There is a common misconception that transferring assets to revocable trusts or designated transfer-on-death or other beneficiary designation protects those assets from creditors. Assets in trust or those that carry a beneficiary designation (or transfer-on-death designation) can assist in protecting such assets from creditor claims; however, these assets are usually still subject to creditors’ claims and statutory allowances. Beneficiaries need to understand that their inheritances may still be subject to claims in the estate. Creditors need to understand the process for proceeding against “nonprobate transferees” to preserve their rights.
A “nonprobate transfer” is a transfer, effective at death, by a transferor domiciled in Indiana and who immediately before death had unrestricted power over the property and its use. Indiana Code § 32-17-13-1(a). Assets transferring to beneficiaries from a revocable trust funded during a deceased’s lifetime would be considered a nonprobate transfer. Assets transferred to a beneficiary by transfer-on-death or other beneficiary designation could also be considered a nonprobate transfer. I.C. § 32-17-13-1(e). Certain specific transfers are excluded from this definition, however, such as a survivor’s interest in real estate if held as tenancy by the entireties, beneficial interests in life insurance policies or annuities, as well as beneficial interests in retirement accounts or plans or benefits under an employee benefit plan. I.C. § 32-17-13-1(b).
Nonprobate transfers can be subject to creditors’ claims or statutory allowances and be pulled into a deceased’s estate, but the claimant needs to be proactive. Any individual or entity that has filed a timely claim in a deceased’s estate can enforce a claim against a nonprobate transferee and commence a formal proceeding, I.C. § 32-17-13-2(a), (that “nonprobate transferee” being the individual who acquires the property by a nonprobate transfer). See I.C. § 32-17-13-2(b). Creditors need to know, however, that the procedure to do so is statutory, specific and has very strict requirements on timing.
Filing a claim in the estate and issuing a written demand: Before such a proceeding can commence, the creditor must file a claim in the deceased’s probate estate and make a written demand on the nonprobate transfers. Specifically, the claimant must: (1) file a claim in the deceased’s estate; (2) deliver a copy of the claim to each nonprobate transferee within five months after the deceased’s death; and (3) deliver a written demand on the personal representative of the estate to proceed against nonprobate transferees within seven months of the deceased’s death. I.C. § 32-17-13-7(d). The claim and the written demand can be filed concurrently in an estate, but the written demand must be delivered within seven months after the deceased’s death or 30 days after the final allowance of the claimant’s claim. I.C. § 32-17-13-7(j). The written demand must also include specific information, such as the: (1) cause number of the estate; (2) a statement of the claimant’s interest in the estate and nonprobate transfers, including the date the claimant filed a claim in the estate; (3) a copy of the claim attached as an exhibit to a written demand; and (4) a description of the nonprobate transfer, including a description of the transferred asset, a description or copy of the instrument by which the deceased transferor established the nonprobate transfer, and the name and mailing address of each nonprobate transferee known by the claimant. I.C. § 32-17-13-7(e).
Importantly, a formal proceeding cannot be commenced if the personal representative of an estate has not allowed nor disallowed the claimant’s claim within the statutory deadlines, unless the claimant’s petition to set the claim for trial has been filed within 30 days after the expiration of the statutory deadlines to allow or disallow claims. I.C. § 32-17-13-7(f). Further if a personal representative of an estate declines or fails to commence a formal proceeding within 30 days after receiving the written demand, a claimant may commence the proceeding in the name of the estate. I.C. § 32-17-13-7(g). Importantly, if no estate administration is commenced, then all these deadlines mean the claimant itself must commence the estate administration.
Statute of limitations for formal proceeding: A formal proceeding against nonprobate transferees must be commenced no later than nine months after the deceased’s death, but if a claim is timely filed in the deceased transferor’s estate, it may be commenced after the final allowance of the claim within the earlier of 30 days after the personal representative files in the estate a written notice that the personal representative does not intend to commence a proceeding, or 90 days after final allowance of the claim if the personal representative declines or fails to commence a proceeding after receiving the written demand and the personal representative does not file a written notice in the estate that the personal representative does not intend to commence a proceeding under this chapter. I.C. § 32-17-13-8.
Venue: A claimant should file in an Indiana county where the nonprobate transfer occurred, the nonprobate transferee is located or the probate action is pending. The filing can be commenced as a separate cause from a pending estate. I.C. § 32-17-13-6. A formal proceeding is commenced by filing a complaint against a nonprobate transferee as a defendant and serving a summons and a complete copy of the complaint to each defendant under the Indiana Rules of Trial Procedure. Id.
The proceeding is complicated. The proceeding requires strict time limitations. The summary above is complicated. When the summary is complicated, the procedure itself can be downright perplexing. Nonetheless, individuals need to know that revocable trusts and other nonprobate transfers can be subject to claims. Creditors need to know that there is the ability to be paid from these nonprobate transfers, but only if complicated procedures and timing are met.•
Rodney S. Retzner is a partner and chair of the estate planning and administration practice and Micah J. Nichols is a senior associate at Krieg DeVault LLP. Opinions expressed are those of the authors.