable for the credit card and other debt after they are deceased. Family member obligation to estate debt depends on joint tenancy account signatory of creditor agreement. If a spouse or co-signing family member is also participatory in a credit agreement, they will likely be equally obligated to pay back outstanding debts. Outstanding monies owed on an account after the other co-signing party dies, are dissolved, or assigned an estate for administration and payoff. Not all authorized users of a decedent’s credit card account, however, are necessarily liable for the balance after the debtor dies. Depending on the creditor agreement, an authorized user may not have a duty to fulfill payment, insofar that they have not used, or ceased using the card prior to the owner’s death.
State and federal laws of estate provide for creditor attached debts to be recovered from a decedent’s estate through probate liquidation of assets. Creditor attachment is one of the lead reasons for an estate or trust to be reviewed by the probate court. Qualifying property, asset, or accounts are subsequently liquidated by a court if creditor attachment is legitimate. Estates will most likely be subject to attachment are those with substantial trust assets. However, the detriment to probate court review of creditor claims, is that beneficiaries may receive a smaller inheritance than expected.
The federal Fair Debt Collection Practices Act (FDCPA) prohibits disclosure of disputed debtor information to third-party debt collectors. The reassignment of an account to a third-party debt collection agency, is sometimes also a violation of account ownership rights, depending on the state. Special assets are now better protected since 2017, however, as result of Employee Retirement Income Security Act (ERISA) rule reforms. The expansion of prudential measures for estate fiduciary best practices, has furthered protections for estates and trusts with creditor attachment. ERISA provision covers key estate and trust assets like managed retirement contribution plans and pension benefit plans, protecting them from creditor attachment prior to probate.
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Estates can protect trust assets and loved ones from creditor attachment, by taking precautionary measures to restrict debt assignment to heirs with living trust or will directives.
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