Challenging Common Nonprobate Accounts in Texas
Generally, there are two categories of property that pass upon the death of decedent: probate assets and nonprobate assets. Probate assets can be described as anything that passes under the terms of a decedent’s will or, if the decedent did not leave a will, through the Texas intestacy statutes. Nonprobate assets are those are contractual in nature, and they pass outside of the decedent’s estate without the necessity for probate. The most common types of nonprobate assets are:
· Property held in a trust;
· Life insurance proceeds with a designated beneficiary; and
· Bank accounts with right of survivorship language or pay-on-death beneficiary designations.
Nonprobate assets often comprise the bulk of a decedent’s property. This blog post will focus on the avenues available to challenging the creation of nonprobate accounts. For a detailed discussion on joint account litigation and the effect of account designations on the probate process, I would recommend David F. Johnson’s Joint Account Litigation in Texas and X Marks The Spot . . . Or Does It? Probate Issues When Dealing With Signature Cards and Beneficiary Designations In Texas by Larry A. Flournoy, Jr. and Chad T. McLain.
There are multiple types of financial accounts recognized in Texas, and each must comply with the various requirements in the Texas Estates Code. For example, the accounts most commonly encountered in our practice are Right of Survivorship Accounts and Pay-On-Death Accounts. In order to be valid, there must be a writing signed by the decedent and/or all account owners. This element is usually present because banks will require a written contract of deposit to open the account. Furthermore, each type of account must contain certain statutory language (or substantially similar language) provided by the Texas Estates Code. See Tex. Estates Code § 113.052.
Deposit agreement are just like any other written instrument passing property and they are subject to various legal challenges. The most challenges to these accounts are challenges to the language or formalities of the deposit agreements and challenges to the circumstances surrounding the execution of the deposit agreement.
Required Statutory Language and Proper Execution
If the deposit agreement does not include language substantially similar to the warnings and definitions required by the Texas Estates Code, it does not create a valid right of survivorship and the funds pass to the decedent’s estate in the proportion of his or her net contributions to the account. The Texas Legislature codified the form signature card to limit litigation over nonprobate accounts; however, some financial institutions have not adopted the statutory language or something substantially similar. It is important to carefully check the language of the deposit agreement to ensure that it complies with the statute. Next, it is important to consider whether the decedent actually executed the agreement or made a valid selection of the type of account, i.e., whether he or she checked the right box.
Even where the account agreement contains the proper statutory language and there are no questions concerning the validity of the decedent’s signature or account selection, there are avenues to challenge the enforceability of the agreement. Primarily, the challenges will center on the capacity of the decedent at the time he or she executed the agreement or whether the creation of the account was the product of undue influence.
Lack of Capacity
Because the deposit agreement is a contract, the applicable standard is legal capacity. This is a higher bar than testamentary capacity and requires only that the decedent had sufficient mind and memory to understand the nature and effect of his or her act. The law presumes that account holders have capacity to enter into deposit agreements and to designate the type of account created. Further, elderly persons are not presumed to be incompetent. Challenging capacity is often difficult through direct evidence; however, circumstantial evidence and instances showing the decedent’s incapacity before and after the execution of the contact may prove that he or she lacked capacity at the time of the execution of the account agreement. If it is determined that the decedent lacked capacity when he or she executed the deposit agreement, then it would be considered void, and the decedent’s net contributions to the account would become and asset of the estate that passes via will or intestate succession.
Deposit accounts can also be challenged as the product of undue influence. To establish undue influence the party asserting the claim has the burden to establish the following elements: (1) the existence and exertion of an influence, (2) subversion of the mind of the maker of the instrument, and (3) execution would not have occurred but for the influence. Direct evidence of undue influence is uncommon; however, undue influence can be proved by circumstantial evidence. Specifically, courts will consider the follow factors:
· The nature and type of relationship between the executing party and the influence;
· The opportunity to exert influence
· Circumstances surrounding the execution of the challenged document
· Existence of a fraudulent motive
· Habitual subjection to another’s control
· The state of mind at the time of execution of the document
· The existence of mental or physical incapacity which could affect a person’s resistance to influence
· Words and actions of the executing party
· Weakness of mind and body, whether from age, disease, or disability, and
· The presence of an unnatural disposition or property.
The undue influence inquiry is fact intensive, and none of the factors alone are determinative. Further, the mere opportunity to exert and influence is not enough to establish that a person was, in fact, unduly influenced.
Breach of Fiduciary Duty
Finally, a nonprobate account may be set aside if its creation was the product of a breach of fiduciary duty. The elements of a breach of fiduciary duty claim are: (1) the existence of a fiduciary duty, (2) breach of such duty, and (3) damages as a result of the breach. One of the most common fiduciary relationships that arise in the context of creation of financial accounts is the principal/agent relationship under a power of attorney. When an agent under a power of attorney enters into a transaction with the principal, there is a presumption that the transaction is fraudulent and void. The burden is on the fiduciary to establish that the challenged transaction as fair, honest, equitable and fully disclosed to the principal. Specifically, the fiduciary has the burden to prove that he or she acted fairly and informed the principal of all material facts relating to the alleged transaction. This is a high burden; however, it is not impossible as long as there is sufficient evidence documenting the disclosure, fairness, and reasons for the creation of the account or change of beneficiary.