MN Probate | Can non-probate assets be used to pay an estate’s debts?

Non-Probate Assets in MinnesotaNon-Probate Assets in Minnesota

Last week we discussed what happens when an estate runs out of money. When this happens, an estate is seen as insolvent, meaning the assets are not sufficient to cover the liabilities owed. In these cases, money is distributed according to a pre-established hierarchy and when it runs out, it’s gone. But what happens if there are assets beyond those in the estate? Can they be used to pay off the estate’s debts? To learn more keep reading.

First, why would there ever be assets that are not part of the estate? The reason is because some assets are seen as non-probate assets and pass outside of the probate system. This happens most often with assets that have what are known as designated beneficiaries.

Designated Beneficiary Law

What is a designated beneficiary? A designated beneficiary is someone who was named as the person to whom an asset will pass should he or she survive the decedent. When you list someone’s name as beneficiary on an IRA, 401(k), life insurance policy or bank account, this makes them a designated beneficiary. In these cases, and those involving pay-on-death or rights of survivorship accounts, the assets pass directly to the named beneficiary. This happens entirely outside of the probate process and results from a contract between the decedent and the financial institution. Because no probate court is involved, these are referred to as non-probate assets.

Insolvent Estates

So what happens if an estate is upside down, but there are non-probate assets with money that could be used to cover some of the debts? Are the non-probate assets up for grabs? Surprisingly, the answer is not always so clear. Recently, Texas passed a new law that says that assets from multi-party accounts that pass outside of the probate process are liable for the debts of an estate. The problem is that the Texas law doesn’t do a very good job of explaining how this should work in practice. The issue is that though these funds may be used to pay debts of an estate, the executors may not have any access to the funds as they were lawfully distributed by the financial institutions directly to the beneficiary. Unless the executor acts quickly and notifies the financial institution that funds are in dispute, it may be too late as they money could already be spent. Should that happen, the Texas law says nothing about how the executor should go about recovering money from the rightful beneficiary.

In Arizona, the law is similar. The legislature there said that non-probate assets can be used to pay a decedent’s debts, but only in cases where the estate’s assets are insufficient to cover its liabilities. In those cases, the beneficiary of the non-probate asset would be held legally responsible for satisfying debts up to the value of the money received. That means if a beneficiary received a bank account worth $10,000, he or she could be on the hook to pay up to $10,000 in debts of the decedent’s estate.

Creditor Claims (Debts of the Deceased)

In other states, non-probate assets are seen as not being part of the estate and thus cannot be claimed by creditors, even if the estate is insolvent. According to the Minnesota Department of Revenue, assets that are payable upon death are not part of the state’s probate process. As a result, the DoR goes on to say that named survivors inherit these non-probate assets, which are not applied to the deceased person’s debts. Examples given of such non-probate assets including things like property with a right of survivorship, insurance proceeds, annuities, pensions, retirement accounts and accounts that are payable upon death.

Minnesota Probate Lawyers

An experienced Minnesota probate lawyer can help walk you through the probate process, answering questions along the way. For more information on estate planning in Minnesota, along with a variety of other topics, contact Joseph M. Flanders of Flanders Law Firm at (612) 424-0398.

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