Colorado Probate Blog - Wade Ash Woods Hill & Farley, P.C.

3 minutes reading time (588 words)

Third Party Rights: Small Estates and Non-Probate Assets

Many of our probate statutes are designed to carry out a decedent’s intention as expressed in his or her will. Certain rules of construction (survivorship, substitution of assets) apply to wills and revocable trusts as will substitutes. The statutes also provide for recognition and ordering of third party (non-beneficiary) interests in probate and revocable trust assets. These would include taxes, creditor claims, and family protection entitlement during the period of administration.

There are two main limitations in this model. First, what happens if the estate is so small that there are not enough assets to go around? Secondly, what happens if all or most of the assets are non-probate assets, that is assets which pass directly to beneficiaries without going through the estate? Non-probate assets include joint tenancy, life insurance, retirement benefits, trust assets, TOD (transfer on death), and POD (payable on death) assets. Compared with the non-probate transfers, assets actually passing under wills in probate constitute a small percentage of the total value of all assets passing at death.

The Colorado Probate Code is not especially friendly toward creditors. Certain rights may be cut out within four months after death on account of publication of a notice to creditors in what is often an obscure newspaper. Further, since the Probate Code does not require the filing of an inventory of assets in the public court records, creditors may not know of a death (notwithstanding the legal fiction that death is notorious) or know whether there are assets worth going after.

As to the normal estate with assets available for distribution, there is a priority of third party interests which generally must be satisfied “off the top,” that is prior to distribution to the beneficiaries. This general priority is:

1. Income and other tax liabilities.
2. Funeral and administration expenses.
3. A family exempt property allowance, currently
    $33,000.
4. A family support allowance, currently $33,000.
5. Creditor claims which have been perfected.

What if the probate estate is insufficient to pay or satisfy the third party claim, but there are non-probate assets sufficient to pay these obligations? Colorado statutes have evolved to help address the situation.

As to death taxes, Colorado has an equitable apportionment statute which provides that all assets subject to estate tax are required to contribute their pro rata share. Similarly, the Colorado Probate Code provides for a surviving spouse to elect to take a forced amount equal to one-half of the decedent’s probate estate assets increased by the value of certain non-probate transfers. The statute provides that the beneficiaries of non-probate transfers are subject to contribution (or payment to the electing spouse) to satisfy the election on a pro rata basis.

Probate assets are also burdened with the payment of creditor claims; but if they are not sufficient, then certain non-probate transfers (including revocable trust assets, POD and TOD bank and securities accounts) are liable for contribution for the excess. Similarly, if the probate assets are insufficient to satisfy the statutory exempt property and family support allowances these non-probate assets are liable for contribution.

Last year, the Colorado Supreme Court ruled that revocable trust assets are subject to creditor claims during or following the death of the settlor/beneficiary. This was no surprise.

The lesson is clear both for clients and professional advisors. The creation of non-probate transfer documents (revocable trusts, POD bank accounts, TOD security accounts, joint tenancy bank accounts and the like) will not avoid the legitimate interests of third parties at death (such as death taxes, creditor claims, and statutory family protection benefits).

 

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