What Happens When an Heir or Beneficiary is Indebted to the Decedent?
Author: Attorney Eric S. Johnson
There are a variety of ways to transfer your property to another person upon your death. There are Wills, Trusts, and beneficiary designations, to name a few. What happens when one of the recipients of your property also owes you money? Rather than extinguish the debt, Wisconsin law created a method by which the debt is considered when the property is distributed.
What law applies?
Wis. Stat. §§ 854.12 provides that, “If an heir owes a debt to the decedent, the amount of indebtedness shall be offset against the intestate share of the heir.” It also states, “if a transferee under a revocable governing instrument survives the transferor and is indebted to the transferor, the amount of the indebtedness shall be treated as an offset against the property to which the debtor transferee is entitled.”
What types of transfers are covered?
The law of intestacy identifies who receives property at death, when the decedent fails to leave a Will providing those instructions. The inheritance of a debtor receiving property through intestacy is subject to offset for the debt.
The law requiring debt to be offset also applies to “governing instruments.” A governing instrument includes a Will, Trust, deed, insurance or annuity policy, retirement plan, and beneficiary designation. Wis. Stat. § 854.01.
Does the debtor have defenses against the offset?
The debtor has the benefit of any defense that the debtor could have used in a civil lawsuit to collect the debt, with two very notable exceptions. First, the offset cannot be defended on the basis that the debt was discharged in bankruptcy. Second, the offset cannot be prevented on the ground that the relevant statute of limitations has expired.
What should I consider before attempting to offset debt under these circumstances?
Although the law does not require a Court to approve the amount of the offset, a hearing will be necessary if the debtor contests the amount of the offset. Wis. Stat. §§ 879.69 authorizes a Personal Representative to have the Court rule on a matter of importance in the administration of an Estate. Wis. Stat. §§ 701.0201 provides essentially the same authority to the Trustee of a Trust. A Personal Representative or Trustee can use those statutes for a final determination on the amount of the offset.
Personal Representatives or Trustees should be prepared to counter the debtor’s allegations that the debt was forgiven. Record keeping for debts between family members is often poor. To make matters worse, Wisconsin repealed the “Dead Man’s Statute” (Wis. Stat. §§ 885.16 and 885.17) – rules of evidence that prevented testimony about conversations with the deceased by the person who stood to gain from the testimony. Prior to its repeal, a debtor could not have testified that the decedent forgave the debt prior to dying. Now, that testimony is allowed. Such testimony can be discredited by its self-serving nature. It is better to have other witnesses contradict it. Better still, is for the creation and payment status of debts between family members to be well documented.
What happens to the property that was to be transferred to the debtor?
“The. . . property not distributed to the debtor becomes part of the residue of the decedent’s probate estate.” Wis. Stat. § 854.12(2)(c). The offset will not result in a dollar-for-dollar reduction in the debtor’s share of the Estate if there are no specific gifts, and the debtor is one of the recipients of the residue of the probate estate.
For example, if three children are the beneficiaries of the residue of the probate estate, child #1 owes the decedent $100,000 and the residue is worth $600,000, the distributions from the Estate would be as follows:
- $600,000 / 3 children = $200,000 per child.
- $200,000 to child #1 – $100,000 offset for debt = $100,000 to child #1. $200,000 to children #2 and #3.
- $100,000 / 3 children = $33,333.
- Final result:
- $133,333 to child #1.
- $233,333 to child #2.
- $233,333 to child #3.