Ask the Expert: Transfer-on-death accounts may be subject to creditor claims
I recently heard that transfer-on-death, or TOD, bank and brokerage accounts and living trusts aren't legally protected from their owner's creditors after he dies. I know TOD accounts and living trusts pass to their named beneficiaries without going through probate. I thought they were creditor-protected.
TOD accounts and living trust assets do pass directly to your named beneficiaries — but they are subject to your creditors' claims, both during your lifetime and after your death.
When you die, everything you owned falls into one of two categories. Assets you owned in your sole name (aka "probate assets") are governed by your will, which goes through probate, the legal process in which a court authorizes your executor to carry out its instructions. But your jointly owned assets and assets with named beneficiaries are "nonprobate" assets because they don't pass through your will. They go directly to the surviving joint owners or beneficiaries.
Your executor is responsible for paying your debts from your probate assets before disbursing them to your heirs. But if your debts exceed your probate assets, your creditors are entitled to claim some nonprobate assets, said Eric Kramer, a Uniondale estate lawyer. Creditors can't touch life insurance proceeds and retirement accounts with designated beneficiaries. But they can sue your heirs to claim TOD accounts and living-trust assets.
Under certain circumstances, creditors can also reach a decedent's jointly owned account, said Joseph Bollhofer, a St. James elder law attorney. For example, if creditors can show the decedent deposited his only assets into a joint account with his daughter before he died, they can claim his half-interest after his death.
"It's more difficult for creditors to come after nonprobate assets, but if there's enough at stake, they will," says Bollhofer.
The bottom line
TOD accounts and living trust assets aren't legally protected from your creditors.
More information
nycourts.gov/courthelp/WhenSomeoneDies/probate.shtml
finra.org/investors/alerts/plan-transition-transfer-brokerage-account-assets-death
