When someone dies, how are creditor claims handled?
Jeffrey Epstein’s Last Will and Testament is dated August 8—just two days before he was found dead in a jail cell. His will shows $577 million in assets, including fine arts and collectibles that are still to be valued. It also has a trust to hold his property. However, the estate needs to deal with creditor claims.
CNBC’s recent article, “Here’s why a bitter legal battle could be ahead for Jeffrey Epstein’s estate,” reports that a long fight is coming as Jeffrey Epstein’s estate addressees the legal claims over the distribution of his assets. The 66-year-old was facing federal charges of sex trafficking of minors and sex trafficking conspiracy.
The time to do your will isn’t two days before you die.
Attorneys believe there will be a long legal fight, as alleged victims file claims against the money manager’s estate. The Epstein estate will be in the middle of lawsuits for a long time until all of the plaintiffs are paid.
Let’s look at some of the issues that heirs, plaintiffs, and attorneys will face.
- Creditors get paid first. Epstein’s will tells his executor to pay from the probate estate several costs, including funeral and burial expenses, administration costs, and “all of my debts duly proven and allowed against my estate,” which includes victim and creditor claims. The will then directs the executor to give all of his property after these payments and distributions to The 1953 Trust, which was also established on August 8. The trust distributions aren’t known, because the trust document wasn’t attached to the will.
This means creditors, including plaintiffs of the many lawsuits against Epstein who receive a judgment in their favor against the estate, will be paid before property passes through to the heirs.
- All trusts not equal. Trusts may provide creditor protection, but not all trusts offer the same level of protection. Irrevocable trusts can’t be changed by the grantor, once they’ve been established. When you transfer the assets to this trust, they’re out of your estate and you save on taxes at death. In addition, you’ve given up control of the asset—that’s why these trusts offer creditor protection. However, revocable trusts can be revised by the grantor during his or her life. Because the terms can change, the assets are still deemed to be owned by the grantor—making them subject to estate taxes and seizure from creditors.
You don’t usually have protection from creditors when you create a revocable trust, and Epstein’s trust is revocable. Since you can access the assets when you want, your creditors can when you don’t want them to. Although moving assets to an irrevocable trust may protect them from creditors, it won’t work if you’re facing legal claims.
- Where you live is key. Epstein was a resident of St. Thomas in the U.S. Virgin Islands, but his will mentions five properties, including a mansion in New York City. The other properties, all owned by corporations of which he owns shares, are in New Mexico, Florida, Paris, and the Virgin Islands. New York is known to chase down well-to-do residents who claim to live in tax-free havens. They conduct non-residency audits and hit them with taxes. Big estates can mean a lot of revenue for New York.
There is a chance New York could seek its share of state income and estate taxes. Where you live is answered by looking at facts and circumstances, including voter’s registration, driver’s license, and the location of family and belongings. Just spending 183 days in your “new” state alone isn’t sufficient to protect it from an audit from a high-tax state.
The Epstein Estate executors and trustees will need to resolve creditor claims.
Reference: CNBC (August 24, 2019) “Here’s why a bitter legal battle could be ahead for Jeffrey Epstein’s estate”