We covered two of the most common ways to challenge nonprobate transfers in the previous post, lack of contractual capacity and undue influence. In both of those circumstances, the transferor wasn’t making a free, properly informed decision. Now, we turn our attention to a different scenario—when the transferor makes a deliberate nonprobate distribution to avoid paying his creditors. In contrast to our last post, here the transferor knew and understood exactly what he was doing.
In formal probate proceedings, creditors of the deceased can make claims against the deceased person’s estate. The person in charge of the estate, called an executor or administrator, must pay valid creditor claims before distributing the deceased person’s property to heirs or beneficiaries.
Creditors don’t have this same opportunity when the deceased person used a nonprobate transfer to avoid paying his debt. In fact, they may have a much more difficult time collecting their claim. But that doesn’t mean they are totally out of luck. Several legal remedies are available to creditors, depending on the circumstances and type of nonprobate transfer.
Texas Creditors Can Claim that a Nonprobate Transfer Was Fraudulent
Under Texas law, a fraudulent transfer occurs when a debtor transfers property with the intent to hinder, delay, or defraud a creditor. If a debtor designates a beneficiary on an account or asset with the intent to shield that property from creditors, it may be considered a fraudulent transfer. This is a powerful claim that allows for the recovery of the debtor’s attorney’s fees and for other damages.
However, proving fraudulent transfer based on nonprobate transfers, such as beneficiary designations, can be challenging. The legal burden is on the creditor to show that the debtor had the intent to defraud them at the time of the transfer. This can be difficult to establish, as the debtor may have had legitimate reasons for designating a beneficiary, such as estate planning or providing for a loved one.
In order to prove fraudulent transfer based on a beneficiary designation, the creditor will need to show that the debtor acted with actual intent to hinder, delay, or defraud them. This may involve gathering evidence such as financial records, communications between the debtor and the beneficiary, and testimony from witnesses.
Overall, proving fraudulent transfer based on a beneficiary designation in Texas will require a careful examination of the facts and circumstances of the case. It is advisable to consult with an attorney experienced in challenging nonprobate transfers.
The Texas Estates Code Allows Creditors to Collect a Debt from a Nonprobate Account
Texas creditors may be able to collect from a deceased debtor’s bank account that would otherwise be subject to a nonprobate transfer via a beneficiary designation. The creditor must meet several conditions, however, to accomplish this recovery:
-A formal estate proceeding must be pending in a probate court. If there is no estate proceeding pending, the creditor can apply to the probate court to open one. This can be an expensive and time-consuming process.
-The debts of the deceased person must exceed the assets in their estate.
-The creditor must present a written demand to the executor or administrator of the estate.
-The creditor must seek to enforce the debt in court within two years of the deceased person’s death.
In practice, this can be a difficult claim to establish. If the account has already been paid out to the beneficiaries, then the creditor may have difficulty collecting the claim even if the creditor meets the conditions above. It’s not impossible, though. So, if you are trying to collect a debt from a creditor, contact our attorneys to discuss the possibility of collecting from a deceased person’s nonprobate account.
Transfer on Death Deeds May Be Ineffective Against Texas Creditors
Creditors have rights to collect their claims against a deceased person even if the deceased person made a nonprobate transfer of real property using a transfer on death deed.
The Texas Estates Code provides that a beneficiary, who receives property from a transfer on death deed, takes that property subject to any mortgages, liens, or other debts specifically attached to the property. This type of creditor is called a secured creditor. The creditor, however, must make an election of how to assert their claim. The specific choice may affect how much and how easily they can obtain repayment. The details of this procedure are too involved for the sake of this post, but if you are a secured creditor seeking to assert a claim against a deceased person’s estate, you should speak with an experienced probate attorney.
All types of creditors, including both secured and unsecured creditors, have additional rights when the deceased person uses a transfer on death deed to accomplish a nonprobate transfer. The Texas Estates Code provides a procedure to, in essence, change the nonprobate asset into a traditional probate asset. Similar to the section above on nonprobate accounts, the creditor must meet several conditions:
-A formal estate proceeding must be pending in a probate court.
-The debts of the deceased and the expenses of estate administration must exceed the assets in the estate. Again, the creditor can apply to open the estate, but this can be an expensive and time-consuming process.
-The creditor must make a demand for payment to the executor or administrator of the estate.
-If the executor or administrator fails to start a legal proceeding against the beneficiary of the transfer-on-death deed within 90 days of the creditor’s demand, the creditor himself can file that legal proceeding.
-The legal proceeding against the property recipient must be opened within two years of the deceased person’s death.
If you are an estate creditor, you may have rights to collect your debt, even if the deceased person utilized nonprobate transfers. This area of law is nuanced, and we recommend speaking with a Texas lawyer experienced in probate and collection against nonprobate transfers. In our next post, we examine legal procedures for challenging nonprobate transfers.
If you need help collecting or defending against a creditor claim involving a nonprobate asset transfer, we encourage you to speak with our Dallas, Texas probate attorneys. The Johnson Firm’s probate and estate lawyers can help you determine whether creditor rights apply and how difficult it would be to enforce them. We’re here, ready, and willing to engage with nonprobate asset beneficiaries, executors, and administrators in North, South, Central, East, and West Texas.