When a person dies while indebted and estate
assets appear insufficient to pay all the debts, lenders may want to look carefully at the probate process. There are options and tools available to help collect at least a portion of the debt, even if the estate appears to be insolvent. This article will highlight some basic concepts involved in collecting from an insolvent probate estate.
A. Verifying that a probate estate exists — or causing one to be opened.
Just because someone dies does not mean that a probate case will necessarily be opened. For example, if a decedent’s property passes through “non-probate” transfers — e.g., joint tenancy, transfer on death or payable on death designations, or transfers to a trust — the property would pass by operation of law to family members or other recipients. Also, family members may be unfamiliar with the probate process or fear its costs and may not understand that it might be needed.
But if creditors are not being paid, they can urge heirs to file a probate. Failing that, a creditor has the option of starting probate proceedings themselves, even without the cooperation of heirs.
Creditors who think that a probate case might already exist but who have not received a notice should inquire at the county where the decedent lived. The court clerk should be able to check on pending probates, and lawyers can also access that information.
Creditors of a decedent are considered “interested parties” by Nebraska law and can therefore file a petition to probate an estate, even if no heir has done so. That creditor can even nominate its own representative to be the personal representative of the estate. A family member or close family associate can also be asked to serve.
B. Filing a claim in the probate proceeding.
Once a probate proceeding is opened, the creditor should file a claim against the estate. Generally, a claim should be filed within 60 days of the date of mailing of the notice by the personal representative providing the creditor with notice of the probate’s opening. If a creditor fails to file a claim, the creditor may be able to proceed against collateral if properly secured but may not be able to proceed against the estate for personal obligations of the decedent, such as personal guaranties.
C. The estate inventory.
After filing a claim, a lender should review the estate inventory. The inventory is due to be filed within three months after a personal representative is appointed. If properly prepared, it will catalog the decedent’s assets at death, including jointly held property that passed upon death and the fair market values. If not timely filed, the creditor can bring this to the attention of the probate court.
But that inventory probably won’t tell the whole story. Until all creditor claims are filed, the total debt amount won’t be known. Once the claims bar date passes, the lender can review creditor claims and determine if the estate is likely solvent or insolvent. An additional way to check for non-probate property is to review a decedent’s Nebraska inheritance tax return. A properly completed inheritance tax return will list all assets in which the decedent had an interest, including assets passing through non-probate transfer. The inheritance tax return is required to be filed with the county court within 12 months of the decedent’s death.
D. Enlarging the Estate Assets
Once it becomes clear that the estate is likely insolvent, the creditor may want to look at several ways to enlarge the estate to pay debts.
- Bringing joint tenancy property, “payable on death,” and other non-probate assets back to the estate.
Nebraska law provides that if other estate assets are insufficient, transfers resulting from a right of survivorship (joint tenancy property), a “payable on death” (“POD”) designation on a bank account or a “transfer on death” (“TOD”) for securities, are not effective against the estate to the extent it is needed to pay claims and statutory allowances. Neb. Rev. Stat. § 30-2726(a). One who receives payment from an account after the death of the decedent “is liable to account to the personal representative for a proportionate share of the amount received to the extent necessary to discharge estate claims.” In other words, the joint payee must pay the funds received from a joint account or other non-probate property back to the estate, up to the amount needed to make the estate solvent.
However, the personal representative is not required to act unless it has received a “demand” from an interested party, such as a creditor or heir. The proceeding to recover the joint property or account funds has a time deadline — one year from the decedent’s date of death. Creditors should be aware of this one-year cutoff. A demand made by a creditor after the one-year period has expired may be of no effect.
This is a very powerful tool for creditors. It is common for substantial property to change hands at the decedent’s death due to joint tenancy, POD or TOD accounts. Often, those monies and property go to the surviving spouse or other family members. Those funds can be recovered for creditors under this statute, and in some instances, that may provide the difference between a solvent estate and an insolvent estate. - Recovery of pre-death fraudulent transfers
The personal representative can also bring a claim for transfers the decedent made during his lifetime that were fraudulent as to creditors. These could include, for example, transfers of money or property to family members where there was no adequate consideration received, if the transfer was made while the decedent was insolvent, or if the transfer rendered him or her insolvent.
E. What if the Personal Representative is Not Acting Responsibly?
Sometimes, the PR may not be fully cooperative in collecting assets to pay creditors. This might be for any of several reasons. For example, the PR may have benefited from the receipt of joint or other non-probate property received upon the decedent’s death and may be unwilling (or feel unable) to repay it. Or, those funds may have gone to other family members, leaving the PR reluctant to make demands upon them. Or, overwhelmed by the death of a loved one and the responsibilities of the estate, the PR may not be emotionally able to address the necessary liquidation of property for payment of estate debts. Fortunately, the probate code provides ways to address these issues.
- Appointment of a “Special Administrator”
Nebraska courts can appoint a special administrator in many circumstances, including where the personal representative has a conflict of interest, such as when the PR or a family member benefited from non-probate property that is now needed to pay creditors. The creditor can ask the court to appoint someone to take up the job of collecting non-probate or fraudulently transferred property or where the court otherwise finds it necessary to preserve the estate. (Neb. Rev. Stat. §30-2507(2)). The special administrator — sometimes but not always a lawyer — can be compensated from estate assets. A special administrator can also pursue claims against the personal representative if that person has breached their fiduciary duty to the estate. Neb. Rev. Stat. 30-2474 may make the PR personally liable for those acts. - Replacement of the PR.
In situations where the PR is not acting responsibly, the Nebraska statutes permit an interested party to ask the court to replace the PR with someone else upon a showing of sufficient cause. Neb. Rev. Stat. §30-2454 allows interested parties — which would include creditors — to petition the court to remove a PR. Grounds for removal include, broadly, the “best interests of the estate” or if the PR misrepresented material facts in the proceedings or has mismanaged the estate. The court can appoint a successor PR, which could be a family member or an unrelated third party.
F. Priority for Payment of Claims
Creditors should be aware of the priority for payment of claims from the estate. Creditors with unsecured claims do not have first priority as to funds in the estate. Generally, the priority order for payment of claims is as follows:
(1) Estate administration costs;
(2) Reasonable funeral expenses;
(3) Debts and taxes with preference under federal law;
(4) Reasonable and necessary medical and hospital expenses of the last illness;
(5) Debts and taxes with preference under Nebraska law; and
(6) All other claims.
Most unsecured claims will fall under (6). However, creditors who have secured collateral can proceed against the property outside of the probate proceedings, for example, by way of foreclosure proceedings.
CONCLUSION
When lenders believe that their claims against a decedent are in doubt due to the estate’s potential insolvency, they should step up their activity to learn more about the estate left by the decedent. It may be advisable to retain counsel to fight to gather and liquidate assets to bolster the estate for creditors.
