How to Handle Claims When a Decedent Was Self-Employed in Arizona

TL;DR

When a self-employed individual in Arizona passes away, the personal representative of their estate is responsible for managing all business-related claims. This process involves securing the business assets, identifying the business structure (sole proprietorship, LLC, etc.), and formally notifying all known and potential creditors through the probate court. You must then value the business, pay valid debts from estate assets according to Arizona law, and either wind down, sell, or transfer the business operations. All actions must be meticulously documented and follow the timelines set by the Arizona probate code.

Key Highlights

Secure the Business Immediately: Gain control of physical assets, digital accounts, and financial records to prevent loss.
Identify the Business Structure: Determine if it was a sole proprietorship, LLC, or partnership, as this dictates how debts and assets are handled.
Initiate Probate: File with the appropriate Arizona Superior Court to be appointed as the personal representative, which grants you legal authority.
Notify Creditors: Publish a notice to creditors and send direct notice to all known lenders, suppliers, and other claimants as required by Arizona law.
Value Business Assets: Obtain a professional valuation of the business to understand its worth for creditors, heirs, and tax purposes.
Pay Valid Claims: Use business and estate assets to pay legitimate debts in the order of priority set by state statutes.
File Final Taxes: Prepare and file all final personal and business tax returns for the decedent.

Introduction

In Arizona, small businesses and self-employed individuals form a vital part of the economy. According to the U.S. Small Business Administration, over 600,000 small businesses operate within the state, employing nearly half of the private workforce. Many of these are run by a single person, a freelancer, or an independent contractor. When that individual passes away, their business doesn’t simply disappear; it becomes a complex asset and liability within their estate, requiring careful and legally compliant management.

The legal framework for this process is governed by Title 14 of the Arizona Revised Statutes, which outlines the state’s probate code. This code provides a structured path for the personal representative (often called an executor) to follow. It details the specific requirements for identifying assets, notifying creditors, and settling debts. For a self-employed person, this means their business bank accounts, client lists, equipment, and outstanding invoices are all part of the estate that must be administered under the supervision of the court.

When a loved one who ran their own business dies, the responsibility of settling their affairs falls to the designated personal representative. This role extends beyond personal matters and directly into the professional world they built. You must address business debts, collect payments owed to the business, and make critical decisions about its future. The following sections provide a detailed roadmap for managing the claims and responsibilities associated with a decedent’s self-employment in Arizona, ensuring you act in accordance with state law and protect the interests of the estate.

1. The First 72 Hours: Immediate Steps to Secure the Business

When a self-employed person passes away, time is critical. The initial hours are crucial for preserving the value of the business they built. As the potential personal representative or a close family member, your first actions should focus on stabilization and information gathering. This prevents assets from disappearing, protects sensitive data, and maintains goodwill with clients and suppliers.

Gain Control of Physical and Digital Access

Your primary goal is to prevent unauthorized access and operational chaos. Start by securing the keys to any office, workshop, or storage unit. If the business operated from a home office, ensure that area is secured.

Physical Assets: Locate and secure company vehicles, tools, inventory, and equipment. Create a preliminary inventory list of these items.
Digital Assets: This is often the most important and vulnerable area. You need to locate the decedent’s work computer, external hard drives, and business phone. Do not attempt to access them if you are unsure of passwords; instead, note their location for a future IT professional or for when you have legal authority.
Mail and Communications: Arrange to have business mail forwarded to a secure address. Check the business’s physical mailbox and post office box regularly. Identify the primary business email account and phone number.

Locate Essential Business Documents

The business’s legal and financial health is detailed in its documents. Finding them early will make every subsequent step easier. Look for a folder, filing cabinet, or digital file labeled “Business Documents” or similar.

Key Documents to Find:

Formation Documents: If the business was an LLC or corporation, find the Articles of Organization or Incorporation. For a sole proprietorship, look for a business license or trade name registration.
Financial Records: This includes bank statements, credit card statements, accounting software access (like QuickBooks), ledgers, and records of accounts receivable (who owes the business money) and accounts payable (who the business owes).
Tax Information: Locate the Employer Identification Number (EIN) if one exists, as well as past tax returns (both business and personal).
Contracts and Agreements: Find client contracts, vendor agreements, lease agreements for property or equipment, and any loan documents.
Insurance Policies: Look for a business liability policy, commercial auto policy, or any professional insurance.

Communicate with Key Parties (Carefully)

While you may not have legal authority yet, you can make preliminary, informational communications. Be cautious about what you promise or agree to.

Employees or Contractors: If the decedent had help, inform them of the situation. Reassure them that you are working to understand the next steps. They can be a valuable source of information about daily operations.
Key Clients or Customers: For ongoing projects, a simple, professional message may be necessary. You could state, “We are currently addressing a family emergency and will provide an update on the status of [Project Name] shortly.” This prevents clients from feeling abandoned.
Landlord or Property Manager: If the business leases space, notify the landlord of the situation to prevent any default actions on the lease.

Taking these initial, protective measures helps to freeze the business in a stable state. It gives you the breathing room needed to begin the formal legal process without the added pressure of a business in active decline.

2. Understanding the Business Structure: Why It Matters

The legal structure of the decedent’s business is the single most important factor in determining how you handle its assets, debts, and claims. In Arizona, the distinction between the business owner and the business itself can be clear or nonexistent, which has significant implications for the estate.

Sole Proprietorship: The Owner and Business Are One

This is the most common structure for freelancers and independent contractors. Legally, a sole proprietorship has no separate existence from its owner.

Assets: All business assets, from the company truck to the business bank account, are considered personal assets of the decedent. They will be listed as part of the general estate inventory during probate.
Debts and Claims: Crucially, all business debts are the personal debts of the decedent. There is no liability shield. If the business owes a supplier $10,000, that supplier can file a claim against the entire estate, including the decedent’s personal home, car, and savings. The personal representative is responsible for paying these business debts from the total pool of estate assets.
Continuation: A sole proprietorship technically ceases to exist upon the owner’s death. The personal representative’s job is to wind it down by collecting outstanding payments, selling assets, and paying creditors. It cannot simply be “taken over” by an heir without forming a new business.

Limited Liability Company (LLC): A Separate Legal Entity

An LLC is designed to create a legal separation between the owner (called a “member”) and the business. This separation is key when handling claims.

Single-Member LLC: If the decedent was the only member, the situation is more complex than a sole proprietorship but still manageable. The fate of the LLC is determined by its Operating Agreement. This document should specify what happens upon the death of a member. It might allow the LLC to be transferred to an heir or require it to be dissolved.
- Liability Shield: The LLC’s debts are generally separate from the decedent’s personal debts. Creditors of the business must file a claim against the LLC’s assets first. They can only go after the decedent’s personal assets if the owner personally guaranteed a loan or “pierced the corporate veil” by mixing personal and business finances.
- Probate Asset: The decedent’s ownership interest (their “membership”) in the LLC is an asset of the estate. It must be valued and administered through probate.
Multi-Member LLC: If the decedent was a partner in an LLC with others, the Operating Agreement is even more critical. It will almost certainly contain a “buy-sell” provision or other clauses that dictate what happens to the deceased member’s share. The surviving members may have the right to buy out the decedent’s interest from the estate. The personal representative’s role is to ensure the estate receives fair market value for that share.

Partnerships and Corporations

Though less common for solo self-employed individuals, the decedent may have been in a partnership or owned a small corporation.

General Partnership: Similar to a sole proprietorship, partners are generally personally liable for business debts. A partnership agreement will dictate the process for buying out a deceased partner’s share.
Corporation (S-Corp or C-Corp): The corporation is a distinct legal entity. The decedent’s shares of stock are an estate asset. The personal representative manages these shares, but the corporation itself continues to exist. Corporate bylaws and any shareholder agreements will control what happens to the shares.

To determine the business structure, look for the formation documents you located earlier. If you cannot find them, you can search the Arizona Corporation Commission (ACC) website for registered LLCs and corporations. Understanding this structure from the outset will guide your entire strategy for dealing with creditors and managing the business assets.

3. The Arizona Probate Process for a Business Owner

Once you have stabilized the business and identified its structure, you must begin the formal legal process of probate. Probate is the court-supervised procedure for settling a deceased person’s estate. For a self-employed individual, the business is a central component of this process. You cannot legally pay business debts, sell business assets, or formally close the business without the court’s authority.

Opening Probate and Getting Appointed

The first step is to file a petition with the Arizona Superior Court in the county where the decedent lived. If there is a will, it must be submitted to the court. The will likely names a personal representative. If there is no will (a situation called “intestate”), the court will appoint someone based on a priority list in Arizona law, usually a surviving spouse, adult child, or other close relative.

Once the court approves the petition, it will issue Letters Testamentary (if there is a will) or Letters of Administration (if there is no will). These “Letters” are the official documents that grant you, the personal representative, the legal authority to act on behalf of the estate. You will need certified copies of these Letters to:

Access the decedent’s business bank accounts.
Negotiate with creditors.
Sell business assets like vehicles or equipment.
Sign contracts to wind down or sell the business.

The Personal Representative’s Duties Regarding the Business

As the personal representative, you have a fiduciary duty to the estate’s creditors and beneficiaries. This means you must act in their best interests, not your own. Your duties related to the business include:

Marshalling Assets: Formally take control of all business assets. This includes transferring business bank funds into a new estate bank account, securing inventory, and creating a detailed inventory of all business property. This inventory will be filed with the court.
Continuing Operations (If Necessary): Arizona law (A.R.S. § 14-3715) allows a personal representative to continue a decedent’s business for up to four months without a special court order if it is in the best interest of the estate. This might be done to complete a profitable contract or prepare the business for sale as a going concern. For any period longer than four months, you will need court approval.
Valuing the Business: You must determine the fair market value of the business. This is not just about the cash in the bank; it includes equipment, inventory, real estate, intellectual property, and “goodwill.” This valuation is essential for the estate inventory, tax purposes, and any potential sale.
Addressing Claims: You are responsible for managing all claims filed against the estate, including those from business creditors.

The Importance of an Estate Bank Account

One of your first actions after receiving your Letters should be to open a new bank account in the name of the estate (e.g., “The Estate of Jane Doe”). You will need the estate’s Tax ID number (EIN), which you can obtain from the IRS. All of the decedent’s cash, including money from their business accounts and payments from their clients, should be deposited into this account. All estate expenses, including payments to business creditors, should be paid from this account. This creates a clear record for the court and beneficiaries and avoids any appearance of commingling funds.

The probate process provides the legal framework and authority you need to properly manage the decedent’s business affairs. It protects you from personal liability as long as you follow the rules and act in good faith.

4. Valuing the Self-Employed Business for the Estate

Before you can settle claims or distribute assets to heirs, you must know what the business is worth. A proper business valuation is a cornerstone of estate administration. It provides the basis for the inventory you file with the probate court, informs negotiations with potential buyers, and is required for filing the final estate tax returns. The method you use will depend on the type and complexity of the business.

Why a Formal Valuation is Necessary

Probate Court Requirements: The court requires a detailed inventory of all estate assets, including the business, with their fair market values as of the date of death.
Creditor Negotiations: Knowing the true value of business assets helps you negotiate with creditors. If a creditor’s claim exceeds the value of the business, this information is critical.
Equitable Distribution to Heirs: If multiple heirs will inherit the estate, a clear valuation ensures that the business’s value is distributed fairly, whether through a buyout or liquidation.
Tax Purposes: The value of the business is included in the decedent’s gross estate. While Arizona has no state estate tax, the value is needed for the final federal estate tax return if the total estate is large enough to require one.

Common Valuation Methods

There isn’t a single way to value a small business. Often, a combination of methods is used.

Asset-Based Valuation: This is the most straightforward method. You simply add up the fair market value of all the business’s tangible assets and subtract its liabilities.
- Assets to Include: Cash in bank accounts, accounts receivable (money owed by clients), inventory, equipment, vehicles, and real estate.
- Liabilities to Subtract: Outstanding loans, accounts payable (money owed to suppliers), and other debts.
- Best For: Businesses where the primary value is in its physical assets, such as a construction contractor with a lot of heavy equipment or a retail shop with significant inventory. It does not account for intangible assets like brand reputation.
Income-Based Valuation (Earnings Approach): This method values the business based on its ability to generate profit. A common approach is the “Seller’s Discretionary Earnings” (SDE) method, where you calculate the total financial benefit the owner received and then apply a market “multiple” to it.
- Calculation: Start with the net profit, then add back the owner’s salary, personal expenses run through the business, and other non-essential costs.
- Multiple: The multiple (e.g., 1.5x, 2x, 3x) depends on the industry, stability of the business, and other risk factors.
- Best For: Service-based businesses like consulting, graphic design, or accounting, where the primary value is in the cash flow it generates, not its physical assets.
Market-Based Valuation: This approach looks at what similar businesses have recently sold for. It can be difficult for very small or unique businesses where comparable sales data is not readily available. However, business brokers and valuation experts often have access to databases that can provide this information.

When to Hire a Professional Appraiser

While you can perform a simple asset-based valuation for a very small-scale operation, it is highly recommended to hire a professional business appraiser or a CPA with valuation credentials in most cases.

You should hire a professional if:

The business has significant revenue or complex financials.
The business has valuable intangible assets like patents, trademarks, or a strong brand name.
Heirs are in disagreement about the value of the business.
The estate is large enough to potentially face federal estate taxes.
You plan to sell the business as a going concern.

A professional valuation provides a defensible, third-party assessment that will hold up in court and with the IRS. The cost of the appraisal is a legitimate expense of the estate and can be paid from the estate bank account.

5. Managing Business Debts and Formal Creditor Claims

The core of “handling claims” is the formal process of identifying, validating, and paying the decedent’s debts. Arizona’s probate code has specific, strict rules for this process. As the personal representative, your duty is to treat all creditors fairly while protecting the estate’s assets from invalid claims.

The Formal Notice to Creditors

Your first official act regarding debts is to give formal notice to all potential creditors. This is a two-part process in Arizona:

Publication: You must publish a “Notice to Creditors” in a newspaper of general circulation in the county where the probate is filed. This notice must run once a week for three consecutive weeks. This serves to notify any unknown creditors.
Direct Notice: You must also send a copy of this notice via mail or personal delivery to all known creditors. This includes anyone the business owed money to, such as suppliers, landlords, lenders, credit card companies, and the Arizona Department of Revenue. A diligent search of the decedent’s financial records is required to identify these creditors.

The Creditor Claim Period

The publication of the notice starts a clock. Creditors have a limited time to file a formal, written claim with you (the personal representative) and the court.

For Unknown Creditors (notified by publication): They have four months from the date of the first publication to file a claim.
For Known Creditors (who received direct notice): They have the later of that four-month period or 60 days from the date they received your notice.

Any claim not filed within this statutory timeframe is forever barred. This is a powerful tool for creating a final list of debts that the estate must address.

Reviewing and Responding to Claims

When you receive a formal claim, you must review it for validity. Does the estate actually owe this debt? Is the amount correct? You have the right to request proof, such as invoices or signed contracts.

Once you have reviewed a claim, you have three options:

Allow the Claim: If the claim is valid, you file a “Notice of Allowance” with the court. The debt is then added to the list of approved debts to be paid.
Disallow the Claim: If you believe the claim is invalid, incorrect, or fraudulent, you must file a “Notice of Disallowance” with the court and send a copy to the creditor. The creditor then has 60 days to file a lawsuit against the estate to prove their claim. If they fail to do so, their claim is barred.
Compromise the Claim: You can negotiate with the creditor to settle the debt for a lower amount. This is common, especially if the estate has limited funds. Any compromise should be documented in writing.

Priority of Payments

You cannot simply pay creditors in the order their bills arrive. Arizona law (A.R.S. § 14-3805) establishes a strict priority for how estate assets must be used to pay claims. If the estate is insolvent (owes more than it is worth), this order is critical. The general priority is:

Costs and expenses of estate administration (your fees, attorney fees, court costs).
Funeral expenses.
Debts and taxes with preference under federal law (like federal income taxes).
Reasonable and necessary medical and hospital expenses of the last illness.
Debts and taxes with preference under Arizona law.
All other claims.

You must pay all claims in a higher category in full before moving to the next. Business creditors without a secured interest (like a vehicle loan) typically fall into the “all other claims” category at the bottom.

6. Winding Down, Selling, or Transferring the Business

After valuing the business and managing creditor claims, you must decide on its ultimate fate. The goal is to maximize the value for the estate and its beneficiaries. Your options are generally to wind down and liquidate the assets, sell the business as a going concern, or transfer it to an heir.

Option 1: Winding Down and Liquidation

This is the most common path for a sole proprietorship or a small business that was heavily dependent on the decedent’s personal skills. Winding down involves systematically closing all business operations.

Steps for an Orderly Wind-Down:

Collect Accounts Receivable: This is a top priority. Contact all clients who owe the business money and arrange for final payment. You may need to offer a small discount for prompt payment. Diligently follow up on all outstanding invoices.
Terminate Contracts and Leases: Provide formal notice to terminate any office leases, equipment leases, or service contracts. Review the contracts for any termination clauses or penalties.
Sell Tangible Assets: Arrange for the sale of all business assets. This can be done through:
- An auction for specialized equipment.
- A bulk sale to a competitor.
- Selling items individually online or through classifieds.
- Hiring a professional liquidator. Document every sale and deposit all proceeds directly into the estate bank account.
Close Business Accounts: Once all funds are collected and all checks have cleared, formally close the business bank accounts, credit cards, and lines of credit.
File Final Tax Returns: This is a critical final step. You must file a final personal income tax return (Form 1040) for the decedent, which will include the business’s final profit or loss on a Schedule C. You may also need to file final payroll tax returns (if there were employees) and sales tax returns with the Arizona Department of Revenue.

Option 2: Selling the Business as a Going Concern

If the business has ongoing value beyond its physical assets (e.g., a strong client base, a recognizable brand, or valuable contracts), selling it as a complete entity may yield a higher return for the estate.

Requires Court Approval: A sale of the business is a major transaction that typically requires approval from the probate court, especially if real estate is involved.
Find a Buyer: You might approach competitors, key employees, or use a business broker to find a suitable buyer. The professional valuation you obtained earlier will be your starting point for setting an asking price.
The Sales Agreement: The purchase agreement should be drafted or reviewed by an arizona wrongful death attorney. It will specify what is being sold (assets, client lists, trade name) and explicitly state that the buyer is not assuming any of the old business’s debts, which remain the responsibility of the estate.

Option 3: Transferring the Business to an Heir

If a family member or other heir wishes to continue the business, it may be possible to transfer it to them as part of their inheritance.

Valuation is Key: The business must still be formally valued. The value of the business will be counted as part of the heir’s share of the total estate. If the business’s value is more than their share, they may need to buy out the other beneficiaries’ interests.
Formal Transfer: The transfer is not automatic. The personal representative will execute documents (like a bill of sale for assets or an assignment of an LLC membership interest) to formally move ownership from the estate to the heir.
Heir Starts Fresh: The heir should form their own new legal entity (e.g., a new LLC) to receive the assets and continue operations. This creates a clean break from the decedent’s old business and its liabilities.

Choosing the right path depends on the nature of the business, the wishes of the beneficiaries, and the overall financial condition of the estate. Each step should be taken with care and documented thoroughly for the court.

Conclusion

Managing the claims and affairs of a self-employed decedent in Arizona is a significant responsibility that combines business management with the legal duties of estate administration. The process requires a methodical approach, starting with the immediate security of business assets and a clear understanding of the business’s legal structure. From there, the personal representative must use the authority granted by the Arizona probate court to formally notify creditors, obtain an accurate valuation, and make a strategic decision about the business’s future—be it liquidation, sale, or transfer.

The key to success lies in following the established legal procedures. Adhering to the timelines for creditor notices, properly categorizing and paying claims according to state-mandated priority, and maintaining meticulous financial records are not just best practices; they are legal requirements that protect you, the estate, and its beneficiaries. Every action, from collecting a final invoice to selling a piece of equipment, must be performed with the fiduciary duty to maximize the estate’s value.

This process can be complex, and the intersection of business law and probate code presents unique challenges. You do not have to handle this alone. The costs of professional guidance from an experienced probate attorney and a qualified business appraiser are legitimate administrative expenses of the estate. Seeking their help early can prevent costly mistakes, resolve disputes among heirs, and ensure that the business the decedent worked so hard to build is honored through a proper and respectable conclusion. If you are facing this responsibility, take the first step by consulting with a legal professional to ensure you are on the right path. Contact us for free evaluation today.