Sometimes a probate estate will have insufficient assets to pay all creditors, which makes the estate insolvent. The following gives some guidance on how to handle an insolvent probate estate.
Is the Probate Estate Actually Insolvent?
Dealing with Creditors in an Insolvent Estate
When a creditor files a creditor claim, many attorneys for the personal representative will recommend that an objection to the claim be filed, out of an abundance of caution. Perhaps the creditor claim is not valid, perhaps a lesser amount is owed, or perhaps a third party is responsible for paying the debt, which is often the case with medical creditor claims. Especially with medical claims, given the the complexity of the payment system, it is advisable to always object to a medical claim.
After a creditor claim objection is filed, the creditor then has 30 days within which to file a separate lawsuit against the estate, known as the independent action. The independent action is filed wherever a normal lawsuit could have been filed, in state or federal court. After an objection is filed, not every creditor will file the independent action, some deciding that the effort is not worth the payoff. A common practice is to notify a creditor that the estate is insolvent, with the possibility that the creditor abandons is claim.
Some attorneys feel that objecting to every claim is problematic. A great practice is to offer a creditor who has filed a claim in an insolvent estate a standstill agreement, where the creditor is not forced to file an action against an insolvent estate within the 30 day period, and the insolvent estate is not required to defend a creditor claim for no reason. Here is an example of a creditor standstill agreement. This way, no one wastes time or money until there is greater clarity about the estate.
In sum, it might be possible to negotiate with creditors and/or object to creditor claims such that the estate is no longer insolvent, or at least delay anyone having to waste time an money or a pointless exercise.
Revocable Trust is Responsible for Creditor Claims
Oftentimes a probate estate will be insolvent because the bulk of the assets of the deceased are in a revocable trust. A revocable trust is liable for the debts of the decedent. See the Complete Guide to Creditor claims in Florida Probate.
Fraudulent Conveyance Can be Used to Reclaim Assets for a Probate Estate
Sometimes the deceased will have transferred assets before death to keep the assets out of the hands of creditors. Florida recognizes fraudulent conveyance claims against estates.
Appellant Isabel Valdivia, the ex-wife of decedent, Jose Valdivia, M.D., claims the remainder of her lump sum alimony against his estate. She argues that the only substantial asset owned by the doctor from the time of the couple’s 1985 divorce until the doctor’s death in 1990 was his successful medical practice, Belo Medical Center, and that this asset was fraudulently conveyed to defeat her claim.
In June 1987, two and one-half years after the divorce decree, and two weeks prior to his marriage to Fajardo, the doctor transferred his interest in the Center to himself and Fajardo, as joint tenants with right of survivorship. In April 1990, several weeks before the doctor’s death, Fajardo Valdivia, executed a transfer of the 75% stock interest to herself individually.
Appellant alleged that the transfers had taken place in secret and for no consideration, and that the doctor, up to the time of his death, had continued to control the property.
We conclude that the appellant should have been permitted to prosecute her petition to void the conveyance as fraudulent.
The law is clear that a debtor may not transfer property owned by himself, individually, to himself and his wife as tenants by the entireties if such a transfer will defraud creditors by putting that property beyond the creditors’ reach. Whetstone v. Coslick, 117 Fla. 203, 157 So. 666 (1934); Ferre v. City Nat’l Bank, 548 So.2d 701 (Fla. 3d DCA 1989); see Money v. Powell, 139 So.2d 702 (Fla. 2d DCA 1962). Appellant’s petition to void the transaction sufficiently alleged a valid cause of action for fraudulent transfer. Therefore, appellant should have been permitted to go forward with her claim.
Valdivia v. Valdivia, 593 So.2d 1190 (Fla. App. 1992).
Which Claims Get Paid in an Insolvent Estate?
Claims against an estate are divided into 8 different categories, with the earlier claims paid before the latter claims. The first class is administrative expenses, and the last are general creditors not in any other class. Each category must be paid in full before going to the next category. See the Complete Guide to Creditor claims in Florida Probate.
The Florida Probate Code provides as follows:
(2) After paying any preceding class, if the estate is insufficient to pay all of the next succeeding class, the creditors of the latter class shall be paid ratably in proportion to their respective claims.
How Are The Beneficiaries and Creditors Notified of an Insolvent Estate?
Through a petition to declare the estate insolvent, or via the Petition for Discharge and Final Accounting. An example of a petition to declare an estate insolvent can be found here. More information about the Petition for Discharge.
Does an Insolvent Estate Have to Be Opened?
No. There is no obligation to open an insolvent estate, or any estate for that matter. If a creditor wants to purse a creditor claim against an estate not yet opened, the creditor can open the estate to pursue the claim.
