Decedents' Creditors and Nonprobate Assets
| Publication year | 1986 |
| Pages | 2190 |
| Citation | Vol. 15 No. 12 Pg. 2190 |
1986, December, Pg. 2190. Decedents' Creditors and Nonprobate Assets
People seldom die debt-free. Although death ends an individual's ability to generate income, there is no corresponding termination of debt. The decendent's estate usually becomes responsible for debts such as an energy bill, tax payment, credit card statement, mortgage payment or other everyday expenses.
Secured creditors are generally protected to the extent of the security's value, whether or not estate assets are sufficient to pay all debts, allowances and claims.(fn1) Unsecured creditors are less secure, but they too have easy access to a decedent's probate assets as long as the assets are sufficient to cover all debts, allowances and claims. A convenient forum exists for asserting and processing claims against the probate estate.(fn2) If no probate estate has been opened and there are probate assets, the creditor can open an estate and collect the debt from available assets.(fn3)
However, certain kinds of assets pass to beneficiaries designated by the decedent free of probate. These assets are not subject to the creditor provisions of the Colorado Probate Code ("Code").(fn4) A decedent's creditors often cannot attach non-probate assets to satisfy a claim because title to those assets automatically shifts to a designated beneficiary at death. The decedent's estate never acquires ownership of nonprobate assets and therefore cannot hold them for the creditors' benefit.
Examples of nonprobate assets include stock and real estate held in joint tenancy; trust assets; joint bank accounts; payable on death ("POD") property in the form of bank or brokerage accounts or U.S. savings bonds; and insurance, annuity and retirement benefits. Colorado law is often unclear with respect to creditors' rights in these nonprobate assets.(fn5)
This article discusses the difficulties a decedent's creditors may encounter in trying to satisfy their claims from assets held in a nonprobate form of ownership. Particular attention is given to the problems of creditor access to assets in joint tenancy, beneficiary designation property, funds in multiple party accounts and trust assets.
Real estate or securities held in joint tenancy are free from the claims of a decedent's creditors as long as the joint tenancy was not created to defraud the creditors.(fn6) The primary source of this doctrine is Colorado case law. In Park State Bank v. McLean,(fn7) the Colorado Court of Appeals held that a creditor's lien against a husband's interest in real estate held in joint tenancy with his wife extinguished when the husband died. The bank had obtained a default judgment against the husband in 1975. The husband died in 1978. Approximately two years after the estate was closed, the bank filed a motion to revive its judgment lien against the husband's interest in the property. The court ruled that a judgment lien against a joint tenant's interest does not survive that joint tenant's death. The lien terminates if the joint tenant-debtor dies before attachment or levy has been made on the interest.
The court reasoned that a joint tenancy is analogous to a life estate. No transfer occurs at the death of a joint tenant. Any interest the deceased joint tenant may have had in the joint tenancy property merely terminates. Liens existing against the deceased joint tenant's interest are extinguished at death and the survivor becomes the sole owner of the entire property free of any encumbrance against the decedent's "vanished" interest.
A similar result occurs with respect to securities held in joint tenancy. In Eisenhardt v. Lowell(fn8) the Denver Probate Court denied the petition of a creditor who sought to attach a deceased joint...
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