Our last post discussed three types of claims that can be used to challenge and invalidate attempted non-probate transfers. This post continues that discussion by highlighting transfer traps that lead to unexpected consequences. We’ll also provide some tips for avoiding undesirable outcomes.
Texas Divorce Affects Non-probate Transfers in a Variety of Ways
The death of a spouse can create unexpected community property claims and complicate non-probate transfers like POD account designations, as we discussed in our last post. If your marriage ends in divorce, it’s critical to reexamine your assets and your plans for distributing them upon death. Wildly different outcomes apply, depending on the asset owned at the time of divorce.
–First, Obey the Decree. All Texas divorce proceedings end in a final divorce decree, which functions as a judgment entered by the family court. Divorce decrees are supposed to establish the rights of the former spouses to all property held by either spouse at the conclusion of marriage. That includes rights to assets that you may have intended to distribute via non-probate transfers, such as retirement accounts. The first step toward securing your plan for non-probate distribution should always be a review of the divorce decree.
–Second, Consider Automatic Revocations. Often, divorce decrees neglect to mention or otherwise dispose of certain assets. Your intended plans for those assets may be subject to automatic revocation under Texas law. For example, if you execute a TOD deed in favor of your spouse and then divorce that spouse, the TOD deed is automatically revoked and ineffective under Texas law. Similarly, any gifts made to your spouse in your last will and testament are automatically revoked upon divorce. If you maintain a relationship with your ex-spouse and still wish for them to inherit from you, you’ll need to take additional action to preserve your wishes.
–Third, Remember to Change Other Non-probate Transfers. Not all non-probate transfers are subject to automatic revocation upon divorce. If you designated your spouse as a POD beneficiary of a bank account or TOD beneficiary of an investment account, your subsequent divorce will not automatically revoke those designations. Depending on how the divorce decree reads, you may need to update those POD and TOD designations with the appropriate financial institutions if you don’t want your ex-spouse to receive those assets.
Texas Wills Cannot Change Beneficiary Designations or TOD Deeds
You may wish to change your POD or TOD designation to a different beneficiary or remove the designation outright. There’s only one way to do this—by directly contacting the financial institution holding your assets and executing the appropriate forms that they provide for that purpose. For example, you may have designated your son as the POD beneficiary of your savings account several years ago. Years later, you execute a will that specifically leaves the same savings account to your daughter. Perhaps your will even specifically states “I hereby revoke any prior beneficiary designations on this account.” We have bad news for you—the gift in your will is ineffective. The only way to change the beneficiary designation is by contacting the bank directly and following its procedures.
Similarly, your will cannot change the recipient of real property subject to a properly executed and filed TOD deed. If you want someone else to receive that property, you must properly file a revocation or a new TOD deed. We strongly recommend engaging a North Texas probate attorney to assist with this process.
Texas Debts Typically Pass to Your Probate Estate and Avoid Your Non-probate Transfers
As a general rule, Texans cannot escape their debts through death. If there are any assets in your probate estate, the personal representative of your estate must pay your valid debts using those assets before distributing them to your heirs or beneficiaries.
If certain assets are subject to non-probate transfers (for example, accounts with POD designations), those assets pass outside of your estate. In other words, your debts do not apply to non-probate transfers if the assets in your probate estate are sufficient to pay those debts. This can lead to unintended consequences, like in the following hypothetical scenario.
Imagine that you own two major assets in your lifetime—a bank account holding $100,000 and a coin collection worth $100,000. You want to treat your daughter and son fairly upon your passing and decide that your son should receive the coin collection and your daughter should receive the bank account. So you execute a POD designation on the bank account in favor of your daughter and a will that leaves the coin collection to your son. Upon your death, you owe $50,000 in credit card debt. In this scenario, your daughter will receive the full $100,000, and your executor will need to sell enough coins from your collection to pay your credit card debt.
An estate planning attorney can help you avoid unintended consequences like this scenario. Our Dallas probate litigation and estate planning attorneys are skilled at avoiding disputes related to non-probate transfers—and dealing with them when they arise. Call us today to discuss your goals. Our offices also service Plano, Frisco, McKinney, Denton, Fort Worth, Garland, Irving, Austin, Houston, San Antonio, Nacogdoches, Lufkin, and Center.
Our next post wraps up our series on non-probate transfers and highlights some significant takeaways to remember.