Article on Creditor Rights and the Arkansas Trust Code

Today, there is no doubt that more wealth in this nation passes outside of probate than through it. Over the last half-century, the laws of wills and descent have come to no longer dominate the law of succession due to, as one scholar put it, “a fundamental change in the nature of wealth.”  This trend can be attributed chiefly to many deficiencies in the probate system, the most common complaints being expense, delay, lack of privacy, and sometimes even corruption.  Thus, reasons such as these have prompted a movement towards an era of the use of “will substitutes,” whereby practitioners and academics have created a number of techniques to avoid probate.  Of these techniques, the revocable (inter vivos) trust has certainly become a favorite among estate planners, as these instruments seem to offer a solution to many of the complaints waged against the probate system.  In fact, revocable trusts are authorized in every state, either by judicial decision or by statute. 

As a side effect of the proliferation of will substitutes, much confusion abounds in the laws of probate and nonprobate transfers, especially with regard to the rights of creditors.  Specifically, as one attorney noted, “The trend toward the use of nonprobate assets to pass wealth at death has increased so rapidly that it has outpaced the ability of states to deal with the situation.”  This recent increase in the use of will substitutes has led to the realization that the laws governing the rights of a decedent’s creditors in nonprobate transfers often conflict and lack clarity in certain situations.  Thus, the question becomes, how far do the rights of creditors extend with respect to nonprobate assets, and, in particular, to those held in revocable trusts?

The general rule followed across the jurisdictions is essentially this: “Probate assets are subject to creditors while nonprobate assets are not.”  Yet this rule’s operation with regard to revocable trusts greatly depends on whether the creditor is attempting to assert his rights before or after the debtor-settlor’s death, as an unsecured creditor may have priority over third-party takers only if state law so provides.  Most states, including Arkansas, have spoken on the issue of creditor rights by statutorily providing rights to creditors against a settlor’s revocable-trust assets–at least during the settlor’s lifetime.  Although it may be true that a creditor will generally be protected during the settlor’s life, it is not always clear as to whether a creditor can reach revocable-trust assets after the settlor’s death. In Arkansas, this is certainly the case as the state’s recently enacted trust code is completely silent as to whether a deceased settlor’s creditors can reach revocable-trust assets when the decedent’s probate estate is insufficient.  Such statutory ambiguities in other states “have been construed as applying only during the life of the [settlor] and not after the death of the [settlor], when the power of revocation has expired.”  Therefore, this uncertainty for Arkansas practitioners and revocable-trust settlors and creditors can only be resolved after a close examination of the nature of a revocable trust, Arkansas’s public policies, and precedent from various jurisdictions.