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A huge issue in handling many probates and many trusts after the grantor dies is: How does the executor/administrator/successor trustee do things right so that he or she won't be sued by creditors of the person who died? This issue is complicated by N.R.S. 111.779 which reads in pertinent part as follows:
NRS 111.779 Liability of nonprobate transferee; proceedings to impose liability; payment of claims against nonprobate assets.
- Except as otherwise provided in NRS 21.090 and other applicable law, a transferee of a nonprobate transfer is liable to the probate estate of the decedent for allowed claims against that decedent's probate estate to the extent the estate is insufficient to satisfy those claims.
- The liability of a nonprobate transferee may not exceed the value of nonprobate transfers received or controlled by that transferee.
- Nonprobate transferees are liable for the insufficiency described in subsection 1 in the following order of priority:
- (a) A transferee specified in the decedent's will or any other governing instrument as being liable for such an insufficiency, in the order of priority provided in the will or other governing instrument;
- (b) The trustee of a trust serving as the principal nonprobate instrument in the decedent's estate plan as shown by its designation as devisee of the decedent's residuary estate or by other facts or circumstances, to the extent of the value of the nonprobate transfer received or controlled; and
- (c) Other nonprobate transferees, in proportion to the values received.
- Unless otherwise provided by the trust instrument, interests of beneficiaries in all trusts incurring liabilities under this section abate as necessary to satisfy the liability, as if all the trust instruments were a single will and the interests were devises under it.
- If a nonprobate transferee is a spouse or a minor child, the nonprobate transferee may petition the court to be excluded from the liability imposed by this section as if the nonprobate property received by the spouse or minor child were part of the decedent's estate. Such a petition may be made pursuant to the applicable provisions of chapter 146 of NRS, including, without limitation, the provisions of NRS 146.010, NRS 146.020 without regard to the filing of an inventory and subsection 2 of NRS 146.070.
Here is the executive summary of this law:
- The distinction between "probate" and "non-probate" assets is this: "Probate assets" are assets of the dead person that have to go through a court process called probate to pass on to heirs. If the asset has a title or name, such as real estate or a bank account, and it is only titled in the name of the dead person, a probate proceeding is necessary to transfer to title whether or not there is a will. To avoid probate many people plan to pass on their assets to their heirs in a "non-probate" way. They can put the assets in a trust. Or they can hold joint accounts or hold property in joint tenancy. Or they can put Nevada real estate or financial accounts into a transferrable on death status.
- In an ordinary probate proceeding involving more than $100,000, creditors of the estate must be notified of the probate and they have an opportunity to make a probate claim. If they are given notice and fail to timely file a creditor's claim their claim becomes invalid.
- In a probate proceeding involving not more than $100,000, minor children and/or a surviving spouse trump creditors. If there are no minor children or a surviving spouse the Petitioner must either pay all creditors or state under penalty of perjury that there are no creditors. Sometimes, if the estate is less than $100,000 and there is no surviving spouse or minor children, the more complicated procedure for estates over $100,000 is used to determine if there are creditors.
- So, "non probate" assets escape the scrutiny of the probate court and the legal requirements (the violation of which is a criminal violation because representations are made to the court under penalty of perjury) to advise the court of estate creditors; so as a practical matter in a probate proceeding certain things have to be done to either pay creditors or give them an opportunity to assert a claim. BUT if the transfer is outside of probate then the heirs have the ability to avoid creditors without incurring criminal liability by lying the Probate Court. BUT, the above law allows creditors to lay claim to what the heirs inherit.
- In addition, the above law imposes civil liability (for money damages) on the trustee of a trust who ignores creditors. The trustee can publish notice to creditors to protect him or herself from liability and most trustees are well advised to do so unless they are confident all creditors have been paid.
- If the dead person's property passes to heirs through a transfer on death deed or account or through joint tenancy or a joint account, the heir could still be liable to a creditor of the dead person, BUT there is no trustee involved to also share liability. A trustee of a trust might be only one of several beneficiaries of the trust but could be liable to creditors for the full amount of the trust if the trustee did not notify creditors. In contrast, the person who "inherits" joint property or transferrable on death property is only potentially liable to creditors for whatever they got.
- As a practical matter, let us consider a person who dies and their only significant asset is their house, but before their death they had at some point received Nevada Medicaid benefits (as opposed to Medicare benefits). If the house has to go through probate, the heirs must notify Nevada Medicaid of the probate proceeding and Nevada Medicaid will make a claim which will have to be paid. On the other hand, if the house had a Transfer on Death Deed to an adult child, the adult child would take the house by filing a death certificate and Nevada Medicaid would probably never know it had a claim. Theoretically Nevada Medicaid could claim against the house, but probably it would never know to do so. Ditto for a bank account that had to go through probate (because it was only in the name of the dead person) versus a bank account that was joint with an heir or payable on death to an heir.
Spouses and Minor Children is Estate under $100,000:
If the person who died left a spouse or minor children and if the estate, after deducting any mortgages or other loans on estate property is not more than $100,000, N.R.S. 146.070 cuts out valid creditor in favor of the surviving spouse and/or minor children. This statute can not defeat a security interest in estate property such as a mortgage on a home or a loan against a car but this statute can defeat unsecured creditor's claims such as hospital bills etc.
60 and 90 Day Notices to Creditors:
Nevada's Summary and General Probate procedures (see Probate ) have a provision for giving notice to known and unknown creditors which impose strict deadlines on the creditors to make a claim. Generally, known creditors must be mailed a Notice to Creditors and this Notice to Creditors is published (usually in the Nevada Legal News at a cost of $70) and this publication is deemed sufficient to put unknown creditors on notice and subject the deadlines described below for making a claim.
The probate statutes provide a 90 day deadline for creditors to file a claim in an estate valued at $200,000 or more (N.R.S. 147.040) and a 60 day deadline to file for estates valued under $200,000 (N.R.S. 145.060) after these creditors, if known to the estate, fail to respond within the time limits to being mailed a "Notice to Creditors." (Potential creditors unknown to the estate are cut-off if they fail to respond to a published Notice to Creditors.) These deadlines, or "statutes of limitations," supercede traditional statutes of limitations. Suppose for example that the decedent owes money under a contract: usually the statute of limitations to sue on a contract is six years. However, these shorter 60 and 90 day time periods apply in estate cases.
Deadline for Creditors to Make Claims:
It occasionally happens that an estate is opened up many years after a person died. Suppose an estate is opened up 7 years after a person died. You might think that any contract debts would have been automatically extinguished by the passage of more than six years since the person's death. However, if the person dies and no estate is opened up, the usual statutes of limitations on the decedent's death are tolled--they don't come into play. This is what the Nevada Supreme Court said in Brown v. Eiguren, 97 Nev. 251, 628 P.2d 299 (1981), interpreting N.R.S. 11.310. See, also, General Scientific Laboratories v. Brimer, 98 Nev. 50, 639 P.2d 1174 (1982).
A big current issue is what happens if a person dies leaving valuable assets such as large bank accounts PLUS a house with a mortgage that is greater than what the house is worth. Can the heirs keep the valuable assets and walk away from the underwater mortgage? I and a majority of probate attorneys in Las Vegas including the present Probate Commissioner and probate court judge say the answer is yes IF the mortgage holder fails to respond within the 60 or 90 day limits of N.R.S. 147.040 or 145.060 after being mailed a Notice to Creditors. Mortgage holders rarely respond within these time limits.
A small minority of probate lawyers note that under N.R.S. 40.455, in some circumstances, a mortgage holder, has six months after foreclosure to sue the borrower (or presumably the borrower's estate) for the loss it suffered because the amount of money obtained in the foreclosure sale was less than the debt owed. Some of these lawyers will not petition the court to distribute the estate proceeds until the underwater real estate has been foreclosed upon and the six month deadline for filing a deficiency judgment has run. I believe this is overly cautious.
Please note that for the 60 and 90 day deadlines to apply one has to use the more complicated "Summary Administration" or "General Administration" procedures, typically only used for estates over $100,000 in value. If the estate is under $100,000 the procedure called "Set Aside Without Administration" can be used; this procedure is cheaper and faster. But the "Set Aside Without Administration" procedure does not allow for the 60 and 90 day deadlines to creditors. Therefore, many lawyers, myself included, recommend a "Summary Administration" even for estates under $100,000 if the client wants to cut-off creditors, including mortgage holders.
One attorney I know argues that N.R.S. 147.050 limits a mortgage holder's claim against the estate to simply having a valid lien on the mortgaged property; in other words the mortgage holder cannot claim against anything other than the mortgaged property. Under this interpretation, if the estate's net value is no more than $100,000, the simpler, faster, cheaper "Set Aside Without Administration" can be used to cut off a mortgage holder's possible ability to go after a deficiency judgment; it is only necessary to serve the mortgage holder with a copy of the Petition seeking the Set Aside and a Notice of the Hearing on that Petition. This effectively gives the mortgage holder only two weeks' notice. I believe that N.R.S. 147.050 does not preclude the mortgage holder's right to sue the estate and its heirs and its attorneys for a deficiency judgment if its rights were not cut-off by having failed to act on a 60 or 90 Notice to Creditors. But, N.R.S. 40.455 in some cases does not allow for a deficiency judgment. In conclusion, I am not comfortable trying to use a "Set Aside" procedure to try and cut-off a mortgage holder's claim against an estate, its heirs, and its lawyers, but, as a practical matter if the Probate Commissioner and Judge sign off on such a procedure it is unlikely that the mortgage holder would sue for a deficiency judgment and seek to have a higher court rule in its favor.
Paying "Valid" Claims:
Another issue is whether the failure of a creditor to file a creditor's claim after proper notice is a valid legal "excuse" from paying an otherwise valid creditor's claim. The answer is yes in most cases. Sometimes the executor or administrator will want to pay valid creditor's claims, even if they can be avoided, and usually the will encourages this.
Every time a new probate is filed in Nevada, including procedures for estates under $100,000, notice must be given to Nevada Medicaid, not to be confused with Medicare. If Nevada Medicaid ever paid for any health care of the decedent, no matter how long ago, it has a claim against the estate. This claim is handled by the Nevada Attorney General's office which is not allowed to offer a discount on the claim. If the only asset of the estate of is real estate and the claim exceeds the value of the real estate, Nevada Medicaid may consent to a quick sale of the real estate.