A Guide To Safeguarding Your Estate: Dealing With Creditors In Estate Planning

After a lifetime of hard work, the last thing you want is for the assets you worked so hard to acquire to be used to pay off debts, potentially leaving your loved ones with nothing. When you die, Florida requires the estate to go through probate. Part of the probate process includes identifying and notifying creditors of the individual’s death so they can file their claims to get final payments on the debts they hold. Fortunately, Florida also offers individuals options for how to structure their estates so they can legally protect their assets from being used to pay off debts. With a properly executed estate plan, you can ensure that your loved ones receive the inheritances you want them to have without fear that your hard-earned assets will be used to pay off your debts. If you wish to explore estate planning in more detail to ensure that your assets are protected, call Loughlin Law, P.A. at (561) 677-8384 to book an appointment with one of our experienced estate planning attorneys.

What Kind of Creditors Can File a Claim Against an Estate?

Any creditor with a valid debt owed by the deceased can file a claim against the estate. These can include the funeral home for funeral and burial expenses and facilities such as a hospital or nursing home for final medical expenses. Other creditors may also include assisted living or household expenses, secured debts such as mortgages or car loans, past-due child support, unsecured consumer debt such as credit cards or personal loans, direct or private loans from friends or family, and damage claims such as court judgments. Creditors have three months from the first publication date or 30 days from receiving the Notice to Creditors that informs them of the individual’s death to file their claim with the probate court. If they do not file within the provided time, the claim may be barred and the creditor will be unable to collect on the debt.

Because there are often a variety of creditors who all wish to file claims and be paid, Florida’s probate court sorts creditors into eight classes, and then prioritizes those classes based on which debts are most important to be paid and which ones may go unpaid in the event the estate is unable to pay all the debts. Class 1 debts are prioritized for payment, with each remaining class having a lower priority than the ones above them. Per FL §733.707, those classes are:

• Class 1: The administrative expenses and costs, including the personal representative’s compensation and any attorney’s fees associated with the estate.
• Class 2: Funeral, interment, and grave marker expenses up to $6,000 for all expenses combined, regardless of who paid these expenses.
• Class 3: Any taxes or debts with preference under federal law, including unpaid court costs, fees, and fines for claims in favor of the state.
• Class 4: Necessary and reasonable hospital and medical expenses from the final 60 days of the last illness of the decedent’s life, including compensation for any staff attending the decedent.
• Class 5: Family allowance.
• Class 6: Court-ordered child support arrearages.
• Class 7: If the decedent had a business, any expenses associated with continuing the business after their death. However, this extends only to those assets associated with the business.
• Class 8: All other claims not included in another class, including judgments or decrees against the decedent.

Are There Any Assets Automatically Protected From Creditors?

Compared to some other states, Florida offers generous asset protection from creditors. Particularly when it comes to an individual’s estate plan, the state offers a variety of possible assets that may be exempt from being claimed by creditors. However, it is important to note that even these exempt assets may be subject to creditor collection if the individual’s estate plan is not structured properly or the required circumstances for exemption do not exist. Therefore, it is strongly recommended that individuals consult with an estate planning attorney to ensure that their assets are properly protected, whether they are automatically protected or not.

Homestead Property

The Constitution of the State of Florida exempts an individual’s homestead property from being claimed by creditors, both during the individual’s life and after their death. A homestead property is the primary home owned and lived in by the individual and their spouse, if they are married. The real estate can be up to a half-acre if located within the city limits and up to 160 acres outside city limits.

There are two exceptions to this exemption. First, if the debt owed is for taxes or assessments on the real estate itself, the exemption does not apply. The second exception is for any debts incurred as part of the purchase, repair, or improvement of the property or for the labor associated with the purchase, repair, or improvement of the property.

Joint Bank and Brokerage Accounts

Not all joint bank or brokerage accounts can qualify as exempt and be protected from creditors. However, if the accounts are set up as “tenants by entirety,” then they are protected from creditors who are suing or pursuing a debt owed by only one spouse. This may be beneficial during an individual’s life, such as if they are sued after a car accident.

If the bank does not specifically offer the option to set up the joint account as “tenants by entirety,” then the law presumes that this protection applies to the account. However, if the bank does offer the option, then the account owners must elect the option for the protection to apply. If an individual believes that this should apply to a joint account they own, they will want to check with their banking institution to determine whether they need to elect the option. If their institution offers the option, and the account owners do not elect it, then the account is unprotected and a creditor may be able to make a claim against it.

Life Insurance, Annuities, and Other Qualified Plans

FL §222.14 protects the cash surrender value of life insurance policies and the proceeds of annuity contracts against the creditors of both the individual insured and the beneficiaries of the insurance policy or annuity contract. This means that not only can the decedent’s creditors not attempt to claim these assets to collect the decedent’s debts, but if the beneficiary of one of these assets has debts, their creditors are also prevented from trying to claim them when the beneficiary receives them.

Limited Liability Company Assets

If an individual owns a business, they may already be familiar with limited liability companies (LLC). An LLC is often used by business owners to separate their business and personal assets so that if their business faces a lawsuit or other claim, their personal assets are protected.

However, LLCs are not just for businesses. Individuals can set up a “Family LLC,” which is an LLC used for estate planning purposes. This type of LLC allows parents to transfer assets into the LLC and retain control over the assets while protecting them from creditors because the parent no longer owns the asset—the LLC does. Heirs inherit shares of the LLC ownership after their parent’s (or other loved one’s) death. Individuals should consider consulting with an attorney to ensure that an LLC set up for this purpose is properly structured.

Other Assets Exempt By Florida Law

FL §732.402 exempts several other assets from being claimed by creditors to pay debts. These assets include household furnishings, furniture, and appliances up to $20,000 in net value at the time of the decedent’s death. Up to two motor vehicles are also exempt from creditor claims if they meet the legal requirements. College tuition, including all tuition programs that qualify under the Internal Revenue Code is also exempt.

Florida law gives the surviving spouse, or the individual’s children if there is no surviving spouse, any exempt assets before any creditor’s claims are paid. However, the spouse or children may be required to file a petition for such property. Therefore, individuals who are creating or reviewing their estate plan may want to discuss which assets are exempt to their spouse and adult children and what may be required to be given those assets upon their death to ensure that these heirs do not waive their rights unintentionally.

Structuring Your Estate Plan To Protect Assets From Creditors

Any assets not already described as being protected from creditors would be open to creditor claims during the probate process. Fortunately, Florida allows individuals to structure their estate plans to protect additional assets from creditors. If an individual does not have a comprehensive estate plan, or dies with only a Last Will and Testament or no will at all, their assets must go through probate. A comprehensive estate plan allows the individual to take advantage of several methods of protecting their assets. A consultation with a compassionate estate planning attorney at Loughlin Law, P.A. may offer individuals guidance on which methods may be most appropriate for their needs.

Revocable or Irrevocable Trusts

Trusts can be very powerful estate planning tools, but they can also be quite complex. A trust protects assets, creates rules for how those assets are used, and can preserve government benefits for disabled beneficiaries. A properly structured trust can offer extensive protections against creditors.

However, it is important to note that there are instances in which a revocable trust can be dissolved and the assets used to pay creditors. While this rarely happens, if an individual wants the most protection against creditors using a trust, they may want to consider an irrevocable trust. Irrevocable trusts provide the most protection against creditors because the trust grantor cannot regain ownership of the assets, thus their creditors cannot claim those assets. As the name implies, an irrevocable trust cannot be dissolved or changed, so individuals must be absolutely certain of what assets they want to put in the trust, the terms they want to include in the trust, and the beneficiaries they want to name, as all of these things will be irreversible.

Pay on Death Financial Accounts

Bank accounts such as checking, savings, and money market accounts can all be designated as pay on death, as can many other types of financial accounts. Other financial accounts and instruments that may be designated as pay on death include investment accounts, certificates of deposit (CD), and retirement accounts.

To designate a financial account as pay on death, individuals should contact the financial institution with which they have the account and ask them to apply for the designation. The individual will need to name the beneficiary who will receive the account upon their death. This beneficiary will need to present the account holder’s death certificate and the beneficiary’s identification to gain access to the account, after which the financial institution will release the funds and close the account. If the account is jointly owned, a pay on death beneficiary will not receive the funds from the account until the last surviving account holder has died. Other joint account holders will remain in control of the account until their deaths.

Ladybird Deeds for Real Estate

Homestead property is exempt from creditor claims because it is the individual and their spouse’s primary residence. Many people own other real estate, such as rental properties, vacation homes, or homes they have purchased for their children or other loved ones. Because these properties are not the individual’s primary residence, they are not considered exempt from creditor claims. This does not mean they cannot be protected from creditors in an individual’s estate plan, though.

Individuals can protect real estate by using ladybird deeds. A ladybird deed allows the property’s owner to retain ownership until their death, or until the death of the last surviving owner in the case of joint ownership. Upon the owner’s death, the ladybird deed allows automatic transfer of the property to the predetermined beneficiary named in the ladybird deed. The owner of the property continues to control the property until their death, including the right to live in, lease, or sell the property if they choose.

Life Insurance Instead of Cash Savings

Many times, someone wants to leave a cash inheritance to their loved one. They may want to do this for a variety of reasons, including to pay for the heir’s education, fund a wedding, help them purchase a home, or otherwise improve their financial situation. While cash may seem to be a simple and easy way to leave an heir with an inheritance that betters their life, if cash is not properly protected by placing it in a trust or a pay on death account or other asset protection method, creditors can file their claims and the cash may be used to pay off debts instead of going to the intended individual.

One simple way around this is to use life insurance instead of cash to leave a monetary gift. An individual can purchase a life insurance policy in the amount of their choosing, name the intended heir as beneficiary, and upon the named insured’s death, the beneficiary will receive the policy’s proceeds upon presenting the death certificate. This money is not subject to creditor claims because it does not go through probate but instead is given directly to the beneficiary.

What Happens If There Are No Assets Available for Creditors Claims?

Some assets are automatically exempt from creditors, and an individual has worked with an estate planning attorney to create an estate plan that allows them to protect many other assets. This raises the question of what happens to creditor claims if there are no available assets to pay those debts. There are a few things to understand about what happens in these circumstances.

Family and Personal Representative Not Responsible for Debts

The first thing to understand is that the decedent’s family and their personal representative are not personally responsible for any debts the deceased incurred. The creditors can file claims against the estate, but if the estate is unable to pay them, the creditors cannot attempt to collect those debts from friends, family, or others associated with the decedent. If a friend or relative signed a contract or otherwise took legal responsibility for a debt the deceased incurred, they can be held responsible, but the creditor must be able to present evidence that this friend or relative agreed to take financial responsibility for the debt.

Only Probate Assets Used for Debts

Another important thing to know about creditors and their claims against an individual’s estate is that non-probate assets are typically off-limits to creditors. These would be the exempt assets, such as the homestead property, and any assets that do not pass through probate, such as those assets in a trust, life insurance policies, and other assets that have been properly protected.

This means that generally, if there are no assets to pay the debts, then the creditors do not get paid. If there is money to pay some creditors, but not all, the personal representative is to pay the debts in the order of the eight classes Florida has for creditors. This means some creditors may get paid while others do not. While non-probate assets are usually off-limits, there may be exceptions to this so individuals should consider consulting with an attorney to learn more about when and how these exceptions may apply to their estate.

Some Debts Must Still Be Addressed

While many creditor claims may go unpaid if the estate is structured to protect most of the individual’s assets, there are still some debts that will need to be addressed. For example, if the individual still had a mortgage on their home or a loan on a motor vehicle, the beneficiary is not personally responsible for making those payments. If they do not, the lender may proceed with foreclosure or repossession proceedings. Therefore, individuals should ensure that beneficiaries are aware of mortgages, car loans, or similar debts that will need to be addressed and that the beneficiaries know who the lender is. The beneficiary will need to contact the lender to learn more about their potential options, such as assuming the mortgage or loan, selling the asset, or using other financing options to pay off the original debt.

How Our Boca Raton Estate Planning Attorneys May Be Able to Assist You

Estate planning may never be anyone’s favorite activity. After years of hard work accumulating valuable assets, protecting those assets probably is something that most people want to do. By taking the time to carefully structure your estate plan and protect your assets from creditors, you can ensure that your loved ones benefit from all your efforts. Whether you need to create your plan for the first time or review it to ensure everything is accurate, a knowledgeable estate planning attorney at Loughlin Law, P.A. may be able to assist you. Call our Boca Raton office at (561) 677-8384 to book an appointment and ensure your estate is protected from creditors both during your lifetime and after your death.