When someone passes away, their assets go through probate, which is a process where the decedent’s assets are located, collected, and inventoried by the estate’s executor or administrator (a process referred to as “marshaling”), the creditors are notified of the probate proceedings, and once they are paid off in order of priority, the estate’s remaining assets, if any, are distributed to the will’s beneficiaries. But what of assets that pass to beneficiaries outside of probate, or those that never became part of the probate estate in the first place? In this guide, we will discuss the distinction between probate and non-probate assets, the reasons for which a creditor would prefer to target the non-probate assets, and how they might go about it. 

What Are the Differences Between Probate And Non-Probate Assets? 

Probate assets constitute the deceased person's property that passes through the court-supervised probate process, and generally include assets owned solely in the decedent's name, with no designated beneficiaries or joint ownership in place, such as:

• Bank accounts in the decedent's name alone, 
• Solely owned vehicles or real estate, 
• Personal belongings like furniture or jewelry, 
• Stocks, bonds, mutual funds, or other financial instruments in brokerage accounts held solely in the decedent's name.

Conversely, non-probate assets are those that bypass the probate process and transfer directly to heirs or beneficiaries outside of court supervision. Common types of non-probate assets include:

• Assets held in joint tenancy with right of survivorship (JTWROS): In a JTWROS, ownership passes automatically to the surviving joint owner(s) upon the death of one owner. This could include real estate, bank accounts, or other jointly held property.
• Assets and accounts with designated beneficiaries: These include retirement accounts (401(k)s, IRAs), life insurance policies, annuities, and potentially other assets with beneficiary designations. Upon the owner's passing, designated beneficiaries receive these assets directly.
• Payable-on-Death (POD) or Transfer-on-Death (TOD) accounts: These are bank or investment accounts that are structured to pass directly to the beneficiaries outside of probate. passing.
• Assets Held in Trust: Assets placed in certain forms of trusts (discussed in detail below) never became part of the probate estate (discussed in detail below).

The Advantages of Pursuing Non-Probate Assets 

Now that we have distinguished between probate and non-probate assets, let’s discuss some of the reasons why creditors would want to pursue their claims against the latter. 

Insufficient Probate Assets: It is not uncommon that a probate estate’s assets are insufficient to satisfy all its debts and liabilities in which case non-probate assets will be the only viable alternative.

Efficiency and Speed: The probate process can be slow, often taking months or even years. Non-probate assets, however, transfer directly to beneficiaries without the delays inherent in probate court proceedings. Pursuing these assets can thus offer a more efficient and faster path to debt recovery.

The Five Legal Avenues for Creditors

Now that we’ve discussed the “Why” of targeting non-probate assets, let’s move on to the “How.” After all, if the overall essence of non-probate assets is that they did not belong to the decedent upon their passing, how would a creditor be entitled to reach those assets to satisfy their claim? 

1. Challenging Fraudulent Transfers

There are, of course, many legitimate estate planning reasons for which ownership interests can be transferred through inter vivos trusts or by establishing joint tenancies that provide for the automatic transfer of interests to another after one’s death. Unfortunately, these mechanisms are frequently abused by individuals looking to avoid taxes, skirt laws regarding asset declaration, or (you guessed it) put those assets out of the reach of creditors. Common signs of such fraudulent practices include:

• Suspicious Timing: Transfers made shortly before death, particularly of valuable assets like real estate or investment accounts, might raise red flags for creditors. The closer the transfer is to the debtor's passing, the more likely it will be scrutinized.
• Below-Market Transfers: Transferring assets to family or close associates for significantly less than their fair market value could indicate an attempt to shield assets from creditors. For instance, selling a property to a child for a fraction of its appraised value would likely be considered a fraudulent transfer.
• Retained Control: If the debtor maintains control over the transferred asset after the supposed transfer (e.g., continues living in a "sold" house, using a "gifted" car), it could be a sign of a fraudulent transaction with the implication that the transfer was not legitimate because the debtor is still benefiting from the asset.

2. Claims Against Jointly Owned Property 

Jointly owned property with rights of survivorship typically passes directly to the surviving owner(s) upon the decedent's death, thereby avoiding probate. That said, creditors may have limited ability to claim against the deceased's interest in such property under specific circumstances. Here are some key considerations:

• Understanding the Type of Joint Ownership: The specific legal form of joint ownership (e.g., tenancy by the entirety, joint tenancy with right of survivorship) can significantly impact creditor rights. Each state may have variations on these ownership structures.
• Debts Incurred Before Ownership: If the debt was incurred before the property was acquired jointly, and the deceased was solely liable for the debt, a creditor generally cannot claim against the surviving owner's interest.
• Debts Incurred During Joint Ownership: If the debt was incurred during joint ownership, and both parties were liable (joint debt), the creditor might be able to make a claim against the entire property, potentially forcing its sale to satisfy the debt (however, many states limit the creditor's claim to only the deceased's ownership share).
• Using the Property as Collateral: If the jointly owned property was used as collateral, this gives a creditor a secured claim which it could potentially enforce against that property, even though it was not solely owned by the decedent when they died.

3. Asserting Claims Against Assets in Payable-on-Death and Transfer-on-Death Accounts: 

While POD and TOD accounts offer a streamlined method for transferring assets to beneficiaries outside of probate through ownership interests in bank accounts, securities, and other financial vehicles, it's important to understand that these designations do not guarantee absolute protection against creditors' claims. Specifically, in instances where the assets within the probate estate are insufficient to cover its debts, creditors might have the legal right to petition that the POD and TOD accounts be applied towards making up the shortfall. 

4. Asserting Claims Against Retirement Accounts and Life Insurance: Limited Exceptions

Retirement accounts and life insurance policies are generally considered safe havens from creditors, mainly because they pass directly to named beneficiaries, sidestepping the probate process. Nonetheless, several important exceptions could affect their immunity:

• When the Estate is a Designated Beneficiary: Designating the estate as the beneficiary for either retirement accounts or life insurance policies converts these assets into part of the probate estate. Consequently, they may be subject to creditor claims if the estate lacks sufficient funds to settle the decedent's debts.
• Retirement Accounts—Federal Protections and Their Limits: Under federal laws, retirement accounts that fall under the Employee Retirement Income Security Act (ERISA) are entitled to significant protections against creditors, however, there are notable exceptions, such as obligations for unpaid child support, alimony, certain judgment liens, criminal restitution orders, or certain federal tax liabilities, these protections might not apply. 
• Life Insurance Policies: Life insurance policies may be entitled to some protections as well, but these protections are usually less extensive and governed by state laws. In specific scenarios, a surviving spouse may have legal rights to a portion of the deceased’s life insurance benefits, regardless of the named beneficiary, and the extent of these rights can vary dramatically between states. 

5. Asserting Claims Against Trust Assets

When attempting to recover debts from a deceased person's estate, understanding how different types of trusts work is essential. Testamentary trusts are created within a person's will. Because they're part of the will, they go through probate court, making them a standard target for creditors, as assets within a testamentary trust are generally accessible to satisfy outstanding debts. 

Inter vivos trusts, on the other hand, are established with the grantor is still alive. These trusts can be both revocable and irrevocable trusts established while the grantor was alive, and the level of asset protection they offer against creditors varies significantly based on which of those they are. With revocable trusts, the grantor maintains a lot of control over these assets after they are placed in the trust. As a result, a revocable trust might still be considered part of the deceased grantor's estate for debt repayment purposes and creditors are more likely to have a chance of accessing these assets. Conversely, when a grantor places assets into an irrevocable trust, they give up ownership and control, which has the effect of transferring them outside of probate thereby harder for creditors to reach. 

In conclusion, pursuing creditor claims within the probate estate is the traditional and most direct route. That said, even though it comes with a unique set of challenges, targeting a decedent’s non-probate assets is not impossible, and has several strategic advantages. Through AAL's directory, you can find numerous access seasoned attorneys with years of experience in practicing probate law who can provide you with guidance through each phase of the recovery process, vigorously defend your rights during proceedings, and, if need be, represent your interests in court to recover the fullest extent of what you are due.