When someone dies, their estate may be subject to lawsuits. This is especially true if the decedent had any assets or property in Texas. Understanding the law can help protect your estate from potential litigation.
But why would anyone want to file a lawsuit against a decedent’s estate?
The main reason creditors may file a lawsuit against an estate is due to the debt that the estate owes. If the creditor is owed money by the estate owner before they passed away, they may take legal action against the estate that is left behind to collect what they are owed.
There are a few things that can be done to avoid this situation from happening. We will discuss these in this article.
Protecting Your Estate and its Assets From Creditor Lawsuits in Texas
- Create Beneficiary Designations
To protect your estate and its assets from creditor lawsuits, you should make beneficiary designations. This is a legal document in which you designate someone or something to receive the assets of your estate after you die. By doing this, you reduce the chances that your creditors will be able to seize any of your property. Additionally, if you have children or other loved ones who may need money after you die, making a beneficiary designation allows them to receive the inheritance without having to go through a probate process.
Examples of beneficiary designations include:
An individual retirement account (IRA) is a tax-advantaged savings vehicle that allows individuals to save for their future. Generally, contributions are made by the employee and the employer contributes matching funds. IRA rules may vary depending on the type of IRA, but generally, IRAs offer several benefits, including protection from creditors (Section 42.0021 of the Texas Property Code).
When you create an individual retirement account (IRA) with your employer, you are allowing yourself to save money for your future. You can use this money to pay for your bills and other expenses now, or you can leave it in your IRA to grow over time.
However, to ensure that you can pass your IRA funds on after your passing, if you are a resident of Texas, you may want to consider making an IRA beneficiary designation so that any money in your IRA will be transferred to your beneficiary when you die. By making an IRA beneficiary designation, you can protect this part of your estate and its assets from creditor lawsuits.
- Life Insurance Policies
Life insurance policies can be an effective way to protect your estate and its assets from creditor lawsuits. When the policy owner dies, the life insurance proceeds are transferred directly to the beneficiary, typically without going through any other party. This also means that the life insurance policy is never considered to be a part of the deceased’s estate.
This means that creditors of the policy owner cannot get their hands on these funds, protecting the beneficiaries from potentially massive judgments. The beneficiary may then use the money to pay off creditors or they may simply decide not to do so as it is not their debt.
- Payable-on-Death Designation Accounts
When you create a payable-on-death (POD) designation account, you are specifying that the account’s assets should be transferred immediately to the beneficiary upon your death, without going through the court system. This means that creditors will not have access to any funds in this account and can’t take them away from your loved ones.
The benefits of having a POD designation account are many. For one, it ensures that your loved ones will inherit everything you have left them immediately and without any interference from creditors. Secondly, it can protect your estate from creditor lawsuits in the future if there are any unexpected financial issues.
If you are interested in setting up an IRA, a life insurance policy, or a POD designation account, speak with an attorney who can help make the process as smooth as possible.
2. Create an Irrevocable Trust
If you are concerned about creditor lawsuits and how they could impact your estate, you may also want to consider creating an irrevocable trust. An irrevocable trust is a legal document that creates a special type of trust. The trust cannot be changed or undone, which makes it a very effective way to protect your estate and its assets from creditor lawsuits. In fact, in many cases, an irrevocable trust can even prevent creditors from ever getting their hands on your Texas estate at all.
As we just mentioned, irrevocable trusts can protect your assets and ensure that they are distributed to beneficiaries according to your wishes. However, making an irrevocable trust is not without risk. If you do not contact a lawyer who is experienced in creating trusts, you could end up with an invalid trust or one that is not effective in protecting your assets. If you are a Texas resident and would like to set up an irrevocable trust to protect your heirs, contact a trusts lawyer at our firm. We can help you create an effective and legal trust arrangement.
3. Consider Joint Ownership
Joint ownership is another type of estate planning tool that can protect your assets from creditor lawsuits. When you create a joint ownership account, the account transfers straight to the other party without going through any bank or brokerage. This way, if one party dies, their share of the account goes directly to their beneficiary without having to go through probate or court. The property also does not revert to the deceased’s estate; it becomes the property of the other partner(s) in the joint ownership. This also keeps it out of reach of creditors, as it is no longer a part of your estate.
There are some exemptions, however. For example, if partners co-signed the loan that was used to get such property, it may not be exempt from creditor action if one party dies.
Speak to a Texas Estate Planning Attorney
In conclusion, it is important to keep in mind that creditors have the right to file a lawsuit against your Texas estate, but there are steps you can take to protect yourself. To get started with any of these steps, it is advised to speak with an estate planning attorney at Kazi Law Firm about your specific situation to make sure you are taking all necessary precautions.