Ask the Probate Judge—Paying Creditors
Rudd, appeared January 30, 2003, Albuquerque Journal, Business Outlook
Reprinted with permission
Editor's note: This column may not be quoted or reproduced in whole or part without express written permission of the author.
Q: I like the idea of avoiding probate by using transfer on death deeds and payable on death (POD) beneficiaries. But how is the executor able to pay final expenses of the decedent (medical bills, funeral expenses, etc.) if all assets pass directly to the heirs? L.R., Albuquerque
You raise an excellent point. New Mexico's Uniform Probate Code addresses this issue. "If other assets of the estate are insufficient," the law reads, "a transfer resulting from a right of survivorship or POD designation…is not effective against the estate of a deceased party to the extent needed to pay claims against the estate and statutory allowances to the surviving spouse and children." The law governing transfer on death deeds for real property contains virtually identical language.
The law sets out the procedure for recovering joint tenancy and POD funds. The recipient beneficiary is liable to account to the decedent's personal representative. The personal representative has the power to commence a proceeding to recover the funds once he or she receives a written demand for payment from a surviving spouse, creditor, or child of the decedent. This proceeding must be started within one year after decedent's death.
Under a different section of the law, a personal representative can stop a financial institution from paying the beneficiary by sending a written notice of a pending dispute to the institution. The financial institution can then refuse, without liability, to make payment to the beneficiary.
The transfer on death (TOD) laws for stocks and security accounts also considers creditors' rights. The TOD laws do "not limit the rights of creditors of security owners against beneficiaries and other transferees under other laws of this state."
Some might balk at the idea of the personal representative having to bring a legal action to recover funds distributed to beneficiaries. However, most attorneys and judges I talked with had not encountered the formal recovery procedure outlined above.
In reality, the POD, TOD, and joint beneficiaries usually work out on informal, voluntary arrangement to chip in and pay any remaining debts of the decedent. If the amounts due creditors are small, the creditors may decide it is not worth pursuing the POD or joint assets.
If there is any possibility of problems among the beneficiaries, probating the assets rather than using all POD, TOD, or joint beneficiary designations to pass assets may be more efficient and economical. Having the assets in hand to pay bills, taxes, etc. and then distributing the rest is easier than collecting assets back from reluctant beneficiaries. If the beneficiaries have spent the money, recovering it could prove difficult.
As long as family members are reasonable, a court procedure should not be necessary. If a fight is brewing, then the beneficiaries can spend their inheritance on court and attorney fees.
© 2003, Merri Rudd & Albuquerque Journal, All Rights Reserved