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Texas Community Property Transfers and Creditor Rights

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Texas community property that passes on the death of a spouse is subject to the debts of the deceased spouse and the rights of creditors before any transfers of the community property asset can occur.

In Matter of Estate of Abraham, the Decedent used a parcel of community property as collateral for a loan.  When Decedent died, the loan was unpaid.  The loan holder filed a creditor claim in Decedent’s probate estate seeking the unpaid balance of the loan.

Four months after Decedent died, Decedent’s son filed a deed that transferred the property to Decedent’s son.  Decedent had signed the deed, however the deed was not notarized until after the Decedent’s death.

Two years later, the Decedent’s surviving spouse transferred her interest in this community property by deed to the son.  The deed was contingent on the son paying the creditor’s claim but did not reference the other debts of the decedent’s estate.

The surviving spouse did not ask the court for permission to execute the deed, nor post a bond. The administrator of the Decedent’s estate petitioned to set aside the deed, and the Texas probate court granted the petition, on the grounds that:

  • The court did not grant permission
  • No partition order was entered
  • No bond was posted.

The Texas appellate court affirmed the ruling.

Is A Texas Community Property Transfer After Death Subject To The Rights of Creditors?

Pursuant to Texas Estates Code 101.001, the title to the community property vested immediately in the surviving spouse upon Decedent’s death.  However, the property remained subject to Decedent’s non-exempt debts and creditor rights.

For the surviving spouse to get title to his or her share of a community property asset, the surviving spouse had to follow the methods described in Texas Estates Code s 360.253.

Section 360.253 provides that a spouse may apply to have the court partition community property.  To do so, however, the request must:

  1. come after an inventory, appraisement, and list of claims for the estate have been returned (or affidavit in lieu of the same);
  2. be accompanied by a suitable bond “in an amount equal to the value of the surviving spouse’s interest in the community property” and,
  3. the court approves the partition, dividing it into “two equal moieties, one to be delivered to the surviving spouse and the other to be delivered to the executor or administrator of the deceased spouse’s estate.”

As the Texas appellate court explained:

The provision gives creditors a lien “on the property delivered to the surviving spouse to secure the payment of the bond” and a right to sue in their own name to have judgment against the bond. Id. at § 360.253(d)(1) and (2).

 

Creditor Rights Must Be Protected Before Texas Community Property Transfer

The surviving spouse did not follow section 360.253 when she purported to transfer the Texas community property, and instead argued that following the procedures set forth in this statute is optional.  The appellate court explained that if the surviving spouse wants to transfer the Texas community property prior to the completion of estate administration, following the statute is mandatory to protect the rights of creditors.

The Texas appellate court summarized the problem with the surviving spouse’s position:

Margaret’s view that she can transfer a community property asset out of the estate without the probate court’s approval, any input from creditors, or the use of the bond provisions of Section 360.253, thus runs contrary to the text and objectives of the Estates Code. It would literally allow her to transfer assets to a third party of her choosing and shield them from a legitimate estate creditor. The deed that she used, moreover, relies on making the transfer effective as of a date in the past. Yet  traditionally, a “deed takes effect only from the date of its delivery, which may be either actual or constructive.” Tuttle v. Turner, Wilson & Co., 28 Tex. 759, 773 (1866). She cites no authority allowing a retroactive effective date, which would only invite mischief in the world of secured transactions and creditors rights.

Therefore, before transfers of community property assets during the administration of an estate, the procedures of section 360.253 must be followed to protect the rights of creditors.  Upon completion of the estate administration, the procedure set forth in 360.253 does not need to be followed, since creditor rights would have already been determined.

 

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