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How Creditor Claims Can Affect Your Estate

Estate planning is not just about taking care of your family. It is also about taking care of your creditors. Your death does not magically make your debts disappear. The personal representative of your estate has a legal obligation to pay your valid debts from the assets in your probate estate before distributing the remainder to your heirs or the beneficiaries named in your will.

Death of NBA Team Co-Owner Raises Creditor Concerns Over Potential Sale

Creditor claims can significantly complicate the administration of a probate estate. An ongoing high-profile probate case in Oklahoma offers a useful illustration. In March of this year, Aubrey McLendon, a well-known natural gas company executive, died in a single-car crash. Among his many assets, McLendon owned approximately 20% of the NBA’s Oklahoma City Thunder franchise. McLendon was part of a group that purchased and relocated the former Seattle Sonics to Oklahoma City in 2008.

According to news reports, McLendon’s widow wishes to purchase her late husband’s share from the estate. This has raised objections from Aubrey McLendon’s creditors, who are concerned that she will pay a below-market value for the share, leaving the estate with less funds available to pay debts. Forbes magazine has estimated the total value of the Thunder franchise at $950 million.

The Oklahoman newspaper reported that at a May 13 probate court hearing, “At least two creditors claimed…that the estate is insolvent,” meaning there is insufficient assets to cover all of the estate’s debts. The McLendon estate’s attorney denied this, noting the estate has yet to even file a formal inventory of assets with the probate court. The attorney also indicated there might be no sale of the Thunder interest—arguably the estate’s largest asset—due to NBA restrictions on ownership sales.

Will Your Estate Face Insolvency?

Obviously, most of us do not have to worry about the fate of our billion-dollar NBA team. But potential insolvency is a subject many smaller estates face. Consider whether or not you have a mortgage on your home. Combined with other debts—unpaid taxes, medical bills, credit cards, etc—that can leave your estate insolvent if you were to die today. This means your estate might have to sell your house to ensure your creditors get paid, leaving nothing for your family.

Also, if you have any interests in a business, such as a partnership or LLC, there may be restrictions on the sale or transfer of ownership. An LLC operating agreement, for instance, might specify that your fellow co-owners have the first right to repurchase your shares of the business if you die. As the creditors in the McLendon estate noted, this can result in the estate receiving less than it might be able to obtain in an unrestricted sale.

Regardless of the amount of assets you presently own, you should speak with an experienced San Diego estate planning attorney about these and other issues that may affect your future estate. Contact the Law Office of Scott C. Soady today if you need assistance with a will, trust, or any other estate planning matter.

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