If you’re looking to avoid paying debt by dying, we’ve got some more bad news for you. Almost all debt incurred during life must be repaid upon death from the estate of the decedent. Creditors have the legal right to make claims against an estate for unpaid debts.
An estate has an obligation to pay legitimate creditor claims with estate assets. An estate consists of all types of property that a decedent had an ownership interest in at the time of death, including property passing outside of probate to a designated beneficiary.
Appropriate estate planning can ensure liquidity to pay estate debts, so property, such as family homes or businesses, does not need to be sold to satisfy creditor claims. At Plan Forward Legal, we prepare strategic estate planning solutions to help Chicago area families protect themselves and their legacies.
- The Rights of Creditors to Make Claims against an Estate in Illinois
- Estate Property that May Avoid Creditor Claims
- Strategies for Ensuring Funds Will Be Available to Pay Estate Debts
- Plan Forward Legal Can Help Protect Your Family Legacy
The Rights of Creditors to Make Claims against an Estate in Illinois
Creditors can have up to two years to pursue claims against an estate in Illinois. If a probate is opened, the executor appointed to handle the administrative tasks is responsible for notifying creditors. Creditors receiving notice, whether directly or indirectly, have a limited time to file their claims.
Executors do not have to make sure every possible creditor is notified. An executor must publish notice of a decedent’s death in a newspaper in the county where the estate is being administered for 3 consecutive weeks and mail notice to creditors whose addresses are known or reasonably ascertainable.
Creditors have 6 months from the time notice was first published or 3 months from the time notice was actually received (whichever is later) to file claims. Claims must be in writing and can be filed either with the executor or the probate court.
Claims filed with an executor are either allowed or disallowed. The executor sends notice of a disallowed claim to the creditor, who then has 60 days to file a claim with the court.
Limitations on Creditor Claims
Except for estate administration expenses and claims made by a surviving spouse or child, creditor claims are barred if:
- A creditor is notified by mail and fails to file a claim by the deadline in the notice
- The executor disallows a creditor’s claim, and the creditor doesn’t file the claim with the court
- A creditor is not notified by mail and fails to file a claim 6 months from the date notice was first published
In situations where there is no probate and no executor is appointed, all creditor claims are barred 2 years after a decedent’s death.
Priority of Creditor Claims
Creditor claims are prioritized by law. There are seven classes of claims, and they are paid in descending order.
- Funeral/burial expense and estate administration expenses
- Award to the surviving spouse or child
- Debts due to the US
- Medical expenses incurred by the decedent 12 months before death
- Property held or managed by the decedent for someone else that is untraceable
- Debts due to a school district, municipality, or state
- All other claims
When estate assets are insufficient to pay all claims within a class, each claim receives a pro rata share of the available assets.
Estate Property that May Avoid Creditor Claims
Estate property will not avoid creditor claims merely because it does not go through probate. Property that passes directly to a beneficiary at death may still be subject to the claims of creditors. However, there are certain direct transfers to beneficiaries for which the property transferred will not be available to satisfy creditor claims.
Life Insurance Proceeds
The proceeds of a life insurance policy paid to a beneficiary who is not the decedent’s estate are generally not subject to creditor claims. A named beneficiary must be alive to accept life insurance proceeds.
When a decedent’s estate is the beneficiary or the beneficiary is deceased, and there is no alternate named, life insurance proceeds become part of the estate and are available to pay creditors. Life insurance proceeds may also be used to pay creditors if the policy was purchased with the intent to keep assets from being used to pay debts.
Retirement Accounts
In Illinois, retirement accounts created under federal or state law are exempt from creditors’ claims and may pass to named, surviving beneficiaries free of a decedent’s debts. However, the accounts lose their protected status in the beneficiary’s hands and may be targeted by the beneficiary’s creditors.
Primary Residence Held in Tenancy by the Entirety
When married couples in Illinois acquire a primary residence, they may choose to take title to the property as a tenancy by the entirety. Property held in tenancy by the entirety belongs 100% to the survivor when one spouse dies and is not available to satisfy creditor claims solely against the deceased spouse.
Strategies for Ensuring Funds Will Be Available to Pay Estate Debts
With thoughtful planning, you can ensure funds are available to pay estate debts, so family assets do not need to be sold. Specific accounts can be created and funded, ensuring adequate capital on hand to satisfy anticipated claims. Money can be readily available through accounts that allow you to designate a pay-on-death beneficiary.
Life insurance is another way to ensure that a specified sum is paid directly to a beneficiary, who can then use the proceeds to pay creditor claims. The value of life insurance won’t escape inclusion in a decedent’s estate for tax purposes unless an irrevocable trust owns the policy.
Plan Forward Legal Can Help Protect Your Family Legacy
Unanticipated debt can force families to sell businesses, homes, and other cherished heirlooms to pay the creditors of a decedent’s estate. With few exceptions, creditors are paid first, which can severely impact beneficiaries’ inheritances if debt payments have not been adequately planned for.
Strategic preparation enables creditors to be paid and ensures family assets are preserved. At Plan Forward Legal, our Chicago estate planning attorney works with families to set up estate plans that protect them during life and provide for contingencies after death, so they can rest easy knowing their legacies will continue for generations to come.
