Debts of a Deceased Person (Arizona)
1. What debts is the estate responsible for?
In general, all debts of the deceased person must be paid to the extent the probate estate has funds available to pay them. However, Arizona law provides up to $37,000 in "statutory allowances" for a surviving spouse and dependent children. These allowances protect some assets from debts and creditors of the deceased person, except for expenses of administration (attorney fees, probate costs, compensation for personal representative).
However, a closer look is required because it is common for most or all of a deceased person's assets to pass outside the probate estate.
2. What assets are exempt from the deceased person's debts and creditors?
Life insurance death benefits are fully protected from a deceased person's debts and creditors in Arizona if payable to a named individual or a trust (not the deceased person's probate estate). The amount of the exemption is unlimited, provided the beneficiary did not also agree to be responsible for the debt. However, there is an exception to the exception, which states that a surviving spouse and dependent children Arizona law gives the surviving spouse and children up to $20,000 of claim-free life insurance proceeds even if they are also obligated to pay the debt.
The assets in a deceased person's 401k account are exempt from the deceased person's debts and creditors under federal ERISA law, with only one exception – if the deceased person owed back child support.
Other types of retirement accounts, including individual retirement arrangements (“IRAs”) payable to named individuals or a trust are also exempt under Arizona law, although it should be noted that Arizona is one of only a small group of states that provide this exemption. The Arizona exemption only applies to retirement accounts payable to Arizona residents.
3. What debts might the surviving beneficiaries be personally responsible for?
If a surviving beneficiary agreed to be formally responsible for the debt, the beneficiary remains fully responsible for its payment. For example, if a beneficiary co-signed a loan with the deceased person or if the beneficiary is a named account holder for a credit card.
Assuming no one else agreed to be formally responsible for the debt, and the deceased person was unmarried at the time of death, no one else will be responsible for payment. The analysis becomes more complex, however, if the deceased person was married. For a separate debt of the deceased spouse, up to one-half of the community property (representing the deceased spouse’s one-half) is available to pay the debt, along with the separate property of the deceased spouse. For a community debt, all of the community property, and potentially even the separate property of both spouses, is available to pay the debt.
A separate debt is a debt incurred prior to the marriage or any debt not incurred for the benefit of the family. A community debt is a debt incurred during the marriage, provided the expense benefited the family directly or was used to care for family property.
4. If the probate estate is insolvent, can a determined creditor pursue assets passing outside probate?
Yes, a determined creditor can request payment from persons who inherited by beneficiary designation and not through the probate estate. For example, if Child inherited an account from Dad through a pay-on-death designation at a bank, a creditor of Dad could demand payment from Child. In order to do so, the creditor would have to deliver a written demand to the personal representative, if any. The personal representative may then request Child to give back up to the entire amount received from the bank account to the estate. If Child refuses, the personal representative (or the creditor itself) can initiate a court proceeding to obtain a judgment against Child. This process is subject to the two year statute of limitations against creditor claims.
About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection. He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law. Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.
For more information on this topic, I also recommend these articles from other authors:
How to Deal with Debt After a Spouse's Death (from LendEdu)
Retirement Plan Benefits Include Creditor Protections (from AZ Central)