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Recovering Nonprobate Assets to Pay Estate Claims

Many individuals avoid probate by using revocable trusts, payable on death designations and joint tenancy. When they die, their money quickly disappears leaving creditors with unpaid probate claims. However, there are ways to recover nonprobate assets from persons who receive those assets.

Probate is the legal process by which a person’s property is transferred to a new owner at death. It is one of many ways that property interests pass at death. An estate is opened, somebody is appointed to be in charge of the estate (a Personal Representative) and then that same person collects the decedent’s property that did not automatically transfer to a new owner by some other method. As part of this process, creditors are paid and then distributions are made to the heirs and devisees of the deceased.

In general, individuals try to minimize or avoid probate. This is accomplished by revocable trusts and payable on death designations for bank accounts, financial instruments and real estate. This is called a nonprobate transfer.

Creditors of the deceased are not too happy when they do not get paid. The typical process is to file a claim against the estate, wait until all the probate assets are gathered up and then get paid. However, if there are no probate assets, the creditors do not get paid. Credit card companies, lenders and medical service providers are often left with large bills totaling tens of thousands of dollars. Yet the heirs and devisees of the deceased may receive hundreds of thousands of dollars through nonprobate transfers.

Colorado has laws making certain nonprobate transfers subject to the claims of creditors. In general, if the transfer occurred at death and could have been revoked by the decedent during life, the property transferred can be recovered to pay claims against the estate. The general exceptions to this rule are survivorship interests in joint tenancy real estate, proceeds transferred pursuant to a beneficiary designation under a life insurance, accident insurance or annuity contract and retirement plans.

The Personal Representative is responsible for recovering nonprobate property to pay claims against the probate estate. However, the creditor must make a demand upon the Personal Representative. If the Personal Representative does not initiate proceedings to recover the nonprobate assets, then the creditor may initiate the proceeding, at the creditor’s own expense.

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