Probate inventory may be kept private

This is one of a series of posts about 2011 legislation.

The 2011 legislative change that is likely to have the biggest impact on Texas probate lawyers is SB 1198’s amendment to Section 250 of the Probate Code permitting independent executors to file an affidavit in lieu of an inventory, appraisement and list of claims if there are no unpaid debts, except for secured debts, taxes and administration expenses, at the time the inventory is due.  The public disclosure of information in the inventory is unpopular with clients and drives some Texans to use a living trust-based plan when a will otherwise would suffice.

Here are the particulars of the change:

• Only independent executors and independent administrators are permitted to file an affidavit in lieu of an inventory. Dependent administrators must file a public inventory.
• The affidavit may be used if there are no unpaid estate debts, other than secured debts, taxes and administration expenses, at the time the inventory is due.  If the independent executor can pay all unsecured debts between the date he or she qualifies and the due date of the inventory, the independent executor can avoid the public disclosure of inventory information.
• The change does not mean that it no longer is necessary to prepare an inventory.  The independent executor still must prepare a verified, full and detailed inventory and deliver it to each estate beneficiary.
• Any person interested in the estate – specifically including a possible heir of the decedent or a beneficiary named in a prior will – is entitled to receive a copy of the inventory on request.  The independent executor is protected from liability to the estate or its beneficiaries if he or she provides a copy of the inventory to a person the independent executor believes in good faith “may be” a person interested in the estate.  If the independent executor refuses to give a person a copy of the inventory, he or she may apply to the court to compel the independent executor to do so.

The change to Section 250 necessitates changes to a number of related sections. An independent executor may be removed if he or she fails to file an inventory or the affidavit in lieu of an inventory (Section 149C).  Successor independent executors also may file an affidavit in lieu of an inventory (Section 227). If additional property or claims are discovered, the independent executor either must file a supplemental inventory or a supplemental affidavit in lieu of an inventory (Section 256). The setting apart of exempt property (Section 271), the setting of the family allowance (Section 286) and the sale of property to raise funds for the family allowance (Section 293) are tied to the filing of the inventory or an affidavit in lieu of an inventory.

While Section 250 permits the independent executor to choose to file an inventory or an affidavit in lieu of an inventory, beneficiaries may believe that the independent executor has breached his or her duties if (a) he or she fails to use the affidavit in lieu of an inventory if the estate is eligible to do so and (b) he or she fails to quickly pay the decedent’s unsecured debts (if it is possible to do so) in order to make the estate eligible for the affidavit in lieu of inventory. It may be hard for the independent executor to justify making an unnecessary public disclosure of asset information.

This change should make will-based plans more popular.  Clients still may wish to use living trusts for other reasons (out-of-state real property, disability planning or fear of a will contest, for example), but they may not have to forego a will-based plan merely to avoid a public disclosure of information.

An affidavit in lieu of an inventory may be used for the estates of decedents dying on or after September 1, 2011.  For persons who died before September 1, 2011, an inventory must be filed, even if the inventory is filed after September 1, 2011.

Significant changes to Section 128A notices to beneficiaries

This is one of a series of posts about 2011 legislation.

The 2007 amendment to Probate Code Section 128A caused much grumbling among probate lawyers.  It required the personal representative of a testate decedent to send certified mail notices to (or obtain waivers from) all beneficiaries named in the will.  The 2007 changes were a rush job to address concerns expressed in the Legislature over a sensational case in Travis County in which an independent executor was accused of misappropriating estate funds without ever telling the estate beneficiaries that he was the executor and that they had an interest in the estate.  Because it was a rush job, 2007’s Section 128A was rough around the edges and went further than has proven to be necessary.

SB 1198 amends Section 128A to make the rules about notices to beneficiaries much easier to meet.  Here are the key changes:

• The notice does not have to be given to a beneficiary who is receiving $2,000 or less worth of property or who has received all gifts to which he or she is entitled within 60 days of the order admitting the will to probate.
• The notice or waiver need not include a copy of the will and the order admitting it to probate if it includes a written summary of the gifts to the beneficiary under the will, the court in which the will was admitted to probate, the docket number assigned to the estate, the date the will was admitted to probate and, if different, the date the court appointed the personal representative.
• The personal representative does not need to notify a beneficiary of a trust whose right to receive income distributions is at the sole discretion of the trustee if the trustee has given the notice to an ancestor of the beneficiary and there is no apparent conflict of interest between the ancestor and the beneficiary.  This change may offer some help in the case of trusts permitting distributions to all of a person’s descendants, but it will not help if the distribution standard is based on the health, education, maintenance and support needs of the beneficiary, since this is not a wholly discretionary standard.

SB 1198 clarifies that notices are not required if the will is probated as a muniment of title and that notices are not required to a person whose interest arises on the occurrence of a contingency which has not occurred.

The changes made by SB 1198 apply to the estate of a decedent dying on or after September 1, 2011.  The old law must be followed for persons dying before that date.

2011 Texas Legislative update

Glenn Karisch's 2011 Texas Legislative Update is now available here in pdf format. This covers all of the key probate, guardianship and trust law changes made in the regular and first called session of the 82nd Texas Legislature. Most of the changes become effective September 1, 2011. Subject-by-subject excerpts will be posted to this site shortly.

Bill Pargaman's excellent and comprehensive legislative update is available here in pdf format.  Bill's paper includes the full text of the Probate Code and Trust Code changes.

Sine die

The 2011 regular session of the Texas Legislature ended May 30, 2011. Governor Perry has until June 19, 2011, to sign or veto bills. While the legislature is meeting in special session as of this writing (June 8, 2011), it is unlikely that any probate, guardianship or trust legislation will be enacted in this or any other special session. Most enacted legislation becomes effective September 1, 2011.

There are summaries of each enacted bill in the 2011 Legislation portion of The Texas Probate Website. Bill Pargaman's excellent and comprehensive legislative update is available online here.  texasprobate.com. Here are some of the key changes:

You won't have to file an inventory in most independent administrations.

SB 1198 amends Section 250 of the Probate Code to permit an independent executor to file an affidavit in lieu of an inventory if there are no unpaid debts, except for secured debts, taxes and administrative expenses, at the time the inventory is due. The independent executor still must prepare an inventory and send a copy to each beneficiary, but the public disclosure of the decedent's assets which results from filing a probate inventory will no longer be required in the vast majority of estates.

The testator and witnesses need to sign the will only once.

SB 1198 amends Section 59 to allow a combined execution of the will and self-proving affidavit so that the testator and witnesses are required to sign only once, instead of having to sign both the will and the self-proving affadavit. The old way still works, but this provides a new way to speed up will signings.

Survivorship accounts -- the worst part of Holmes v. Beatty is overruled. 

SB 1198 amends Sections 439 and 452 to make it clear that, for both community property and non-community property multiple party accounts, a survivorship agreement will not be inferred from the mere fact that the account is a joint account or that the account is designated as JT TEN, Joint Tenancy, or joint, or with similar language. The effective date provision makes it clear that this was intended to expressly overrule Holmes v. Beatty, 290 S.W.3d 852 (Tex. 2009).

Changes to Section 128A notices to beneficiaries.

SB 1198 amends Section 128A to make it easier on personal representatives. No notice is required if the beneficiary receives property worth $2,000 or less or if the beneficiary receives all property to which he or she is entitled within 60 days of the order admitting the will to probate. The notice need not include a copy of the will and the order admitting it to probate if the notice includes a summary of the gifts to the beneficiary, the court in which the will is probated and the docket number assigned to the case. The bill clarifies other issues about 128A notices.

Power of sale in independent administrations.

SB 1198 attempts to clarify whether or not an independent administrator has the power to sell real property. In cases where there is no will or the will does not give the independent administrator or executor the power of sale, Section 145A permits the distributees of the estate to agree at the time the personal representative is appointed to consent to granting the power of sale, in which case the court will include the power of sale in the order appointing the independent administrator or executor. Section 145C attempts to clarify in which cases independent executors have the power of sale.

Deadline to make disclaimers extended to match 2010 tax law.

SB 1197 and SB 1198 change the disclaimer provisions in the Trust Code and Probate Code, respectively, to extend the deadling for persons dying after December 31, 2009, but before December 17, 2010, until 9 months after December 17, 2010. The tax law enacted by Congress in December 2010 gave those decedents until that date to disclaim for federal tax law purposes, so the Texas law change matches the federal change.

Creditor protection for inherited IRAs.

SB 1810 amends Section 42.0021 of the Property Code to provide that all IRAs, including inherited IRAs, are exempt from creditors' claims.  It provides that the interest of a person in an IRA acquired by reason of the death of another person is exempt to the same extent that the interest of the person from whom the account was acquired was exempt on the date of the person's death. The exempt status of inherited IRAs was called into question by In re Jarboe, 2007 WL 987314 (Bankr. S. D. Tex 2007), and similar cases across the country.

REPTL bill tweaks independent administration

HB 2046 fine-tunes Texas statutes on independent administration for inclusion in the new Estates Code. While the changes are minor in the overall scheme of things, each change may be important in particular cases.

Will Hartnett, Author of HB 2046The bill, authored by Rep. Will Hartnett (R-Dallas), is the work of the Real Estate, Probate and Trust Law Section of the State Bar of Texas. It is part of the Section's multi-year effort to address certain key subjects prior to the change to the Estates Code on January 1, 2014. Most of the changes in HB 2046 were included in REPTL's 2009 legislation. The 2009 legislation (HB 3085) failed to pass because of a logjam at the end of the session.

Which rules apply to independent administrations?

Many of the changes clarify if certain rules applicable to dependent administrations also apply to independent administrations. For example, new Section 145B would affirmatively state the authority of an independent executor to act:

Unless this code specifically provides otherwise, any action that a personal representative subject to court supervision may take with or without a court order may be taken by an independent executor without a court order. The other provisions of this part are designed to provide additional guidance regarding independent administrations in specified situations, and are not designed to limit by omission or otherwise the application of the general principles set forth in this part.

Since Section 3(q) of the Probate Code includes "independent administrator" within the definition of "independent executor," Section 145B and other provisions referring to "independent executor" also include independent administrations of intestate decedents and independent administrations with will annexed.

Power of sale

HB 2046 makes substantive changes to the power of independent executors to sell property from the estate. New Section 145C sets out the general rules:

• Independent executors have the power of sale of estate property set forth in the will without the need for court approval.
• In addition, unless limited by the terms of a will, independent executors have the same authority to sell estate property that dependent administrators have, but without the need for court approval and without the need to follow the procedural requirements applicable to dependent adminstrations. 
• Third parties are protected and need not inquire into an independent executor's power of sale (A) if the power of sale is granted in the will or in the order appointing the independent executor or (B) if the independent executor provides an affidavit to the third party that the sale is necessary or advisable to pay expenses of administration, funeral expenses and expenses of last sickness of decedents, and allowances and claims against the estates of decedents. 
• The protection granted to third parties does not relieve the independent executor from any duty owed to a devisee or heir.
• These rules do not limit the authority of the independent executor to enter into leases or borrow money.

One negative comment about these changes is that they expand the power of sale granted in the will to an independent administrator with will annexed. The power of sale may be viewed as a personal right granted to the independent executor named by the testator and should not extend to an independent administrator not named by the testator.

HB 2046 deals with the problem of independent administrations in cases where the will does not grant the power of sale by giving the applicant the opportunity to obtain the consent of all devisees or heirs to the power of sale. Section 145A provides that, if all devisees or heirs agree to give the independent aexecutor the power of sale, then the court may include that authority in the order appointing the independent executor. The power of sale issue must be raised prior to the appointment of the personal representative.

Creditors' claims in independent administrations

Section 294(d) notices and creditor response. Most of HB 2046's changes affecting creditors' claims clarify the procedural aspects of those claims. For example, under current law an independent executor may give a notice to unsecured creditors under Section 294(d) by certified or registered mail, return receipt requested, and claims which are not made within 4 months of the notice are barred.  New Section 146(a-1) would require the Section 294(d) notice to include a statement that "a claim may be effectively presented by only one of the methods prescribed by this section." Section 146(b-4) would require the creditor to perfect its claim by (1) written instrument that his hand-delivered with proof of receipt or mailed by certified mail, return receipt requested with proof of receipt, to the independent executor or the executor's attorney; (2) a pleading filed in a new lawsuit with respect to the claim; or (3) a written instrument or pleading filed in the court in which the administration of the estate is pending. This means that communications from creditors which are not sent by certified mail will not be sufficient to overcome the Section 294(d) bar.

Matured secured claims. Practitioners have different opinions about how matured secured claims are handled in independent administrations. Some think that, having elected matured secured status, the creditor may not then exercise its nonjudicial foreclosure right and instead must rely on the independent executor to sell the secured property in due course of administration. Others think that a creditor with a matured secured claim retains the nonjudicial foreclosure right. Section 146(b-1) would clarify this issue by providing that creditors with matured secured claims do not have the power to conduct a nonjudicial foreclosure, but they retain the right to seek judicial relief or to execute a judgment against an independent executor. Section 146(b-1)(3) would provide a means by which the independent executor may collect the amount of the matured secured debt from the devisees. If the devisees do not pay the debt, then the independent executor must sell the property and pay the money as it is paid in a dependent administration.

Preferred debt and lien claims. Section 146(b-2) would make clear that a secured creditor electing preferred debt and lien status is free to conduct a nonjudicial foreclosure but must wait 6 months after letters testamentary are granted.

Tolling of the statute of limitations. Under current law, Section 16.062 provides that the death of a person against whom or in whose favor there may be a cause of action suspends the running of an applicable statute of limitations for 12 months after the death, but this period is shortened to the date of qualification if a personal representative qualifies within 12 months after death. HB 2046 would keep that general rule, but would add (in new Section 146(b-6)) that the running of a statute of limitations shall be tolled only by written approval of a claim signed by an independent executor, a pleading filed in a suit pending at the time of the decedent's death or a suit brought by the creditor against the independent executor. Thus, the presentation of a statement of claim or a notice with respect to a claim would not toll the running of the statute of limitations with respect to that claim.

Other claims procedures do not apply. New Section 146(b-7) would wrap up the statute regarding claims in independent administrations by making it clear that the other procedural provisions governing creditor claims in "supervised" administrations do not apply. To further avoid confusion, that section states specifically that:

• Section 313 does not apply to independent administrations, so a creditor's claim is not barred by its failure to sue on a rejected claim within 90 days.
• Sections 306(f) - (k) regarding secured claims do not apply to independent administrations.

Closing independent administrations

HB 2046 would retain the seldom-used closing affidavit procedure for closing an independent administration, although it calls those affidavits "closing reports" (Section 151). It would add a new alternative closing procedure.  Under Section 151 (b) the independent executor may file a sworn notice of closing the estate, stating:

• all debts have been paid to the extent permitted by the assets in the independent executor's possession;
• all remaining assets have been distributed; and
• the names and address of the distributees to whom property was distributed.

Jose Rodriguez, Author of SB 1198Before filing such a notice, the independent executor must give each distributee a copy of the notice and the filed notice must include signed receipts or other proof that all distributees have received a copy of the notice.

HB 2046 also changes the Estates Code

HB 2046 also contains parallel provisions putting these same changes into the new Estates Code. The changes noted above would become effective September 1, 2011, if HB 2046 is enacted.

Update: On March 4, 2011, Sen. Jose Rodriquez (D-El Paso), filed SB 1198 as REPTL's decedent's estates bill in the Senate.