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Noel C. Ice, Attorney At
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Noel C. Ice
Cantey & Hanger, L.L.P. 2100 Burnett Plaza 801 Cherry Street Fort Worth, Texas 76102-6898 (817) 877-2800 (Main no.) (817) 877-2885 (Ice) (817) 877-2807 (FAX) Copyright 1997 Noel C. Ice All rights reserved.
I. CLAIMS PROCEDURES IN PROBATE. 1 A. INTRODUCTION. 1 1. TECHNICAL CLAIMS PROCEDURES IN TEXAS.1 2. 1995 AND 1997 AMENDMENTS TO THE TEXAS PROBATE CODE.1 B. PAYMENT, CLASSIFICATION AND PRIORITY. 1 1. CLASSIFICATION.1 2. PRIORITY OF CLAIMS.2 3. CLAIMANT'S PETITION.2 4. PERMISSIVE ORDER OF PAYMENT.3 5. REMEDY OF CREDITOR AGAINST OTHER CREDITORS IN THE SAME CLASS.3 5. PRIORITY OF ALLOWANCES.3 6. PRIORITY AS AGAINST THE FEDERAL GOVERNMENT.5 7. PREFERRED DEBT AND LIEN HOLDERS.5 C. SPECIAL PROBLEMS OF SECURED CREDITORS. 5 1. ELECTION--PROB. CODE §306.6 a. Matured Secured Claims.9 b. Preferred Debt And Lien.9 c. Failure To Elect Matured Secured Status.10 d. Secured Creditors Under an Independent Administrations.10 2. TRAPS AND PITFALLS FOR THE SECURED CREDITOR.12 3. PRE-DEATH JUDGMENT LIEN CREDITOR.13 D. ORDER OF PAYMENT OF CLAIMS IN A GUARDIANSHIP PROCEEDING. 13 E. PAYMENT OF CLAIMS WITHOUT A GUARDIANSHIP. 14 F. NOTICE. 15 1. GENERAL NOTICE TO CREDITORS AND COMPTROLLER OF PUBLIC ACCOUNTS.15 a. Method Of Giving Notice.15 b. Time For Giving Mandatory Notice.16 c. Time For Giving Permissive Notice.16 d. Effect of Giving Permissive Notice.16 2. SPECIAL NOTICE TO SECURED CREDITORS.16 a. To Whom Is Special Notice Given.16 b. Time For Giving Special Notice.17 c. Method Of Giving Special Notice.17 d. Proof Of Service of Notice.17 e. The Statute Itself.17 f. Consequences Of Failure To Give Notice.18 G. PRESENTMENT. 18 1. CLAIMS REQUIRED TO BE PRESENTED.18 a. Claims For Money.18 b. Other Claims.18 c. Administration Expenses.19 2. FORM OF CLAIM.19 a. Requirement Of Authentication.19 (1) Form Of Authentication.19 (2) Waiver of Defects - Vouchers and Exhibits.20 (3) Importance Of Whether Or Not A Claim Is Void.21 b. Authentication In Estate's Of Wards-Guardianships.21 c. Who May Authenticate.22 d. Secured Claims.23 3. METHOD OF PRESENTMENT.23 H. ALLOWANCE OR REJECTION. 23 1. METHOD OF ALLOWANCE OR REJECTION.23 2. EFFECT OF FAILURE TO ENDORSE OR ANNEX-AUTOMATIC REJECTION IF NOT APPROVED WITHIN THIRTY DAYS. 23 3. EFFECT OF ALLOWANCE.24 4. EFFECT OF REJECTION - 90 DAY STATUTE OF LIMITATIONS.24 5. SUIT ON REJECTED CLAIM-JURISDICTIONAL ISSUES.25 a. Liquidated Claims.25 b. Unliquidated Claims.27 6. EFFECT OF PAYMENT WHICH HAS NOT BEEN APPROVED.28 7. EXECUTION AND POWER OF SALE.29 8. CLAIMS BY PERSONAL REPRESENTATIVE.30 9. CLAIMS NOT ALLOWED AFTER ORDER FOR PARTITION AND DISTRIBUTION.30 10. FAILURE TO PRESENT.30 I. ACCOUNTING FOR DISPOSITION OF CLAIMS 31 J. SPECIAL STATUTES OF LIMITATIONS ISSUES. 31 1. TOLLING OF GENERAL STATUTES OF LIMITATIONS.31 2. DOES P.C. §299 APPLY TO INDEPENDENT ADMINISTRATIONS?32 2. NO CLAIM MAY BE ALLOWED ON WHICH A SUIT IS BARRED BY A GENERAL STATUTE OF LIMITATION. 32 3. NO TIME FOR PRESENTMENT.32 4. TOLLING OF STATUTE OF LIMITATIONS BY DEATH.33 5. RESPONSE TO A SUIT BY AN INDEPENDENT EXECUTOR.33 K. INDEPENDENT EXECUTORS--NOTICE, PRESENTMENT, FORM OF CLAIM, ALLOWANCE AND REJECTION, PAYMENT, CLASSIFICATION AND PRIORITY. 33 1. AMENDED SECTION 146.34 2. REMEDY OF CREDITOR AGAINST OTHER CREDITORS IN THE SAME CLASS.35 3. APPLICATION OF NOTICE RULES TO INDEPENDENT ADMINISTRATIONS.35 4. PRESENTMENT OF CLAIMS TO INDEPENDENT EXECUTORS.36 5. FORM OF THE CLAIM--APPLICATION OF §301 TO INDEPENDENT ADMINISTRATIONS. 36 6. ALLOWANCE, REJECTION AND SUIT ON REJECTED CLAIM--§§309, 310 AND 313 DO NOT APPLY TO INDEPENDENT ADMINISTRATIONS. 37 7. CLASSIFICATION AND PRIORITY--§§320-322 APPLY TO INDEPENDENT ADMINISTRATIONS. 38 8. RESPONSE TO A SUIT BY AN INDEPENDENT EXECUTOR.39 L. FORCING PAYMENT. 39 1. GENERAL CREDITORS.39 2. SECURED CREDITORS.40 M. CONCLUSIONS. 40 N. ACKNOWLEDGMENTS AND BIBLIOGRAPHY REGARDING CLAIMS PROCEDURES. 41 II. THE LIABILITY OF THE PERSONAL REPRESENTATIVE FOR TAXES. 42 A. TRANSFEROR LIABILITY FOR TAXES-IRC §3713. 42 1. THE STATUTE.42 2. WHAT IS A DEBT UNDER §3713?.43 3. WHAT IS INSOLVENCY UNDER §3713?.44 4. WHAT IS NOTICE UNDER §3713?.44 5. DO THE STATE PRIORITY RULES APPLY UNDER §3713?.45 6. WHO IS THE GOVERNMENT UNDER §3713?.45 B. GOVERNMENT LIENS.. 45 1. THE GOVERNMENT LIEN UNDER IRC §6321 AND 6324.45 a. The General Tax Lien Of §6321.45 b. The Specific Estate And Gift Tax Lien Of §6324(A)(1).46 c. Administration Expenses.46 d. Transferor and Transferee Liability Under §6324(a)(2).46 C. STATUTES OF LIMITATIONS. 47 D. RELEASE FROM PERSONAL LIABILITY. 48 a. Release From Estate Tax Liability Made Under §2204.48 b. Release From Income and Gift Tax Liability Made Under §6905.48 c. Request for Prompt Assessment Made Under §6501(d).49 D. LIABILITY AND LIENS FOR STATE INHERITANCE TAXES. 49 III. HOMESTEAD, FAMILY ALLOWANCE AND EXEMPT PROPERTY. 50 A. HOMESTEAD. 50 1. WHAT IS THE HOMESTEAD.50 a. Art. §51 Of The Constitution.50 b. No Restriction On Value Of Urban Homestead.50 c. During Life, A Claimant Is Entitled To A Business As Well As A Residential Homestead.50 d. Leasehold Homestead. It is possible to claim a leasehold interest as a homestead.51 2. THE RIGHT TO USE AND OCCUPY THE HOMESTEAD.51 a. Art. 16, §52 Of The Constitution.51 b. Prob. Code §284.51 c. Who Has Homestead Rights?52 d. Limitations.52 e. The Problem With The Mortgage And Other Expenses Associated With The Homestead.52 (1) Mortgage Payments.53 (2) Upkeep.53 (3) Taxes.53 (4) Insurance.53 f. The Election Issue.53 g. Distinction Between Right Of Occupancy And Title.54 3. ALLOWANCE IN LIEU OF HOMESTEAD-PROB. CODE §273.54 a. Probate Code §273. Probate Code §273 provides b. Allowance Where Homestead Is "Incomplete" By Reason Of Large Encumbrance.55 c. Apportionment Of Allowance In Lieu Of Homestead-Prob. Code §275.55 4. THE LIABILITY OF THE HOMESTEAD FOR DEBTS.56 a. Art. 16, §50 Of The Constitution.56 b. §270 Of The Probate Code.56 c. The Basic Rule.57 d. Who Are The Constituent Family Members That Can Cause The Homestead To Survive?57 e. Once The Homestead Passes Free And Clear Of Debt, It Matters Not That It Ceases To Be Used As A Homestead 57 f. A Constituent Family Member Need Not Be A Beneficiary Of The Decedent's Estate In Order For The Homestead To Pass Free Of Debts 57 B. EXEMPT PERSONAL PROPERTY-PROBATE ASSETS. 58 1. ART. 16, §49 OF THE TEXAS CONSTITUTION.58 2. §42.001 AND §42.002 OF THE TEXAS PROPERTY CODE.58 3. EXEMPT PROPERTY TO BE SET APART-PROB. CODE §271.60 4. EXEMPT PROPERTY TO VESTS IN HEIRS IF ESTATE SOLVENT AND IN FAMILY IF ESTATE IS INSOLVENT-PROB. CODE §§278 AND 279. 60 5. EXEMPT PROPERTY MAY BE LIABLE FOR CERTAIN DEBTS-PROB. CODE §281.60 6. ALLOWANCE IN LIEU OF EXEMPT PERSONAL PROPERTY-PROB. CODE §273.61 7. APPORTIONMENT OF ALLOWANCES BETWEEN SURVIVING SPOUSE AND MINOR CHILDREN-PROB. CODE §275. 62 C. FAMILY ALLOWANCE. 62 1. AMOUNT OF THE ALLOWANCE.63 2. TO WHOM IS THE ALLOWANCE PAID?63 3. HOW IS THE ALLOWANCE CHARGED?63 4. CONSIDERATION OF THE SURVIVING SPOUSE'S (AND MINOR CHILDREN'S) OTHER ASSETS. 64 5. WHEN IS THE ALLOWANCE DUE.64 6. APPLICATION TO INDEPENDENT ADMINISTRATIONS.65 7. THE ELECTION ISSUE.65 8. PAYMENT, CLASSIFICATION AND PRIORITY.66 D. EXEMPT PROPERTY-NON-PROBATE ASSETS. 66 1. LIFE INSURANCE.66 a. General Creditors Under The Common Law Exemption.66 b. Estate Taxes.67 c. Article 21.22 Of The Texas Insurance Code.67 d. Limitations on Application of Statute.68 2. MULTIPLE PARTY ACCOUNTS.70 3. IRAS.70 4. QUALIFIED PLAN ASSETS.71 5. EMPLOYEE DEATH BENEFITS.72 6. JOINT TENANCY WITH RIGHT OF SURVIVORSHIP.72 IV. LIABILITY FOR MARITAL DEBTS. 73 A. COMMUNITY AND SEPARATE PROPERTY IN A NUTSHELL. 73 B. ADMINISTRATION OF MARITAL PROPERTY AFTER DEATH. 75 C. MANAGEMENT CONTROL AND DISPOSITION OF MARITAL PROPERTY DURING LIFE-FAMILY CODE §5.21-27. 76 D. LIABILITY OF MARITAL PROPERTY DURING LIFE-IN A NUTSHELL. 77 E. LIABILITY OF MARITAL PROPERTY AFTER DEATH. 78 F. UNILATERAL TRANSFER OF JOINT MANAGEMENT COMMUNITY PROPERTY DURING LIFE. 79 V. CHOICE OF PROBATE PROCEDURE, OR PROCEDURES IN LIEU THEREOF, AND ITS EFFECT ON CREDITOR'S CLAIMS. 81 A. IS THE DECEDENT'S PROPERTY SUBJECT TO A STATUTORY LIEN FOR UNSECURED DEBTS? 81 B. IMPORTANCE OF THE FOUR YEAR RULES. 81 C. PROBATE OF WILL AS MUNIMENT OF TITLE. 81 D. ORDER OF NO NECESSITY OF ADMINISTRATION. TEX. PROB. CODE §180. 82 E. STATUTORY SMALL ESTATE PROCEEDINGS. 82 1. COLLECTION OF SMALL ESTATE BY AFFIDAVIT. TEX. PROB. CODE §137-138.82 2. ORDER OF NO ADMINISTRATION. TEX. PROB. CODE §§139-142.83 3. SUMMARY PROCEEDINGS FOR SMALL ESTATES AFTER PERSONAL REPRESENTATIVE APPOINTED. TEX. PROB. CODE §143. 83 F. PROCEEDINGS TO DECLARE HEIRSHIP. TEX. PROB. CODE §§48-56. 84 G. PREVENTING ADMINISTRATION BY CREDITORS. TEX. PROB. CODE §80. 84 VI. ESTATE TAX APPORTIONMENT, ORDER OF ABATEMENT AND EXONERATION. 85 A. ESTATE TAX APPORTIONMENT. 85 1. APPORTIONMENT UNDER FEDERAL LAW.85 2. APPORTIONMENT UNDER STATE LAW.85 B. ABATEMENT, EXONERATION, AND CLASSIFICATION OF BEQUESTS. 87 1. PRIOR LAW.87 2. PROBATE CODE §322B.87 3. CLASSIFICATION OF GIFTS.88 a. Specific Gifts.88 b. Demonstrative Gifts.91 c. General Gifts.92 d. Residuary Gifts. According to the Texas Supreme Court e. Testator's Intent.94 4. EXONERATION OF MORTGAGES ON SPECIFIC GIFTS.95 C. WHO IS LIABLE FOR THE TAX ON IRA PROCEEDS OR QUALIFIED PLAN ASSETS? 97 1. CODE §§2039 AND 4980A(D).97 2. PROBATE CODE §322A AND ESTATE TAX APPORTIONMENT.97 a. Apportioning The Estate Tax On The Nonparticipant's Community Property Interest In A Qualified Plan Or IRA. 97 b. A Marital Deduction Would Help, But Will Not Be Automatically Available.98 D. WHO IS LIABLE FOR ADMINISTRATION EXPENSES ATTRIBUTABLE TO SPECIFIC GIFTS 99 VII. THE LAW OF FRAUDULENT CONVEYANCES, LIFETIME TRANSFERS, AND SPENDTHRIFT TRUSTS. 100 A. FRAUDULENT TRANSFERS. 100 1. A TRANSFER INTENDED TO HINDER CREDITORS IS VOID.100 2. STATUTES OF LIMITATIONS UNDER THE ACT.104 3. INSOLVENCY UNDER THE ACT.105 4. HEIRS AND PERSONAL REPRESENTATIVE HAVE NO STANDING TO SET ASIDE FRAUDULENT CONVEYANCE OF THE DECEDENT. 106 5. DISCLAIMER IS NOT A FRAUDULENT CONVEYANCE.106 B. PAYING AN ANTECEDENT DATE/ CONVERSION OF NONEXEMPT PROPERTY INTO EXEMPT PERSONAL PROPERTY. 106 C. SPENDTHRIFT TRUST. 106 1. SPENDTHRIFT TRUSTS GENERALLY EFFECTIVE IN TEXAS.107 a. The Statute And The Cases.107 b. Support Trusts May Also Be Valid Spendthrift Trusts.107 2. SPENDTHRIFT TRUSTS GENERALLY NOT EFFECTIVE WITH RESPECT TO CLAIMS FOR CHILD SUPPORT. 108 3. SELF SETTLED SPENDTHRIFT TRUSTS GENERALLY NOT EFFECTIVE IN TEXAS AS TO CREDITORS OF THE GRANTOR. 108 4. SPENDTHRIFT TRUSTS FOR LIFE SHOULD BE CONSIDERED IN TESTAMENTARY PLANNING. 109 D. LIFETIME TRANSFERS AND PARTITIONS. 109 E. FRAUD ON THE SPOUSE AND GIFTS OF NONPROBATE ASSETS. 109 1. GIFTS OF COMMUNITY PROPERTY.109 2. LIFE INSURANCE.110 3. SPOUSE HAS MADE TAXABLE GIFT FOR GIFT TAX PURPOSES IF OTHER SPOUSE MAKES GIFT OF COMMUNITY PROPERTY OUTSIDE THE MARRIAGE. IF ONE SPOUSE MAKES A GIFT TO A THIRD PERSON (SAY, TO A PARAMOUR) OF COMMUNITY PROPERTY, AND THE OTHER SPOUSE EITHER CANNOT OR DOES NOT SET THE GIFT ASIDE UNDER STATE LAW, THE IRS WILL TREAT THE NON-DONOR SPOUSE AS HAVING MADE A GIFT FOR GIFT TAX PURPOSES. THIS MAY BE ADDING INSULT TO INJURY, ESPECIALLY WHERE THE SPOUSE HAS NO CONTROL OVER THE TRANSFER, AND IN FACT STRENUOUSLY OBJECTS TO IT. 111 4. INTER-VIVOS GIFTS IN TRUST-LAND V. MARSHALL.111 5. NAMING ESTATE AS BENEFICIARY OF COMMUNITY PROPERTY LIFE INSURANCE POLICY. 112 VIII. SALES OF PROPERTY IN PROBATE 114 A. SALES MUST BE AUTHORIZED BY THE COURT OR BY THE WILL. 114 1. WHERE THERE IS NO WILL OR IF THE WILL DOES NOT SPECIFICALLY AUTHORIZE SALES, AN ATTEMPTED SALE WILL BE VOID UNLESS MADE PURSUANT TO COURT ORDER. 114 2. SALES MAY BE MADE IN ACCORDANCE WITH THE TERMS OF THE WILL WITHOUT A COURT ORDER. 115 3. SALES BY INDEPENDENT EXECUTOR.116 a. Sales to Pay Debts.116 b. Partitions And Sales By Independent Executor Without a Court Order.116 c. Partitions And Sales By Independent Executor With a Court Order.117 d. Caution Indicated Regarding Estate Tax Lien.117 4. NEITHER AN INDEPENDENT EXECUTOR NOR A DEPENDENT EXECUTOR HAS THE AUTHORITY TO GIVE A WARRANTY OF TITLE ABSENT A PROVISION AUTHORIZING SUCH POWER IN THE WILL. 118 B. REPRESENTATIVE IS UNDER A DUTY TO SELL PROPERTY THAT IS LIABLE TO PERISH, WASTE, OR DETERIORATE IN VALUE OR THAT WILL BE AN EXPENSE OR DISADVANTAGE TO THE ESTATE IF KEPT. 118 C. SALES OF OTHER PERSONAL PROPERTY AUTHORIZED IF IN THE BEST INTEREST OF THE ESTATE IN ORDER TO PAY EXPENSES OF ADMINISTRATION OF CLAIMS. 119 D. SALES OF LIVESTOCK. 119 E. SALES OF PERSONAL PROPERTY AT PUBLIC AUCTION. 119 F. SALES OF MORTGAGED PROPERTY. 120 G. REPORTING THE SALE OF PERSONAL PROPERTY IS NECESSARY TO VEST TITLE/REGULATIONS GOVERNING REPORT AND CONFIRMATION OF REAL ESTATE ARE APPLICABLE TO SALES OF PERSONAL PROPERTY. 120 H. SALE OF PROPERTY OF A MINOR WITHOUT A GUARDIANSHIP. 121 I. PURPOSES FOR WHICH REALITY CAN BE SOLD. 123 1. COURT SELECTS PROPERTY.123 2. REAL ESTATE CAN ONLY BE SOLD FOR STATUTORY PURPOSE.123 3. IF PROPERTY IS SOLD PURSUANT TO WILL PROVISION AUTHORIZING SALE, §341 DOES NOT APPLY. 124 J. CONTENTS OF THE APPLICATION TO SELL REAL ESTATE. 124 K. DEFECTS IN THE CONTENTS OF THE APPLICATION TO SELL REAL ESTATE. 125 L. HEARING, CITATION AND OPPOSITION TO AN APPLICATION TO SELL REAL ESTATE. 125 M. ORDER OF SALE OF REAL ESTATE. 126 1. TERMS OF ORDER.126 2. IRREGULARITIES IN ORDER.127 N. FORCING THE SALE OF PROPERTY. 127 O. TERMS OF SALE OF PROPERTY. 127 1. STATUTORY TERMS.127 2. NONCOMPLIANCE WITH ORDER OF SALE.130 P. REPORT OF SALE. 130 1. CONTENT OF REPORT.130 2. DEFECTS IN REPORT.131 Q. BOND ON SALE OF REAL ESTATE. 131 R. HEARING ON REPORT OF SALE/DECREE CONFIRMING SALE. 132 S. DELIVERY OF DEED CONVEYING TITLE TO REAL ESTATE. 132 T. FAILURE TO DELIVER DEED CONVEYING TITLE TO REAL ESTATE. 133 U. PROHIBITION AGAINST SELF DEALING. 134 1. SELF DEALING UNDER THE PROBATE CODE.134 2. SELF DEALING UNDER THE TRUST CODE.136 3. POWER OF TRUSTOR TO WAIVE RULE AGAINST SELF DEALING IS LIMITED IN THE CASE OF A CORPORATE TRUSTEE. 138 IX. EXECUTOR'S FEES AND COMMISSIONS 139 A. WILL PROVISIONS CONTROL OVER STATUTE. 139 B. PROBATE CODE §241--THE 5% IN AND OUT RULE. 139 C. PROBLEMS WITH AND LIMITATIONS ON THE 5% IN AND OUT RULE. 140 1. SALE OF MORTGAGED PROPERTY.140 2. MISCELLANEOUS ISSUES-- LOANS, TAXES, RECEIPTS FROM A BUSINESS, ETC..140 3. JOINT FIDUCIARIES.140 4. COURT FINDINGS REQUIRED BEFORE COMMISSION CAN BE PAID.141
A. INTRODUCTION. 1. TECHNICAL CLAIMS PROCEDURES IN TEXAS. Probate claims procedure in Texas is technical and formalistic. Failure to understand or follow the rules may not make much difference in a solvent independent administration.(1) In all other cases, however, the path that must be followed by the claimant is tortuous, and the claimant who strays may be ruined, especially if the administration is dependent. There are special traps for the secured creditor of a dependent estate which can operate to severely limit recovery, even where the estate is solvent. The estate representative has a duty to the creditors of the estate as well as to the beneficiaries. In this sense, the personal representative is similar to a trustee. However, if the creditor in a dependent administration fails to adequately perfect his claim, the representative has no choice but to deny it. How much assistance the representative should give to the creditor is a matter which may be open to debate. Most of the pitfalls facing a claimant in a dependent administration may be easily avoided by being aware of the proper procedures and being mindful of the importance of strictly following those procedures. These procedures are found, for the most part, in Part 4 of The Probate Code: Presentment and Payment Claims 294-328. 2. 1995 AND 1997 AMENDMENTS TO THE TEXAS PROBATE CODE. Effective January 1, 1996, much of the statutory law in Texas regarding claims procedure was rewritten in 1995 by the 74th Legislature. Additional changes were enacted by the 75th Legislature in 1997, effective September 1, 1997 (generally). B. PAYMENT, CLASSIFICATION AND PRIORITY. 1. CLASSIFICATION. After a claim has been allowed by a personal representative the court is required to either disapprove the claim or to approve and classify it within 10 days after it has been entered upon the claim docket. As a practical matter, the courts are usually unable to act within the 10 day period. There are seven classes of claims specified by Probate Code §322: Class 1. Funeral expenses and expenses of last sickness in a reasonable amount not to exceed $15,000, with any excess to be classified as an unsecured claim.(2) Class 2. Expenses of administration and the preservation of the estate. Class 3. Claims secured by liens, including tax liens, so far as may be paid out of the security alone, i.e., "matured secured claims" for money under P.C. 306(a)(1). Class 4. Claims for certain taxes (including penalties and interest) due the state of Texas, under a host of enumerated statutes. Class 5. Claims for the cost of confinement established by the Texas Department of Criminal Justice under Section 501.017 of the Government Code. Class 6. Claims for repayment of medical assistance payments made by the state under Ch. 32 of the Human Resources Code for the benefit of the decedent. Class 7. All other claims. [Note that there is no longer a priority in the classification scheme for claims presented within six months!] In order to keep Class 7 claims in perspective, one must take note of §298: Sec. 298. Claims Against Estates of Decedents. (a) Time for Presentation of Claims. A claim may be presented to the personal representative at any time before the estate is closed if suit on the claim has not been barred by the general statutes of limitation. If a claim of an unsecured creditor for money is not presented within four months after the date of receipt of the notice permitted by Section 294(d), the claim is barred. (b) Claims Barred by Limitation Not to Be Allowed or Approved. No claims for money against a decedent, or against the estate of the decedent, on which a suit is barred under Subsection (a) of this section, Section 313, or Section 317(a) or by a general statute of limitation applicable thereto shall be allowed by a personal representative. If allowed by the representative and the court is satisfied that the claim is barred or that limitation has run, the claim shall be disapproved. Note further that allowances and preferred debts are not classed. In order to place these items in the scheme, one must look to §320, the priority statute. 2. PRIORITY OF CLAIMS. The classification of a claim does not necessarily signify its priority. This makes for some confusion. Probate Code §320 provides that the order of payment of claims is to be as follows: a. Funeral expenses and expenses of last illness not to exceed $15,000.(3) b. Allowances made to the surviving spouse and children. c. Expenses of administration and the preservation and management of the estate. d. Other claims in the order of their classification. The above list must be read in conjunction with §320(d), which provides: (d) Permissive Order of Payment. After the sixth month after the date letters are granted and on application by the personal representative stating that the personal representative has no actual knowledge of any outstanding enforceable claims against the estate other than the claims already approved and classified by the court, the court may order the personal representative to pay any claim that is allowed and approved. 2A. DOES 320(d) APPLY TO INDEPENDENT ADMINISTRATIONS. §320(d), quoted immediately above, provides that after six months, the court may order the personal representative to pay all claims previously allowed and approved if "the personal representative has no actual knowledge of any outstanding enforceable claims against the estate other than the claims already approved and classified by the court." There are two reasons for suspecting that 320(d) is not meant to apply to independent administrations. For one thing, the court would not have approved and classified any claims, and for another, it is inconsistent with the general scheme of an independent to have the court order an independent administrator to pay claims. 3. CLAIMANT'S PETITION. The priority statute provides: A claimant whose claim has not been paid may petition the court for determination of his claim at any time before it is barred by the applicable statute of limitations and upon due proof procure an order for its allowance and payment from the estate.(4) 4. PERMISSIVE ORDER OF PAYMENT. Effective January 1, 1996, Probate Code Section 320(d) was added to provide: After the sixth month after the date letters are granted and on application by the personal representative stating that the personal representative has no actual knowledge of any outstanding enforceable claims against the estate other than the claims already approved and classified by the court, the court may order the personal representative to pay any claim that is allowed and approved.(5) A similar provision was added as Probate Code Section 146(c)(2) in the case of an independent administration: (c) Liability of Independent Executor. An independent executor, in the administration of an estate, may pay at any time and without personal liability a claim for money against the estate to the extent approved and classified by the personal representative if: (1) the claim is not barred by limitations; and (2) at the time of payment, the independent executor reasonably believes the estate will have sufficient assets to pay all claims against the estate.(6) 5. DEFICIENCY OF ASSETS. Probate Code §321 provides that claims in the same class are to be paid prorata if the assets are otherwise insufficient: When there is a deficiency of assets to pay all claims of the same class, other than secured claims for money, the claims in such class shall be paid pro rata, as directed by the court, and in the order directed. No personal representative shall be allowed to pay the claims, whether the estate is solvent or insolvent, except with the pro rata amount of the funds of the estate that have come to hand.(7) Reading §146(a)(3) and (c) together with §321 makes it clear that an independent executor is under the same duty as a dependent administrator to pay claims in the same class on a prorata basis. What if the personal representative gave the required notice, paid all properly presented claims within a reasonable period of time, and then had a claim presented which could not be fully paid, either because the estate's assets had been partially or fully distributed, or because the full payment of previously filed claims precluded full payment of the late filed claim? In the case of a dependent administration, §320(d) might afford some protection, and in the case of an independent administration, §146(c)(2) ought to relieve the personal representative of liability if the inability to pay is a result of having paid other creditors. However, these statutes do not explicitly cover distributions to beneficiaries. Moreover, there is always the possibility of liability under the common law, depending on the facts and circumstances, if it can be shown that the personal representative breached a fiduciary duty to the creditor.(8) 6. PERSONAL REPRESENTATIVE HOLDS ASSETS IN TRUST FOR CREDITORS AND BENEFICIARIES. Under the case law, a personal representative, whether independent or dependent, may have a fiduciary duty to creditors as well as to beneficiaries, as if the estate were held in trust for them. In any event the personal representative may not prefer one creditor over another in the same class.(9) 7. REMEDY OF CREDITOR AGAINST OTHER CREDITORS IN THE SAME CLASS. What happens if the dependent administrator, pursuant to 320(d), pays a creditor at a time when the administrator reasonably believes the estate will have sufficient assets to pay all claims against the estate, but it turns out the administrator was mistaken. In that event, Probate Code §318 --which has always given creditors the right to proceed against the heirs-- now allows the creditors to proceed against other creditors who received an undue preference. No claim for money against the estate of a decedent shall be allowed by a personal representative and no suit shall be instituted against the representative on any such claim, after an order for final partition and distribution has been made; but, after such an order has been made, the owner of any claim not barred by the laws of limitation shall have an action thereon against the heirs, devisees, legatees, or creditors of the estate, limited to the value of the property received by them in distributions from the estate.(10) §318 probably applies in an independent administration when the independent executor, pursuant to 146(c)(2), pays a creditor at a time when the independent executor reasonably believes the estate will have sufficient assets to pay all claims against the estate, but it turns out the executor was mistaken. 8. PRIORITY OF ALLOWANCES. Probate Code §320(a) would lead one to believe that both the allowances to the widow and children and the expenses of administration are to come ahead of matured secured Class 3 claims. This is because Probate Code §320 says that the family allowances (priority (2)) are to be paid ahead of "other claims against the estate in the order of their classification" (priority (4)), and a matured secured claim is a Class 3 claim. However, Probate Code §290 provides: "The family allowance made for the support of the surviving spouse and minor children of the deceased shall be paid in preference to all other debts or charges against the estate, except Class 1 claims [i.e., 'funeral expenses and expenses of last sickness in a reasonable amount not to exceed $15,000, with any excess to be classified as an unsecured claim']."(11) [Emphasis added.] On the other hand, §277 (in the inimitable style of our Probate Code) provides: "If property upon which there is a valid subsisting lien or encumbrance shall be set aside to the surviving spouse or children as exempt property, or appropriated to make up allowances made in lieu of exempt property or for the support of the surviving spouse or children, the debt secured by such land shall, if necessity requires, be either paid or continued as against such property. This provision applies to all estates, whether solvent or insolvent."(12) [Emphasis added.] Read together, the statutes have been construed to mean that the right of a Class 3 secured (Prob. Code §§320, 290 and 277) creditor is superior to the claim for allowances, but is inferior to Class 1 and 2 claims.(13) This is interesting because the claim for allowances is superior to Class 2 claims (administration expenses). Note that the neither the classes or the priority categories mention where claims of the federal government fit in, nor do they directly address the super priority afforded a secured "preferred debt and lien." 9. PRIORITY AS AGAINST THE FEDERAL GOVERNMENT. In general, claims of the United States are given superior priority over all other "debts".(14) Funeral and administration expenses(15) are not debts, but expenses of last illness are.(16) The family allowance is not, strictly speaking, a "debt", and the 1977 8th Circuit decision of Schwartz v. Commissioner,(17) indicates that such allowances are not subject to the superior priority of United States claims. This issue has yet to be squarely determined and there is contrary authority.(18) This means that the claims of the federal government, such as claims for income taxes, (1) will come ahead of all other creditor claims, (2) will come behind expenses of administration and funeral expenses, and (3) may come in behind allowances, although this is uncertain. This is certainly inconsistent with the Texas law, which, among other inconsistencies, would place allowances ahead of administration expenses. Do claims of Federal agencies that are in the commercial lending business, such as the SBA and the FHA constitute claims of United States? A good argument that they do not can be based upon the 1979 United States Supreme Court decision of United States v. Kimbell Foods, Inc.(19). 10. PREFERRED DEBT AND LIEN HOLDERS. A secured creditor who by election or by operation of law has his claim classified and approved as a preferred debt and lien has a super priority over all other claims, but only to the extent of the value of the security. Such a creditor will forfeit his right to any deficiency.(20) 11. ADMINISTRATION EXPENSES ATTRIBUTABLE TO THE PRESERVATION OF PROPERTY SUBJECT TO A PREFERRED DEBT AND LIEN. If a creditor elects preferred debt and lien treatment, the creditor generally comes ahead of all debts and expenses, including administration expenses, to the extent of the value of the security. But what if the administration expense was incurred to protect the security? Expenses that are directly attributable to preserving and maintaining the property subject to a preferred debt and lien may be paid out of the proceeds of sale of the security.(21) C. SPECIAL PROBLEMS OF SECURED CREDITORS. Secured creditors are generally in a stronger position before the death of the debtor than afterwards. Before death, a creditor will generally have the right to foreclose upon his security and sue on the deficiency, if there is any, without being forced to make any special elections or submit claims in a special form or deal with 90 day statutes of limitations. After death, the secured creditor must subordinate his claim to claims of administration, if the creditor hopes to be able to recover the amount by which the debt exceeds the value of the security. If not very careful, the secured creditor may find that by inaction or by otherwise failing to properly elect, the law has made an election for her and she is restricted in her recovery to the value of the property securing the debt. 1. ELECTION--PROB. CODE §306. §306 was extensively rewritten by the 74th Legislature, effective January 1, 1996, and was amended again by the 75th Legislature, effective September 1, 1997. It now reads in full as follows: Sec. 306. Method of Handling Secured Claims for Money (a) Specifications of Claim. When a secured claim for money against an estate is presented, the claimant shall specify therein, in addition to all other matters required to be specified in claims: (1) Whether it is desired to have the claim allowed and approved as a matured secured claim to be paid in due course of administration, in which event it shall be so paid if allowed and approved; or (2) Whether it is desired to have the claim allowed, approved, and fixed as a preferred debt and lien against the specific property securing the indebtedness and paid according to the terms of the contract which secured the lien, in which event it shall be so allowed and approved if it is a valid lien; provided, however, that the personal representative may pay said claim prior to maturity if it is for the best interest of the estate to do so. (b) Time for Specification of Secured Claim. Within six months after the date letters are granted, or within four months after the date notice is received under Section 295 of this code, whichever is later, the secured creditor may present the creditor's claim and shall specify whether the claim is to be allowed and approved under Paragraph (1) or (2) of Subsection (a) of this section. If a secured claim is not presented within the time prescribed by this subsection or if the claim is presented without specifying how the claim is to be paid, it shall be treated as a claim to be paid in accordance with Paragraph (2) of Subsection (a) hereof. (c) Matured Secured Claims. If a claim has been allowed and approved as a matured secured claim under Paragraph (1) of Subsection (a) of this section, the claim shall be paid in due course of administration and the secured creditor is not entitled to exercise any other remedies in a manner that prevents the preferential payment of claims and allowances described by Paragraphs (1) through (3) of Section 320(a) of this code. (d) Approved Claim as Preferred Lien Against Property. When an indebtedness has been allowed and approved under Paragraph (2) of Subsection (a) hereof, no further claim shall be made against other assets of the estate by reason thereof, but the same thereafter shall remain a preferred lien against the property securing same, and the property shall remain security for the debt in any distribution or sale thereof prior to final maturity and payment of the debt. (e) Payment of Maturities on Preferred Debt and Lien Claims. If property securing a claim allowed, approved, and fixed under Paragraph (2) of Subsection (a) hereof is not sold or distributed within six months from the date letters are granted, the representative of the estate shall promptly pay all maturities which have accrued on the debt according to the terms thereof, and shall perform all the terms of any contract securing same. If the representative defaults in such payment or performance, on application of the claimholder, the court shall: (1) require the sale of said property subject to the unmatured part of such debt and apply the proceeds of the sale to the liquidation of the maturities; (2) require the sale of the property free of the lien and apply the proceeds to the payment of the whole debt; or (3) authorize foreclosure by the claimholder by Subsections (f) through (k) of this section. (f) Foreclosure of Preferred Liens. An application by a claimholder under Subsection (e) of this section to foreclose the claimholder's lien or security interest on property securing a claim that has been allowed, approved, and fixed under Paragraph (2) of Subsection (a) of this section shall be supported by affidavit of the claimholder that: (1) describes the property or part of the property to be sold by foreclosure; (2) describes the amounts of the claimholder's outstanding debt; (3) describes the maturities that have accrued on the debt according to the terms of the debt; (4) describes any other debts secured by a mortgage, lien, or security interest against the property that are known by the claimholder; (5) contains a statement that the claimholder has no knowledge of the existence of any debts secured by the property other than those described by the application; and (6) requests permission for the claimholder to foreclose the claimholder's mortgage, lien, or security interest. (g) Citation. On the filing of an application, the clerk shall issue citation by personal service to the personal representative and to any person described by the application as having other debts secured by a mortgage, lien, or security interest against the property and by posting to any other person interested in the estate. The citation must require the person to appear and show cause why foreclosure should or should not be permitted. (h) Setting of Hearing on Application. When an application is filed, the clerk shall immediately notify the judge. The judge shall schedule in writing a date for a hearing on the application. The judge may, by entry on the docket or otherwise, continue the hearing for a reasonable time to allow an interested person to obtain an appraisal or other evidence concerning the fair market value of the property that is the subject of the application. If the interested person requests an unreasonable time for a continuance, the person must show good cause for the continuance. (i) Hearing. (1) At the hearing, if the court finds that there is a default in payment or performance under the contract that secures the payment of the claim, the court shall (A) require the sale of the property subject to the unmatured part of the debt and apply the proceeds of the sale to the liquidation of the maturities; (B) require the sale of the property free of the lien and apply the proceeds to the payment of the whole debt; or (C) authorize foreclosure by the claimholder as provided by Subsection (f) of this section. (2) When the court grants a claimholder the right of foreclosure, the court shall authorize the claimholder to foreclose the claimholder's mortgage, lien, or security interest in accordance with the provisions of the document creating the mortgage, lien, or security interest or in any other manner allowed by law. In the discretion of the court and based on the evidence presented at the hearing, the court may fix a minimum price for the property to be sold by foreclosure that does not exceed the fair market value of the property. If the court fixes a minimum price, the property may not be sold at the foreclosure sale for a lower price. (j) Appeal. Any person interested in the estate may appeal an order issued under Subsection (i)(1)(C) of this section. (k) Unsuccessful Foreclosure. If a foreclosure sale authorized under this section is conducted and the property is not sold because no bid at the sale met the minimum price set by the court, the claimholder may file another application under Subsection (f) of this section. The court may, in the court's discretion, eliminate or modify the minimum price requirement and grant permission for another foreclosure sale. [Emphasis added.] Subsections (e), (f), (i), and (j) amended by SB 506, enacted June 20, 1997, effective September 1, 1997. See note following Section 5A regarding effective date of SB 506. a. Matured Secured Claims. If a claim is properly presented and an election duly made within 6 months(22) after the original grant of letters (or four months after notice, if later), a secured creditor may have the claim classified as a matured secured Class 3 claim to be paid in due course of administration(23); otherwise the creditor is not entitled to any deficiency should the security prove inadequate.(24) As a Class 3 claim, a matured secured claim will be subordinate to funeral expenses and expenses of last illness up to $15,000 and to administration expenses. The claim will be superior to all other claims, however, including family allowances, up to the extent of the security. If there is any deficiency, it will be treated as a Class 7 unsecured claim. Although the issue is not entirely free from doubt, a matured secured claim is, by definition, "matured," and the due date of the debt is therefore presumably accelerated.(25) But there is not necessarily a right to accelerate a long term unsecured class 7 debt or a preferred secured claim! b. Preferred Debt And Lien. A secured creditor may have his claim approved as a preferred debt and lien against the specific property securing the indebtedness, to be paid according to the terms of the contract.(26) A creditor who has elected (or who is deemed to have elected) preferred debt and lien treatment will have a super priority over everyone, but only to the extent of the value of his security. He will forfeit any deficiency, whether or not the estate is solvent.(27) The preferred debt and lien secured creditor cannot accelerate the due date of his debt. However, the personal representative may elect to pay the claim prior to maturity if it is in the best interest of the estate to do so.(28) §306(e)&(f) now provide elaborate provisions governing the remedies of the preferred debt and lien holder in the event of default. Although a preferred debt and lien claim ordinarily comes ahead of administration expenses, administration expenses incurred directly for the preservation of the property subject to the lien are probably deductible against the proceeds. c. Failure To Elect Matured Secured Status. Section 306(b) is explicit that a secured claim will be classified as a preferred debt and lien (which can be satisfied only against the property securing the lien) unless the creditor affirmatively elects to have the claim classified as a matured secured claim "within six months after the date letters are granted or within four months after the date notice is received under Section 295 of this code, whichever is later." In other words, if the secured creditor either (a) fails to present his claim within 6 months from the issuance of letters, or within four months from the date the §295 notice was received (if later), or (b) fails to affirmatively elect (within that time) matured secured status, the Probate Code will make the preferred debt and lien election for him.(29) See the discussion of Cessna Finance Corp. v. Morrison, 667 S.W.2d 580 (Tex. App.-Houston [1st Dist.] 1984, no writ), infra. To be contrasted with the Cessna case, is Dallas Joint-Stock Land Bank v. Maxey, 112 S.W.2d 305 (Tex. Civ. App.-Dallas 1937, no writ) where administration expenses were charged against the security when it was sold, despite the failure of the secured creditor to affirmatively elect matured secured status. Note, however, that Maxey was decided prior to the amendment to the Probate Code §306(b), effective 1996, that now mandates preferred debt and lien treatment if the claimant fails to specify how the claim is to be paid. d. Secured Creditors Under an Independent Administrations. Historically, there were no Probate Code procedures for presenting a claim to an independent executor.(30) However, the secured creditor has always had the same option to have his claim treated as a matured secured claim, as in the case of a dependent administration. Until 1996, there was some controversy about whether or not the distinctions described in Probate Code §306 between matured secured claims and preferred debts and liens (and the time periods that can determine the distinction) applied in an independent administration. Two cases, Joffrion and Cox, held that Probate Code §306, as it then existed, did not apply to an independent administration.(31) Contrary to Joffrion and Cox, and subsequently to them,Texas Commerce Bank, N.A. v. Geary,(32) held that old §306 does apply to independenet administrations, and that the 1995 change in the law was intended to clarify prior law. In 1995, however, Probate Code §146 was extensively rewritten. In 1997 it was slightly modifed. The statute now explicitly provides procedures applicable to secured claims in an independent administration: (b) Secured Claims for Money. Within six months after the date letters are granted or within four months after the date notice is received under Section 295, whichever is later, a creditor with a claim for money secured by real or personal property of the estate must give notice to the independent executor(33) of the creditor's election to have the creditor's claim approved as a matured secured claim to be paid in due course of administration. If the election is not made, the claim is a preferred debt and lien against the specific property securing the indebtedness and shall be paid according to the terms of the contract that secured the lien, and the claim may not be asserted against other assets of the estate. The independent executor may pay the claim before the claim matures if paying the claim before maturity is in the best interest of the estate.(34) [Emphasis added.] 2. TRAPS AND PITFALLS FOR THE SECURED CREDITOR. There is no better example of the fate that can befall a secured creditor than that presented in the fact pattern of Cessna Finance Corp. v. Morrison, 667 S.W.2d 580 (Tex. App.-Houston [1st Dist.] 1984, no writ). In this case, Cessna Finance Corp. had financed the purchase of an airplane. The plane crashed in South America while engaged in business about which we can only speculate. There was no insurance covering the crash. The creditor presented his $214,000 claim as a secured claim, but did not affirmatively elect to have the claim classified as a matured secured claim. The administrator rejected the claim, and took the position that the failure to affirmatively elect matured secured claim treatment meant that the debt would be classified as a preferred debt and lien as a matter of law. The Probate Court and the Court of Appeals agreed. This meant that the creditor's sole remedy was to go to South America to recover the pieces of the airplane that were scattered throughout the jungle. (To add insult to injury, the administrator counterclaimed for usury and received a judgment in excess of $100,000. The usury judgment was reversed on appeal, to show that life really is fair after all.) This case should be a warning to everyone. As illustrated by the Cessna case, the secured creditor can be placed in a position far inferior to the general creditor if the value of his security is insufficient to cover the debt. Care should therefore be taken to ensure that preferred debt and lien treatment does not come as a surprise. Consider the general security interest that is often given to a depository bank, under which the bank will have the right to set off against the proceeds in a checking or other account any debt otherwise owed by the account holder.(35) *A 1992 Texas Supreme Court case, relying in part on Prob. Code §449, held that bank that is both a creditor and a debtor of a decedent's estate has the equitable right to set off the assets of the estate against the decedent's debts without following the claims procedures of the Texas Probate Code.(36) There are probably many situations where a general creditor may, by operation of law or otherwise, be a secured creditor to some extent. As indicated, if a creditor is a secured creditor, the creditor will have to affirmatively elect, in the proper form and within the statutory time periods, matured status, or the creditor may find that his security, inadequate though it may be, will be all to which he is entitled. It is perhaps worth remembering in this context that if a creditor somehow fails to perfect his claim against the estate, he may still proceed against the surviving spouse, if any, if the claim is a community debt for which the spouse is liable under other rules of law.(37) 3. PRE-DEATH JUDGMENT LIEN CREDITOR. Is the pre-death judgment lien creditor a secured creditor? Generally, a judgment creditor must present his claim in the same manner as any other creditor, and may not simply execute on the estate.(38) Furthermore, it has been stated that a money judgment does not give the judgment creditor a secured lien against specific property of the debtor.(39) However, if the judgment has been abstracted against a specific piece of real property, there is an argument that the claim should be treated as secured.(40) There is authority for a contrary rule if the property was homestead.(41) If this is a secured claim, must the judgment creditor elect to have the claim treated as either a matured secured or preferred debt and lien? If preferred debt and lien treatment is elected or applies by default, how can the claimant be "paid according to the terms of the contract which secured the lien" as required by Prob. Code §306(a)(2), if there is no contract involved?(42) An interesting variation of this problem recently arose in Flournoy Drilling Company v. Walker.(43) In that the case, the court, in dictum, stated the general rule to be that a judgment creditor was the same as any other and that the debt did not attach to specific property as a secured debt; however, the case under consideration was an oil and gas lien, a statutory lien similar to a mechanics lien. The court held that such a lien is a secured lien within the meaning of the Probate Code. Furthermore, the claimant had the right to perfect the lien after the decedent's death. D. ORDER OF PAYMENT OF CLAIMS IN A GUARDIANSHIP PROCEEDING. Probate Code §805, as amended in 1997, provides the following claim ordering procedure in the case of a claim against a guardianship estate. Sec.805. ORDER OF PAYMENT OF CLAIMS. (a) The guardian shall pay a claim against the estate of the guardian's ward that has been allowed and approved or established by suit, as soon as practicable, in the following order, except as provided by Subsection (b) of this section: (1) expenses for the care, maintenance, and education of the ward or the ward's dependents; (2) funeral expenses of the ward and expenses of the ward's last illness, if the guardianship is kept open after the death of the ward as provided under this chapter, except that any claim against the estate of a ward that has been allowed and approved or established by suit before the death of the ward shall be paid before the funeral expenses and expenses of the last illness; (3) expenses of administration; and (4) other claims against the ward or the ward's estate. (b) If the estate is insolvent, the guardian shall give first priority to the payment of a claim relating to the administration of the guardianship. The guardian shall pay other claims against the ward's estate in the order prescribed by Subsection (a) of this section. (c) A claimant whose claim has not been paid may petition the court for determination of the claim at any time before it is barred by the applicable statute of limitations and on due proof procure an order for its allowance and payment from the estate. Amended by HB 2189, enacted June 20, 1997, effective September 1, 1997. See note following Section 399 regarding effective date of HB 2189. E. PAYMENT OF CLAIMS WITHOUT A GUARDIANSHIP. Probate Code §887 provides a procedure under which a creditor of a minor or other incapacitated person, or the former ward of certain terminated guardianships, may, if no legal guardian of the estate has been appointed, pay a liquidated and uncontested claim owed the person to the county clerk of the of the county in which the creditor resides to the account of the creditor in an amount that is $50,000 or less. E-1. DEATH OF A WARD IN A GUARDIANSHIP. Probate Code §§746 and 748 are instructive: Sec. 746. Payment of Funeral Expenses and Other Debts. Notwithstanding Section 745 of this code, before the guardianship of a person or estate of a ward is closed on the death of a ward, the guardian, subject to the approval of the court, may make all funeral arrangements, pay for the funeral expenses out of the estate of the deceased ward, and pay all other debts out of the estate. If a personal representative of the estate of a deceased ward is appointed, the court shall on the written complaint of the personal representative cause the guardian to be cited to appear and present a final account as provided in Section 749 of this code. Added by Acts 1993, 73rd Leg., ch. 957, Sec. 1, eff. Sept. 1, 1993.
Sec. 748. Payment by Guardian of Taxes or Expenses. Notwithstanding any other provision of this chapter, a probate court in which proceedings to declare heirship are maintained may order the payment by the guardian of any and all taxes or expenses of administering the estate and may order the sale of properties in the ward's estate, when necessary, for the purpose of paying the taxes or expenses of administering the estate or for the purpose of distributing the estate among the heirs. Added by Acts 1993, 73rd Leg., ch. 957, Sec. 1, eff. Sept. 1, 1993. F. NOTICE. 1. GENERAL NOTICE TO CREDITORS AND COMPTROLLER OF PUBLIC ACCOUNTS. a. Method Of Giving Notice. Probate Code §294 was extensively amended, effective January 1, 1996. §294 requires that the personal representative shall publish in a newspaper printed in the County where the letters were issued a notice requiring all persons having claims against the estate to present the claims within the time prescribed by law. The personal representative is additionally required to give a similar notice, by certified or registered mail, to the comptroller of public accounts if the decedent remitted or should have remitted taxes administered by the comptroller. The Section now reads as follows: §294. Notice by Representative of Appointment (a) Giving of Notice Required. Within one month after receiving letters, personal representatives of estates shall send to the comptroller of public accounts by certified or registered mail if the decedent remitted or should have remitted taxes administered by the comptroller of public accounts and publish in some newspaper, printed in the county where the letters were issued, if there be one, a notice requiring all persons having claims against the estate being administered to present the same within the time prescribed by law. The notice shall include the date of issuance of letters held by the representative, the address to which claims may be presented, and an instruction of the representative's choice that claims be addressed in care of the representative, in care of the representative's attorney, or in care of "Representative, Estate of __________" (naming the estate). (b) Proof of Publication. A copy of such printed notice, together with the affidavit of the publisher, duly sworn to and subscribed before a proper officer, to the effect that the notice was published as provided in this Code for the service of citation or notice by publication, shall be filed in the court where the cause is pending. (c) When No Newspaper Printed in the County. When no newspaper is printed in the county, the notice shall be posted and the return made and filed as required by this Code. (d) Permissive Notice to Unsecured Creditors. At any time before an estate administration is closed, the personal representative may give notice by certified or registered mail, with return receipt requested, to an unsecured creditor having a claim for money against the estate expressly stating that the creditor must present a claim within four months after the date of the receipt of the notice or the claim is barred, if the claim is not barred by the general statutes of limitation. The notice must include: (1) the dates of issuance of letters held by the representative; (2) the address to which claims may be presented; and (3) an instruction of the representative's choice that the claim be addressed in care of: (A) the representative; (B) the representative's attorney; or (C) "Representative, Estate of " (naming the estate). [Emphasis added.] b. Time For Giving Mandatory Notice. Probate Code §294(a) requires that the notice to the comptroller and general creditors be given within one month after receiving letters. c. Time For Giving Permissive Notice. Effective January 1, 1996, a personal representative may give notice by certified or registered mail to unsecured creditors at any time before the administration is closed. d. Effect of Giving Permissive Notice. If the personal representative elects to give an unsecured creditor notice, the creditor will have four months after receipt of the notice in which to present the claim, or the claim will be barred.(44) e. Independent Administrations. Probate Code §§146, 196(a)(1)&(2) now require an independent executor to give a similar notice. 2. SPECIAL NOTICE TO SECURED CREDITORS. a. To Whom Is Special Notice Given. Probate Code §295(a) requires that special notice be given to all holders of secured claims. It is noteworthy that since 1996 this special notice is now required to be given all secured creditors, not just holders of recorded claims, and not just to real estate lien holders. b. Time For Giving Special Notice. The notice required by Probate Code §295 is required to be given within two months after receiving letters. (Prior to 1996, the executor had up to four months to give this notice.) c. Method Of Giving Special Notice. Probate Code §295(b) provides that the special notice to be given to secured creditors shall be given by mailing the notice by certified or registered mail, return receipt requested "addressed to the record holder of such indebtedness." [Emphasis added.] Since some secured claims are not recorded, it may be that notice by certified mail is not required in that case. d. Proof Of Service of Notice. A copy of the required notice and return receipt, and a statement by the personal representative that the notice provisions were complied with, are required to be filed with the Probate Clerk.(45) e. The Statute Itself. Probate Code §295 as most recently amended now reads in its entirety as follows. Sec. 295. Notice to Holders of Secured Claims (a) When notice required for secured claimants. Within two months after receiving letters, the personal representative of an estate shall give notice of the issuance of such letters to each and every person known to the personal representative to have a claim for money against the estate of a decedent that is secured by real or personal property of the estate. Within a reasonable time after the personal representative obtains actual knowledge of the existence of a person having a secured claim for money and to whom notice was not previously given, the personal representative shall give notice to the person of the issuance of letters. (b) How notice shall be given. The notice stating the original grant of letters shall be given by mailing same by certified or registered mail, with return receipt requested, addressed to the record holder of such indebtedness or claim at the record holder's last known post office address. (c) Proof of service of notice. A copy of each notice required by Subsection (a) of this section and a copy of the return receipt and an affidavit of the representative, stating that said notice was mailed as required by law, giving the name of the person to whom the notice was mailed, if not shown on the notice or receipt, shall be filed with the clerk of the court from which letters were issued. f. Consequences Of Failure To Give Notice. If either the general notice or the special notice is not given within the time provided by the statutes, the representative and the sureties on the bond shall be liable for any damage which the person suffers by reason of such neglect, unless it appears that the creditor otherwise had notice.(46) If the personal representative of an insolvent estate failed to give timely notice, and, as a result thereof, a creditor was relegated to a lower priority, the creditor, under the authority of Probate Code §297, is likely to look to the personal representative and the sureties on his bond for restitution. G. PRESENTMENT. In the area of presentment, strict adherence to the statutory requirements is crucial. 1. CLAIMS REQUIRED TO BE PRESENTED. a. Claims For Money Must Be Presented. Only claims for money must be presented to the personal representative. The courts have construed "claims for money" as encompassing only those cases "where the amount of the claim is fixed and definite, not contingent and indeterminate, and which are susceptible of verification by affidavit."(47) §314. Presentment of Claims a Prerequisite for Judgment. No judgment shall be rendered in favor of a claimant upon any claim for money which has not been legally presented to the representative of an estate, and rejected by the representative or by the court, in whole or in part.(48) b. Other Claims Need Not Be Presented. If the claim is not a "claim for money" as that term has been construed by the Texas Courts, then it need not be presented. Moreover, it is an interesting question as to whether it may be presented. Whether or not it may be presented will effect such questions as the running of the statute of limitations. In order to be classified, the claim must be "legally exhibited." Claims that are not claims for money, and that, therefore, need not be presented, include all forms of contingent claims. Common situations include cases where the decedent is acting as a surety or guarantor of a debt, or where a claim is based on a tort. It is not always an easy matter to determine whether or not a claim is fixed and definite enough to constitute a claim for money. For example, what about a claim for professional fees alternatively based in quantum meruit?(49) It has been held that a contract of sale was a "money claim," and that, after the death of the buyer, the contract could not be canceled by the seller for nonpayment, notwithstanding a contract term purporting to give the seller this option.(50) Another case held that a claim for unliquidated amounts or injunctive relief need not be presented to an administrator as a prerequisite to the filing of a suit against the estate.(51) A suit for specific performance is not a claim for money,(52) and neither is a claim for recission.(53) On the jurisdiction of the probate court to decide a matter involving a claim of a contingent or unliquidated amount, see Seay v. Hall, 677 S.W.2d 19 (Tex. 1984) and the discussion infra, involving the jurisdictional issues attendant to suits on rejected claims. Another difficult and unresolved issue has to do with the treatment of contingent secured claims. How can a contingent secured claim be presented, and matured secured claim status elected? A preferred debt and lien claim under Probate Code §306(a)(2) certainly may and probably ought to be presented, but it is arguable that it need not be, since it is not a claim that is required to be classified under §322. c. Administration Expenses. Expenses incurred during the administration of the estate are not claims against the decedent, they do not need to be presented, and the 90 day statute of limitations does not apply to such claims.(54) 2. FORM OF CLAIM. In order to properly present a claim to the personal representative, it must be in the proper form, although the administrator may waive defects which are not fundamental. This is an area of controversy. (It is probable that the statutory rules of form need not be followed in the case of an independent administration.(55) ) a. Requirement Of Authentication. (1) Form Of Authentication. Probate Code §301 requires that no personal representative of a decedent's estate shall allow, and the court shall not approve, a claim for money against an estate, unless the claim is "supported by an affidavit that the claim is just and that all legal offsets, payments, and credits known to the affiant have been allowed." The statute goes on to provide: "If the claim is not founded on a written instrument or account, the affidavit shall also state the facts upon which the claim is founded. A photostatic copy of any exhibit or voucher necessary to prove a claim may be offered with and attached to the claim in lieu of the original." Prob. Code §301. Probate Code §303, provides: "If evidence of a claim is lost or destroyed, the claimant or an authorized representative or agent of the claimant, may make affidavit to the fact of such loss or destruction, stating the amount, date, and nature of the claim and when due, and that the same is just, and that all legal offsets, payments and credits known to the affiant have been allowed, and that the claimant is still the owner of the claim . . ." However, the same statute continues as follows: "If such claim is allowed or approved without such affidavit, or if it is approved without satisfactory proof, such allowance or approval shall be void." (Emphasis added.) (2) Waiver of Defects - Vouchers and Exhibits. Probate Code §302 provides: "Any defect of form, or claim of insufficiency of exhibits or vouchers presented shall be deemed waived by the personal representative unless written objection thereto has been made within thirty days after presentment of the claim, and filed with the County Clerk." In the case of a claim which has not been lost or destroyed, are vouchers and a copy of the claim necessary to proper presentment? The statute (§301) is not explicit. It says vouchers and exhibits "may" be offered and attached, but elsewhere the requirement is implied. Even if vouchers and copies are required under §301, the requirement will be waived under §302 by their personal representative's failure to object. The rule in the case of a lost or destroyed claim is different. Strict proof is required and it cannot be waived. Evidence of a lost or destroyed claim "must be proved by disinterested testimony taken in open court, or by oral or written deposition, before the claim is approved." If a lost claim "is allowed or approved without such affidavit, or if it is approved without satisfactory proof, such allowance or approval shall be void."(56) The first sentence of §303 states that the claimant "may" make affidavit of a lost or destroyed claim, but the last sentence states that if the claim is allowed or approved without such affidavit, the allowance or approval shall be void. The choice of language here is misleading and inconsistent. Further, it would tend to indicate that the use of the word "may" in §301 (which describes the procedure when a claim is not lost) also really means "shall". The point to be made is that whatever the rule is with respect to presentment, if a claim has not been lost or destroyed, any defect of form or insufficiency of exhibits or vouchers will be waived under Probate Code §302 unless written objection is made within 30 days after presentment, but if the claim has been lost or destroyed, a much stricter rule applies under §303, and the requirements under §303 may not be waived under §302. (3) Importance Of Whether Or Not A Claim Is Void. The question of whether or not a defect is one of form alone, and, therefore, may be waived, or is so fundamental that it is a nullity, becomes crucial if there is an issue as to when the probate ninety day statute of limitations begins to run. If the presentment is a nullity, but the claim has been rejected, then the failure to file suit within ninety days of the rejection will not cause the claim to be barred. However, if the defect is one of form only, suit must be filed within the statutory period. Whether a defect is one of form or not is often times difficult to ascertain. It is, therefore, important for a creditor to file his claim in the proper form in the first instance, so as not to be faced with this issue.(57) b. Authentication In Estate's Of Wards-Guardianships. A guardian has a little more leeway than the administrator of a decedent's estate when it comes to the payment of unauthenticated claims. "A guardian may pay an unauthenticated claim against the estate of his ward which he believes to be just, but he and the sureties on his bond shall be liable for the amount of any such payment in the event the court should find that such claim is not just."(58) c. Who May Authenticate. The question of who may authenticate a claim does not present an issue when a claim is being made by an individual owner of the claim. However, in the case of a corporation, Probate Code §304 makes provision as to who is the proper party to authenticate a claim. An authorized officer or representative of a corporation or other entity shall make the affidavit required to authenticate a claim of such corporation or entity. When an affidavit is made by an officer of a corporation, or by an executor, administrator, trustee, assignee, agent, representative, or attorney, it shall be sufficient to state in such affidavit that the person making it has made diligent inquiry and examination, and that he believes that the claim is just and that all legal offsets, payments, and credits made known to the affiant have been allowed. (Prior to 1996, the statute required that the affidavit on behalf of a corporation be made by a "cashier, treasurer, or managing official" of the corporation.) This provision is often overlooked, which raises the question: If the affidavit of a corporation is signed by an employee who is not "an authorized officer or representative of a corporation," and the personal representative does not object to its presentment, will the defect be deemed waived pursuant to Code §302, or will it be a nullity? If the claim is rejected, but written objection is not made to the form of the claim, the claimant must file suit within ninety days or the claim will be forever barred, provided that the claim was not a nullity in the first instance. If the claim is a nullity in the first instance, then the claimant could file another claim properly authenticated, and would have ninety days after the rejection of the second claim to file suit. This was the issue presented in the City of Austin v. Aguilar, 606 S.W.2d 310 (Tex. Civ. App.-Austin 1980, no writ). In that case, the Court of Civil Appeals held that the fact that the claim by the City of Austin was signed by the Assistant District Attorney, rather than the cashier, treasurer or managing official of the City, did not render the claim void, but the failure of the claim to be signed by the proper official was a defect in form only, which was waived when not objected to by the administrator, in writing, within thirty days after its presentment. Compare Boney v. Harris, 557 S.W.2d 376 (Tex. Civ. App.-Houston [1st Dist.] 1977, no writ), where the language in the affidavit was held not to be in substantial compliance with the Probate Code and was thus, a nullity. d. Secured Claims. The form of a secured claim is of an importance which cannot be over emphasized. As discussed above, Probate Code §306 (and, in the case of an independent administration, Probate Code §146(b)), provide that a secured claimant shall specify in his claim, in addition to all other matters, whether or not the creditor desires to have the claim allowed and approved as a matured secured claim to be paid in due course of administration, or whether it is desired to have the claim approved as a preferred debt and lien against the specific property securing the indebtedness and paid according to the terms of the contract. In order to have the claim classified as a third class matured secured claim, the creditor must make the election, in the proper form, within six months from the date letters of the administration are issued, or the claim will be treated as a preferred debt and lien which must be satisfied out of the security alone!(59) If the creditor either fails to specify the treatment desired, or fails to file within the appropriate time period, the claim will be treated as a preferred debt and lien to be satisfied against the security alone.(60) 3. METHOD OF PRESENTMENT. Probate Code §298 provides that claims for money shall be presented to the personal representative. However, Code §308 provides that claims may also be presented by depositing them, "with vouchers and necessary exhibits and affidavits attached", with the clerk. 4. TIME FOR PRESENTMENT. A claim for which no notice has been given may be presented at any time. However, the failure to present a claim after notice has been given may bar an unsecured claimant, and relegate a secured claimant to preferred debt and lien treatment. Section 306(b) is explicit that a secured claim will be classified as a preferred debt and lien (which can be satisfied only against the property securing the lien) unless the creditor affirmatively elects to have the claim classified as a matured secured claim "within six months after the date letters are granted or within four months after the date notice is received under Section 295 of this code, whichever is later." If the personal representative elects to give an unsecured creditor notice, the creditor will have four months after receipt of the notice in which to present the claim, or the claim will be barred.(61) H. ALLOWANCE OR REJECTION. After a claim has been properly presented, it is the duty of the personal representative to either allow the claim or reject it. 1. METHOD OF ALLOWANCE OR REJECTION. Probate Code §309 states: When a duly authenticated claim against an estate is presented to the representative, or filed with the clerk as heretofore provided, the representative shall, within thirty days after the claim is presented or filed, endorse thereon, or annex thereto, a memorandum signed by the representative, stating the time of presentation or filing of the claim, and that the representative allows or rejects it, or what portion thereof the representative allows or rejects. [Emphasis added.] 2. EFFECT OF FAILURE TO ENDORSE OR ANNEX-AUTOMATIC REJECTION IF NOT APPROVED WITHIN THIRTY DAYS. Probate Code §310 provides: The failure of a representative of an estate to timely allow or reject a claim under Section 309 of this code shall constitute a rejection of the claim. [Emphasis added.] While the personal representative might hope to throw the claimant off guard by merely failing to allow or reject the claim, in order that the deemed rejection would start the ninety day statute of limitations running, the personal representative runs a substantial risk in failing to affirmatively reject the claim. The last sentence to Probate Code §310 provides that if a claim rejected by inaction is thereafter established by suit, the cost shall be taxed against the representative, individually. "If the claim is thereafter established by suit, the costs shall be taxed against the representative, individually, or the representative may be removed on the written complain of any person interested in the claim . . . " 3. EFFECT OF ALLOWANCE. If the personal representative allows the claim, then it will be filed with the County Clerk and entered upon the claim docket. After ten days it shall be acted upon by the court and either approved in whole or in part or rejected. The court will, at the same time, classify the claim.(62) Any person interested in the estate may contest the claim at any time before the court has acted upon it.(63) The court's order in acting upon a claim shall have the force and effect of a final judgment.(64) 4. EFFECT OF REJECTION - 90 DAY STATUTE OF LIMITATIONS. Probate Code §313 specifies that when a claim has been rejected in whole or in part by the representative, the claimant must institute suit thereon within ninety days after the rejection, or the claim shall be barred.(65) (Rejection of a claim by an independent executor does not start the special ninety day statute of limitations running.(66)) §313. Suit on Rejected Claim. When a claim or a part thereof has been rejected by the representative, the claimant shall institute suit thereon in the court of original probate jurisdiction in which the estate is pending or in any other court of proper jurisdiction within ninety days after such rejection, or the claim shall be barred. When a rejected claim is sued on, the endorsement made on or annexed thereto, or any memorandum of rejection filed with respect to the claim, shall be taken to be true without further proof, unless denied under oath. When a rejected claim or part thereof has been established by suit, no execution shall issue, but the judgment shall be certified within thirty days after rendition, if of any court other than the court of original probate jurisdiction, and filed in the court in which the cause is pending, entered upon the claim docket, classified by the court, and handled as if originally allowed and approved in due course of administration.(67) [Emphasis added.] The failure of the personal representative to notify the creditor of the rejection of the claim will not affect the running of the statute.(68) Once a claim is rejected, even if the rejection is by operation of law as a result of inaction, the creditor will have no choice but to file suit within ninety days or have his claim barred. In the Texas Supreme Court case of Russell v. Dobbs, 163 Tex. 282, 354 S.W.2d 373 (Tex. 1962) the attorney for the administratrix told the creditor that his claim would be approved and paid. Accordingly, the creditor did not file suit until more than ninety days had passed from the date the claim was rejected by operation of law. The claim was rejected by operation of law, because the administratrix took no action on the claim within the thirty day period. Despite the fact that the creditor had relied to his detriment on the assurances of the administratrix through her attorney, the Supreme Court held that the claim was barred. "The assurances of the administratrix or her attorney that [the claim] would be approved and paid afford no basis, legal or equitable, for suspending the operation of the ninety day statute."(69) 5. SUIT ON REJECTED CLAIM-JURISDICTIONAL ISSUES. a. Liquidated Claims. It would seem that in counties with a statutory probate court a suit on a rejected claim would be considered a matter incident to an estate and therefore, ought to be brought in the statutory probate court, particularly if the claim is for a liquidated amount. In First State Bank of Bedias v. Bishop, 685 S.W.2d 732 (Tex. App.-Houston [1st Dist.] 1985, writ ref'd n.r.e.) it was held that the district court and the probate court had concurrent jurisdiction to hear a suit on a rejected claim, but that the probate court had dominant (though not exclusive) jurisdiction by virtue of Probate Code §5A(b). Suit should have been brought in the probate court, and since it was not, it would have been subject to a plea in abatement or other appropriate plea. However, since the jurisdiction issue was not raised in the district court, the judgment of the district court would stand. The court reasoned: "Logic requires our holding that Section 5A(b) only give statutory probate courts dominant jurisdiction over claims "appertaining to or incident to an estate," rather than exclusive jurisdiction, once probate proceedings have been filed in the probate Court." First State Bank of Bedias v. Bishop, supra, p. 736. The Court further observed that Section 313 of the Texas Prob. Code requires that: "[w]hen a claim or part thereof has been rejected by the representative, the claimant shall institute suit thereon in the court of original probate jurisdiction in which the estate is pending or in any other court of proper jurisdiction within ninety days after such rejection, or the claim shall be barred." First State Bank of Bedias v. Bishop, supra, p. 736. It was noted that an interpretation which granted the probate court exclusive jurisdiction would repeal, by implication, that part of Section 313 allowing suits on rejected claims to be filed the court of original probate jurisdiction "or any other court of proper jurisdiction." The court found other practical reasons why district courts should not be divested of jurisdiction over matters "incident to or appertaining to an estate" regarding pending probate proceedings: "Neither lawyers nor courts have agreed on precisely what constitutes matters 'incident to or appertaining to an estate.' In many cases, if the district courts lacked any jurisdiction to hear such cases, the diligent lawyer would be required to file suit in both courts pending a final determination of whether the cause of action was incident to an estate. Yet another problem would be where parties, acting in good faith but uncertain of the appropriate form, could agree to try a suit in the district court, and the loser could cry 'no jurisdiction' and seek to have the Appellate Courts determine whether the claim was 'incident to or appertaining to an estate'". First State Bank of Bedias, supra, at p. 736. In conclusion, the Court of Appeals articulated the rule as follows: "When proceedings have commenced in a statutory probate court, the probate court has dominant jurisdiction over any subsequent suits incident to or appertaining to an estate, and the district court or any other court of concurrent jurisdiction has servient jurisdiction. Thus, a judgment in a suit tried in a court of concurrent jurisdiction without objection, is not void. Upon timely filing of a plea in abatement or other appropriate motion, however, the district court or any other court having concurrent jurisdiction with the probate court must immediately relinquish its jurisdiction to the probate court. Pullen, 667 S.W.2d at 363-64. Only by this interpretation can we resolve the apparent conflicts between the various sections of the Probate Code implicating the jurisdiction of statutory probate courts and district courts."(70) b. Unliquidated Claims. If the claim is for an unliquidated or contingent amount, it is not clear how to present it, and the effect of rejection is likewise uncertain. Adding to these difficulties is the jurisdictional problem of determining whether the controlling issue is incident to an estate. If it is, then suit in the probate court is proper; otherwise, the district court is the proper forum. In Seay v. Hall, 677 S.W.2d 19 (Tex. 1984), the Texas Supreme Court stated that a claim for an unliquidated amount is not a "claim" within the meaning of Probate Code §5A, and hence was not on the laundry list of items that, by definition, are "incident to an estate." Therefore, the jurisdiction of the Probate Court over such "claims" was called into question. The legislature quickly responded by amending Prob. Code §5A(b) by adding a new sentence at the end of that section as follows: "In actions by or against a personal representative, the statutory probate courts have concurrent jurisdiction with the district courts." Seay involved both a wrongful death claim by the decedent's estate and a survivor action by the decedent's family. In Yowell v. Piper Aircraft Corporation, 703 S.W.2d 630 (Tex. 1986), the Supreme Court noted that it had recently held in Seay v. Hall, 677 S.W.2d 19 (Tex. 1984) that survival actions were not matters incident to an estate. The Court then stated that at the time of trial of the Yowell case, the district court was the proper forum to try survival actions. However, in a footnote to this last statement the Court observed: "We note that the legislature has amended §5A(b) to add the following sentence. 'In actions by or against a personal representative, the statutory probate courts have concurrent jurisdiction with the district courts.' Tex. Prob. Ann. §5A(b) (Vernon Supp. 1986). The district court is still a proper forum for survival actions under this amendment." Piper, supra, at p. 634, ft. nt. 1. Observe that the court did not say that the district court is still the proper forum. The sentence in §5A(b) which now immediately precedes the sentence quoted in the Court's footnote reads as follows: "In situations where the jurisdiction of a statutory probate court is concurrent with that of the district court, any cause of action appertaining to estates or incident to an estate shall be brought in a statutory probate court rather than in the district court." (Emphasis added.) Since this was an action to which a personal representative was a party, it would probably be incorrect to conclude that the Supreme Court in the quoted footnote was saying that the statutory probate court would not have had concurrent jurisdiction with the district court under the amended statute. What it is believed the Supreme Court was saying is that, since the matter was not "incident to an estate," then even if there would have been concurrent jurisdiction in Yowell under new §5A(b), it was not a matter which "shall be brought in the statutory probate court rather than in the district court." The next issue to be decided in a future case is whether or not it would be proper for a statutory probate court to exercise its concurrent jurisdiction to hear a wrongful death action or a similar claim of a contingent or unliquidated nature, in the absence of a timely raised objection. It would seem that the exercise by the probate court of jurisdiction under such circumstances would be subject to a plea in abatement or other appropriate plea, but that if a timely plea raising the jurisdictional issue were not made, the judgment should not be subject to collateral attack, since the question is not one of jurisdiction in the fundamental sense; rather, the question is, as between two courts, each having jurisdiction, where ought the matter to be heard. In light of the plain wording of new Probate Code §5A(b) it will be difficult to argue that the probate court ever lacks fundamental jurisdiction over any action where a personal representative is a party; although if the matter is not incident to an estate, it should certainly be brought elsewhere. It is hoped that one salutary effect of the latest addition to §5A(b) will be that the judgment of the statutory probate court, in an action to which a personal representative is a party, will not be subject to collateral attack on the grounds that the court lacked fundamental jurisdiction over a particular issue. 6. EFFECT OF PAYMENT WHICH HAS NOT BEEN APPROVED. The Probate Code is very explicit on this issue: Except as provided for payment at his own risk by a guardian by an unauthenticated claim, no claim for money against the estate of a decedent or award, or any part thereof, shall be paid until it has been approved by the court or established by the judgment of the court of competent jurisdiction.(71) §301 says much the same thing. Despite the seeming injunction of Probate Code §319, it is often inconvenient or impractical to require all creditors to go through the formal claims procedure when the estate is solvent. Frequently, it would cost more than the claim itself for a small unsecured creditor to hire an attorney to properly present a claim against the estate. It is a common practice of guardians and administrators to pay small claims without court approval, and to request ratification of the payment when the annual or final accounting is made. It has been held that if the personal representative can sustain the burden of proving that the claim was a valid one, which would have had to have been paid if the formalities had been complied with, then the representative shall be entitled to a credit for the payment in his final account.(72) If the estate were insolvent, it would seem that any creditor who was not paid in full would have standing to complain of the payment of any claim not properly presented and approved. 7. EXECUTION AND POWER OF SALE. Unless an independent administration is pending, all claims for money must first be presented and either rejected or allowed before further action can take place. This rule extends to all claims for money, and, if a non-independent administration is pending, the power to execute a judgment against a decedent or to foreclose on a deed of trust or other security interest will be suspended.(73) The same rule applies if a temporary administration is opened. See Hury v. Preas, 673 S.W.2d 949 (Tex. App.-Tyler 1984, writ ref'd n.r.e.), which held that the power of sale granted by a deed of trust is suspended as a matter of law by the opening of an administration of a decedent's estate, even of a temporary administration, so long as pending. Probate Code §331 expressly provides that no sale of any property of an estate shall be made without an order of the court authorizing the sale. If no administration has been opened, an extra judicial foreclosure will be voidable, rather than void. If an administration is not opened for four years, the sale cannot be attacked. If, however, an administration is opened, the sale can be set aside and the administrator may recover the value of the use of the property during the period the purchaser had possession.(74) The rule is different if the foreclosure took effect during the pendency of an independent administration. In that event, even if the independent administration is later converted into a dependent administration, the foreclosure will be upheld.(75) 8. CLAIMS BY PERSONAL REPRESENTATIVE. It is not necessary for a personal representative to present a claim to himself. However, the representative is required to file its claim, verified by affidavit, within six months, or the claim will be barred.(76) After the claim has been filed, it will be acted upon by the court in the same manner as in other cases.(77) This requirement probably does not apply to an independent executor.(78) This provision does not apply to the claim of an heir, as such, or to contractual claims accruing after the granting of letters.(79) 9. CLAIMS NOT ALLOWED AFTER ORDER FOR PARTITION AND DISTRIBUTION. No claim for money shall be allowed after an order for partition and distribution has been made. If the claim is not barred by the general statutes of limitations, the claimant may bring his action against distributees of the estate, including other creditors, limited to the value of the property received by them.(80) 10. FAILURE TO PRESENT. In a dependent administration, presentment is an absolute prerequisite to the establishment of a claim, unless suit was filed prior to death (or unless the estate is under an independent administration). "No judgment shall be rendered in favor of a claimant upon any claim for money which has not been legally presented to the representative of an estate, and rejected by the representative or by the court, in whole or in part."(81) A court may not render a judgment authorizing payment of a claim which has not been presented to the personal representative.(82) I. ACCOUNTING FOR DISPOSITION OF CLAIMS Probate Code §399 requires that estates of decedents being administered under court order shall, "upon the expiration of twelve (12) months from the date of qualification and receipt of letters, return to the court an exhibit in writing under oath setting forth a list of all claims against the estate that were presented to him within the period covered by the account, specifying which have been allowed by him, which have been paid, which have been rejected and the date when rejected, which have been sued upon, and the condition of the suit."(83) In addition, the annual account must show information contained nine separate enumerated subsections of §299. Under §299(b), the personal representative is required to continue to file subsequent accounts annually. Probate Code §405 requires the personal representative under a dependent administration to file an account for final settlement, which is required to show, among other things, "the debts that have been paid [and] the debts and expenses, if any, still owing by the estate."(84) J. SPECIAL STATUTES OF LIMITATIONS ISSUES. 1. GENERAL STATUTES OF LIMITATIONS. This outline does not attempt to deal with the general statutes of limitations (also known as limitation of actions) except to note that there is a huge corpus of law on the subject, many different rules, and a myriad of exceptions and special cases. However, as a very general rule, under Texas state law --and, again, subject to many special rules and exceptions--, a person must bring suit for a tort (e.g., personal bodily or property injury) within two years of the injury,(85) and must bring an action on a contract or debt with four years after the day the cause of action accrues.(86) 2. TOLLING OF GENERAL STATUTES OF LIMITATIONS. Effective September 1, 1997, Probate Code §299 provides: Sec.299. TOLLING OF GENERAL STATUTES OF LIMITATION. The general statutes of limitation are tolled on the date: (1) a claim for money is filed or deposited with the clerk; or (2) suit is brought against the personal representative of an estate with respect to a claim of the estate that is not required to be presented to the personal representative. Amended by SB 506, enacted June 20, 1997, effective September 1, 1997. See note following Section 5A regarding effective date of SB 506.(87) [Emphasis added.] This is a change from the law prior to 9/1/97, which then provided that the general statutes of limitation was tolled "by filing a claim which is legally allowed and approved" or "by bringing a suit upon a rejected and disapproved claim within ninety days after such rejection or disapproval." Under the former law, read literally, filing the claim would toll the statute only if the claim was allowed and approved. Now it is clear that filing the claim is sufficient alone. It would be reasonable to assume that presentment to the personal representative would have the same effect as filing the claim with the clerk, but this is not clear.(88) Of course, if the claim is rejected, which it will be if no action is taken for 30 days, the 90 day statute(89) will act as an separate bar, provided that the administration is not independent.(90) 3. DOES P.C. §299 APPLY TO INDEPENDENT ADMINISTRATIONS? Does §299 apply to an independent administration? There is no authority on this point, but there are a number of good reasons for believing that it does not. For one thing, there is no requirement that claims be presented to an independent executor, much less "filed." Furthermore, it is to be doubted whether any action that an independent executor takes to approve or classify a claim presented rises to the level of "legally allowed and approved," which was required by the statute prior to its amendment in 1997. The use of the word "legally" under prior law was quite appropriate in the context of a court supervised dependent administration, but is out of place when used in connection with in an independent administration, which is generally free from court control. The second part of the statute that used to provide for tolling "by bringing a suit upon a rejected and disapproved claim within ninety days after such rejection or disapproval." This was clearly of no application to an independent administration.(91) Under the 1997 legislative change, the statute is tolled if "suit is brought against the personal representative of an estate with respect to a claim of the estate that is not required to be presented to the personal representative." This change in wording could theoretically mean that §299(2) might apply to an independent administration, even if §299(1) does not. Even so, this might not be particularly significant, since filing suit within the statute of limitations usually tolls the statute anyway, provided the requisite service of process is timely. Finally, one is entitled to ask whether the slight change in wording was intended to so broadly change the law as to make it applicable to independent administrations for the first time, without any mention of this intent. 4. NO CLAIM MAY BE ALLOWED ON WHICH A SUIT IS BARRED BY A GENERAL STATUTE OF LIMITATION. Probate Code §298(b) provides that the representative shall not allow and the court shall not approve a claim which is barred by a general applicable statute of limitation. 5. TIME FOR PRESENTMENT. Probate Code §298 was amended, effective January 1, 1996, to read as follows: Sec. 298. Claims Against Estates of Decedents (a) Time for Presentation of Claims. A claim may be presented to the personal representative at any time before the estate is closed if suit on the claim has not been barred by the general statutes of limitation. If a claim of an unsecured creditor for money is not presented within four months after the date of receipt of the notice permitted by Section 294(d), the claim is barred. (b) Claims Barred by Limitation Not to Be Allowed or Approved. No claims for money against a decedent, or against the estate of the decedent, on which a suit is barred under Subsection (a) of this section, Section 313, or Section 317(a) or by a general statute of limitation applicable thereto shall be allowed by a personal representative. If allowed by the representative and the court is satisfied that the claim is barred or that limitation has run, the claim shall be disapproved. There is no longer a requirement that unsecured claims for money be presented within six months after the original grant of letters in order to retain priority. Under the law, prior to 1996, if a claim was not presented within six months, it was merely postponed until the time when the claims which were presented "have been first entirely paid."(92) However, a secured creditor who does not present his claim within a six month period (or within four months of notice if later) will have his claim treated as a preferred debt and lien against the specific property only.(93) 6. TOLLING OF STATUTE OF LIMITATIONS BY DEATH. In the case of a claim by or against a decedent, the statutes of limitation are tolled for a period of 12 months following the decedent's death, unless a personal representative sooner qualifies, in which case, the statute begins to run upon such qualification.(94) 7. RESPONSE TO A SUIT BY AN INDEPENDENT EXECUTOR. Probate Code §147 provides that an independent executor shall not be required to respond to a suit for money until after 6 months from the date the order appointing the independent executor was entered. K. INDEPENDENT EXECUTORS--NOTICE, PRESENTMENT, FORM OF CLAIM, ALLOWANCE AND REJECTION, PAYMENT, CLASSIFICATION AND PRIORITY. Determining which provisions of the Probate Code apply to independent executors and which do not is usually accomplished by resort to case law and experience, on a section by section basis. Often there is no readily apparent or straightforward explanation as to when and why a particular Probate Code section applies or does not apply to an independent administrator. The problem here is that Tex. Prob. Code §3(q) defines "representative" as including the independent executor; however, Tex. Prob. Code §3(aa) limits the application of the general definition by stating that such inclusion "shall not be held to subject such representatives to control of the courts in probate matters with respect to settlement of estates except as expressly provided by law." (Emphasis added.)(95) More to the point, the definitions contained in Tex. Prob. Code §3 have the meaning assigned in that section "unless otherwise apparent from the context."(96) Part 4 Probate Code (Sections 145-154A) govern the independent administration. §145 provides for the creation of the independent administration. In this context it is worth noting §145(h): (h) When an independent administration has been created, and the order appointing an independent executor has been entered by the county court, and the inventory, appraisement, and list aforesaid has been filed by the executor and approved by the county court, as long as the estate is represented by an independent executor, further action of any nature shall not be had in the county court except where this Code specifically and explicitly provides or some action in the county court.(97) [Emphasis added.] 1. AMENDED SECTION 146. In 1995 the legislature extensively amended §146, dramatically affecting the administration of claims in an independent administration. The new statute is set forth in full below, because of its importance: Sec. 146. Payment of Claims and Delivery of Exemptions and Allowances (a) Duty of the Independent Executor. An independent executor, in the administration of an estate, independently of and without application to, or any action in or by the court: (1) shall give the notices required under Sections 294 and 295; (2) may give the notice permitted under Section 294(d) and bar a claim under that subsection; (3) shall approve, classify, and pay, or reject, claims against the estate in the same order of priority, classification, and proration prescribed in this Code; and (4) shall set aside and deliver to those entitled thereto exempt property and allowances for support, and allowances in lieu of exempt property, as prescribed in this Code, to the same extent and result as if the independent executor's actions had been accomplished in, and under orders of, the court. (b) Secured Claims for Money. Within six months after the date letters are granted or within four months after the date notice is received under Section 295, whichever is later, a creditor with a claim for money secured by real or personal property of the estate must give notice to the independent executor(98) of the creditor's election to have the creditor's claim approved as a matured secured claim to be paid in due course of administration. If the election is not made, the claim is a preferred debt and lien against the specific property securing the indebtedness and shall be paid according to the terms of the contract that secured the lien, and the claim may not be asserted against other assets of the estate. The independent executor may pay the claim before the claim matures if paying the claim before maturity is in the best interest of the estate. (c) Liability of Independent Executor. An independent executor, in the administration of an estate, may pay at any time and without personal liability a claim for money against the estate to the extent approved and classified by the personal representative if: (1) the claim is not barred by limitations; and (2) at the time of payment, the independent executor reasonably believes the estate will have sufficient assets to pay all claims against the estate.(99) (d)(100) Notice Required of Unsecured Creditor. An unsecured creditor who has a claim for money against an estate and receives a notice under Section 294(d) shall give notice to the independent executor of the nature and amount of the claim not later than the 120th day after the date on which the notice is received or the claim is barred. (e) Placement of Notice. Notice required by Subsections (b) and (d) must be contained in: (1) a written instrument that is hand-delivered with proof of receipt or mailed by certified mail, return receipt requested, to the independent executor or the executor's attorney; (2) a pleading filed in a 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.(101) [Emphasis added.] 2. REMEDY OF CREDITOR AGAINST OTHER CREDITORS IN THE SAME CLASS. What happens if the independent executor, pursuant to 146(c)(2), pays a creditor at a time when the independent executor reasonably believes the estate will have sufficient assets to pay all claims against the estate, but it turns out the executor was mistaken? In that event, a creditor whose claim was not paid can pursue his claim against the beneficiaries or other creditors, pursuant to Probate Code §318. 3. APPLICATION OF NOTICE RULES TO INDEPENDENT ADMINISTRATIONS. It used not to be entirely certain whether or not independent executors must give notice to creditors; however, the amendments made to §146 in 1995 now mandate that an independent executor shall give the general notices required under 294 and 295, and may give the notice to unsecured creditors specified in §294(d) (in order to bar the claim of an unsecured creditor).(102) 4. PRESENTMENT OF CLAIMS TO INDEPENDENT EXECUTORS. It is not necessary to present a claim to an independent executor to enforce a claim: "Any person having a debt or claim against an estate may enforce the payment of the same by suit against the independent executor . . . "(103) Historically, the statutory procedures for presenting claims did not apply to independent administrations.(104) This general rule is no longer fully applicable, in light of the explicit provisions of §146, enacted in 1995, discussed above. Although not required to do so, a creditor who has been given the 294(d) notice must "give notice to the independent executor of the nature and amount of the claim not later than the 120th day after the date on which the notice is received or the claim is barred."(105) The secured creditor now has a clear option to have his claim treated as a matured secured claim or as a preferred debt and lien, as in the case of a dependent administration,(106) and the failure to timely elect matured secured status will result in preferred debt and lien treatment as a matter of law, as in the case of a dependent administration under §306(b): (b) Secured Claims for Money. Within six months after the date letters are granted or within four months after the date notice is received under Section 295, whichever is later, a creditor with a claim for money secured by real or personal property of the estate must give notice to the independent executor(107) of the creditor's election to have the creditor's claim approved as a matured secured claim to be paid in due course of administration. If the election is not made, the claim is a preferred debt and lien against the specific property securing the indebtedness and shall be paid according to the terms of the contract that secured the lien, and the claim may not be asserted against other assets of the estate. The independent executor may pay the claim before the claim matures if paying the claim before maturity is in the best interest of the estate.(108) See the discussion in paragraph "Execution and Power of Sale," on the effect of foreclosing on a security interest prior to the opening of an administration. 5. FORM OF THE CLAIM--APPLICATION OF §301 TO INDEPENDENT ADMINISTRATIONS. It has long been the rule that suit may be filed directly against the independent executor without first filing a claim.(109) The enactment of the Probate Code has not changed this rule.(110) In Ditto Investment Company v. Ditto, the court held that it was not necessary to file a verified claim for medical services in an independent administration:(111) Where an estate is being administered by an independent executor, the general provisions regulating the procedure for the establishment of claims against an estate are not applicable. 14-A Tex. Jur., p. 316, sec. 326; Travis v. Kennedy, Tex. Civ. App., 66 S.W.2d 444. Although Dr. Ditto, prior to the time appellant acquired the claim by assignment, presented a verified claim to the executor, such presentment to an independent executor was not necessary. Smyth v. Caswell, 65 Tex. 505, 83 S.W.2d 305; Ewing v. Schultz, Tex. Civ. App., 220 S.W.2d 625, error ref.; Ashbrook v. Hammer, Tex. Civ. App., 106 S.W.2d 776.(112) Granting that verification of a properly presented claim to an independent administrator is not prerequisite to a suit on the claim, query whether an independent administrator may nevertheless require verification, or whether, in an insolvent estate, the fact that one claim is properly verified and another is not has any bearing on claim priority. Although this issue has yet to be squarely addressed by the Texas Supreme Court it appears, based on existing authorities, that verification has no bearing on the matter at all, and that there is no special form or other requirements for presenting a claim to an independent executor. Under P.C. §146(e) a lawsuit "filed with respect to the claim" will constitute notice sufficient to stop the four month bar statute under §146(d). Moreover, all that is required to stop the four month bar is notice by the creditor of the "nature and amount" of the the claim. (d) Notice Required of Unsecured Creditor. An unsecured creditor who has a claim for money against an estate and receives a notice under Section 294(d) shall give notice to the independent executor of the nature and amount of the claim not later than the 120th day after the date on which the notice is received or the claim is barred. (e) Placement of Notice. Notice required by Subsections (b) and (d) must be contained in: (1) a written instrument that is hand-delivered with proof of receipt or mailed by certified mail, return receipt requested, to the independent executor or the executor's attorney; (2) a pleading filed in a 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.(113) [Emphasis added.] 6. ALLOWANCE, REJECTION AND SUIT ON REJECTED CLAIM--§§309, 310 AND 313 DO NOT APPLY TO INDEPENDENT ADMINISTRATIONS. The Texas Supreme Court has flatly held that Sections 309 (memorandum of allowance or rejection of claim), 310 (failure to endorse or annex memorandum) and 313 (suit on rejected claim) of the Probate Code simply do not apply to independent administrations. [It is] otherwise apparent that these sections [Prob. Code 309, 310 and 313] are not applicable to an 'independent executor", because to apply them would be inconsistent with the provisions of Section 145 of the Probate Code; the general purpose of which is to free the 'independent executor' from the control of the court, except where the Code specifically and explicitly provides otherwise.(114) In an independent administration, the administrator steps into the shoes of the decedent. Therefore, (1) a creditor is not required to present his claim and may bring suit directly against the independent administrator or may foreclose upon his security without waiting for the claim to be rejected;(115) (2) rejection of a claim by an independent executor does not start the special ninety day statute of limitations running;(116) and (3) execution will issue on a prior judgment obtained during the life of a decedent, without presentment. If a non-independent administration is later opened because of the death or removal of the independent administrator, a sale made under a deed of trust at a time when an independent executor was representing the estate will not be upset.(117) Although Probate Code §310 provides that "The failure of a representative of an estate to endorse on or annex to, a claim presented to him, his allowance or rejection thereof within thirty days after the claim was presented, shall constitute a rejection of the claim," Bunting v. Pearson, as indicated above, is very explicit that §310 does not apply to independent administrations. It is important to determine whether or not §310 applies to an independent administration because the last sentence to Probate Code §310 provides that if a claim rejected by inaction is thereafter established by suit, the cost shall be taxed against the representative, individually. "If the claim is thereafter established by suit, the costs shall be taxed against the representative, individually, or he may be removed on the written complain of any person interested in the claim . . . " The overcautious might be reluctant to take the Texas Supreme Court at its word on this point, because the automatic rejection issue was not directly before the Court. However, the Court was unequivocal in its pronouncement on this score, and it therefore seems reasonable to take its statement at face value. 7. CLASSIFICATION AND PRIORITY--§§320-322 APPLY TO INDEPENDENT ADMINISTRATIONS. On the other hand, the classification and priority rules of Prob. Code §§320-322 do apply to independent administrations. Prior to the adoption of the Code the courts had held that 'independent executors' were required to handle claims in accordance with provisions of the statute dealing with classifications, priority and proration of claims. It appears to us that Section 146 carries forward the law in this respect as it existed prior to the adoption of the code. The phrase 'in the same order of priority, classification, and proration prescribed in this code' refers to Sections 322 dealing with classification; 321 dealing with proration; and 320 dealing with priority.(118) 8. RESPONSE TO A SUIT BY AN INDEPENDENT EXECUTOR. Probate Code §147 provides that an independent executor shall not be required to respond to a suit for money until after 6 months from the date the order appointing the independent executor was entered. 9. INDEPENDENT EXECUTORS AND THE TURNOVER STATUTE. In Beaumont Bank, N.A. v. Buller(119) the Texas Supreme Court allowed a judgment creditor to force an independent executrix to turn over all cash in the estate to the sheriff under Tex. Civ. Prac. & Remedies Code §31.002 (the Texas turnover statute). L. FORCING PAYMENT. 1. GENERAL CREDITORS. Any creditor of an estate of a decedent who's claim, or part thereof, has been approved by the court or established by suit, may, at any time after 12 months from the granting of letters testamentary, upon written application and proof showing that the estate has on hand sufficient available funds, obtain an order directing that payment be made; or, if there are no available funds, and if to await the receipt of funds from other sources would unreasonably delay payment, the court shall then order sale of property of the estate sufficient to pay the claim. . . .(120) [Emphasis added.] If a representative does not pay on demand money ordered by the court to be paid when there are funds of the estate available, the claimant, upon affidavit of the demand and failure to pay, is authorized to have execution issued against the property of the estate for the amount due, with interest and costs. If the representative fails to pay money ordered by the court to be paid, the claimant is authorized to have execution issued against the property of the estate for the amount due, with interest and costs. If the execution is not satisfied, or merely upon failure to pay after demand, then if good cause for the failure is not shown, a judgment may be entered against the representative individually and his sureties for the amount owing, plus interest and costs, and in addition, the representative may be ordered to pay penalized up to 5% of value of the claim per month for each month that payment was not made.(121) A creditor may also have a remedy under the Texas Turnover Statute(122) against an executor who has distributed estate funds to herself.(123) 2. SECURED CREDITORS. Probate Code §338 provides that a secured creditor may petition the court for sale of his security at any time after the lien has been allowed and approved or established by suit. Unlike §326 there is no 12 month waiting period. Note that such a judicially ordered sale is not a foreclosure sale and consequently will not have the effect of discharging liens not satisfied with the proceeds,(124) and this is true even if the court order recites that the sale is free of all liens.(125) Elaborate provisions were added to §306 in 1995, designed to govern the collection of a debt by a preferred debt and lienholder.(126) A creditor who has elected or has been deemed to have elected preferred debt and lien treatment is entitled to have the debt paid according to its terms. If the property has not been sold or distributed within 6 months from the date letters are granted, the representative is required to pay all maturities which have accrued on the debt. If the representative defaults, the court, upon application of the claimholder, shall (1) require the sale of said property subject to the unmatured part of such debt and apply the proceeds of the sale to the liquidation of the maturities; (2) require the sale of the property free of the lien and apply the proceeds to the payment of the whole debt; or (3) authorize foreclosure by the claimholder under Subsection (f) of this section.(127) M. CONCLUSIONS. A probate creditor in Texas must be very circumspect in presenting and preserving a claim against a decedent. Unfortunately, our Texas Probate Code is not a model of clarity. In many instances, it is not only ambiguous and self-contradictory, but fails entirely to give any hint as to what the law really is. The Probate Code simply cannot be read by itself. The attorney representing either a creditor or the estate must be aware of the various cases construing the Code and of the history which sometimes operates to distort its plain meaning. N. ACKNOWLEDGMENTS AND BIBLIOGRAPHY REGARDING CLAIMS PROCEDURES. I wish to express my indebtedness to the various Texas lawyers who have written articles on claim procedures and probate in the past, which articles spawned many of the ideas expressed herein. C. Boone Schwartzel has written a number of outlines which are unsurpassed. The most recent known to me is an outline entitled Presentation and Classification of Claims; The Not-Quite-Solvent Estate; Homestead, Exempt Property, and Family Allowances; Incidental Effects on Other Borrowers, appearing in the 26th Annual Southwestern Legal Foundation Institute on Wills and Probate (1987). As usual with Boone, the article contains an excellent bibliography of sources. Another favorite of mine (with a slightly different perspective) is How to Handle The Insolvent Estate, by Joseph S. Horrigan, 1997 Advanced Estate Planning and Probate Course, State Bar of Texas Professional Development Program. A. TRANSFEROR LIABILITY FOR TAXES-IRC §3713. The executor is liable, within limits, for estate and income taxes owed by the estate, to the extent that the executor makes a transfer of estate property. 1. THE STATUTE. 31 USC §3713 provides: §3713 Priority of Government Claims. (a)(1) A claim of the United States Government shall be paid first when-- (A) a person indebted to the Government is insolvent and-- (i) the debtor without enough property to pay all debts makes a voluntary assignment of property; (ii) property of the debtor, if absent, is attached; or (iii) an act of bankruptcy is committed; or (B) the estate of a deceased debtor, in the custody of the executor or administrator, is not enough to pay all debts of the debtor. (b) A representative of a person or an estate (except a trustee acting under Title 11) paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government. [Emphasis added.] IRC §2002 provides: "The tax imposed by this chapter [i.e., estate taxes] shall be paid by the executor." IRC §6601(e)(1) appears to extend this rule to interest owed on taxes. Treas. Reg. §20.2002-1 provides in part: Every executor, administrator, or assignee, or other person, who pays, in whole or in part, any debt due by the person or estate for whom or for which he acts before he satisfies and pays the debts due to the United States from such person or estate, shall become answerable in his own person and estate to the extent of such payments for the debts so due to the United States, or for so much thereof as may remain due and unpaid. As used in said section, the word "debt" includes a beneficiary's distributive share of an estate. Thus, if the executor pays a debt due by the decedent's estate or distributes any portion of the estate before all the estate tax is paid, he is personally liable, to the extent of the payment or distribution, for so much of the estate tax as remains due and unpaid. . . On its face, IRC §2002 and the regulations under it appear to be unequivocal. However, IRC §2002 should probably be read in light of 31 USC §3713 (quoted above) and the case law interpreting it. The statute requires that in order for §3713 to apply, the executor must first pay a debt before paying a claim due to the United States. The second requirement under the statute is that "the estate of a deceased debtor, in the custody of the executor or administrator, is not enough to pay all debts of the debtor." [Emphasis added.] A third requirement, that finds its support in some of the case law, is that the representative must have "notice" of the Government's claim. Pursuant to IRC §6901, the liability of a transferee is similar to that of the transferor under §3713.(128) 2. WHAT IS A DEBT UNDER §3713?. Case law under §3713 and its predecessors (§§3466 and 3467, formerly 31 U.S.C. §§191 and 192) make it clear that a "debt" for this purpose includes a distribution to a beneficiary.(129) The regulations under IRC §2002 also make this clear. As used in said section, the word "debt" includes a beneficiary's distributive share of an estate. Thus, the executor pays a debt due by the decedent's estate or distributes any portion of the estate before all the estate tax is paid, he is personally liable, to the extent of the payment or distribution, for so much of the estate tax as remains due and unpaid.(130) [Emphasis added.] There is authority for the proposition that administration expenses are not "debts."(131) Moreover, as we have discussed previously, it has been held that family allowances are not "debts."(132) Further, Rev. Rul. 80-112 held that "funeral and administrative expenses and the one-year family allowance provided by state law are under state law not debts of the decedent" for purposes of the predecessor statute to §3713. Funeral and administrative expenses and the one-year family allowance provided by state law are under state law not debts of the decedent, but are charges against the property of the decedent to be deducted before the payment of debts. Costs of the decedent's last illness and the wages of household servants are debts from the decedent. The claims against the decedent's estate for funeral and administrative expenses and the family allowance have priority over federal tax claims of the Government for which it has no lien. However, such federal tax claims are superior to claims against a decedent's estate for doctor's bills from the decedent's last illness and wages due a household employee.(133) Case law has established that secured creditors come ahead of the Government, to the extent of the security, if the claim was perfected prior to death.(134) While the Supreme Court has yet to squarely rule on this underlying issue, it has indicated that in order for this exception to apply (if it does), their must be no procedural flaws in perfection of the security interest.(135) 3. WHAT IS INSOLVENCY UNDER §3713?. Insolvency is probably "balance sheet" insolvency, as opposed to not being able to pay debts in the ordinary course.(136) Insolvency is most likely determined at the time that payment or distribution ahead of the Government is made. Thus, the fact that the estate was solvent at date of death would not be determinative.(137) While there is one case that could be construed for the proposition that an insolvent estate may be held liable for a payment made at a time when the estate was solvent,(138) this case is inconsistent with more recent decisions.(139) 4. WHAT IS NOTICE UNDER §3713?. Although the statute does not require actual notice of a claim by the Government, the more recent cases have required as a condition of liability under §3713 that the executor have knowledge or notice of the debt due the United States at the time of a preferential distribution to a beneficiary or other creditor.(140) Notice has not always been treated as an element under §3713.(141) The Tax Court has described the notice required as being actual knowledge of such facts as would put a prudent person on inquiry as to the existence of the claim of the United States.(142) Beyond this general statement, there are very few cases construing the extent of the notice required in particular fact situations. 5. DO THE STATE PRIORITY RULES APPLY UNDER §3713?. The claims of the U.S. Government probably prevail, despite any higher priorities under State law; nor do the priority rules of §6323(a) apply.(143) (§6323(a) applies to the Government's lien for taxes under §6321.) It has been held by a Federal Court in Texas, that the claims of the Federal Government have priority over claims of the state of Texas for inheritance taxes.(144) There is, however, contrary authority by a New York state court.(145) 6. WHO IS THE GOVERNMENT UNDER §3713?. Do claims of Federal agencies that are in the commercial lending business, such as the SBA, FDIC, and the FHA constitute claims of United States? A good argument that they do not can be based upon the 1979 United States Supreme Court decision of United States v. Kimbell Foods, Inc.(146) B. GOVERNMENT LIENS.. 1. THE GOVERNMENT LIEN UNDER IRC §6321 AND 6324. a. The General Tax Lien Of §6321. IRC §6321 succinctly provides: If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. The general tax lien requires assessment, notice and demand, and finally, a failure to pay the tax, before the lien comes into existence. Therefore, in an estate and gift tax context, the more likely lien statute to apply will be §6324, where notice and demand and so forth are not required. b. The Specific Estate And Gift Tax Lien Of §6324(A)(1). The United States has a specific lien for estate taxes on estate property in the gross estate. §6324 is considerably longer than §6321. The heart of §6324 is found in (a)(1): Note: this lien expires upon the payment of all assessed taxes as finally determined on audit. Otherwise, the lien will expire ten years after death. The §6324 lien does not apply to nonprobate property transferred to a bona fide purchaser.(147) There is no BFP exception in the case of probate property. c. Administration Expenses. §6324 (a)(1) exempts from application of the lien expenses paid in the administration of the estate, other than expenses allowed by the court. The Fifth Circuit has held, however, that this section does not shield administration expenses paid by an independent executor, free of court control.(148) The conventional wisdom and experience is that the Government does not often pursue its lien for reasonable fees paid to fiduciaries and their advisors. d. Transferor and Transferee Liability Under §6324(a)(2). IRC §6324(a)(2) provides as follows: e. Lien For Gift Tax Under §6324(b). IRC §6324(b) provides as follows: (b) Lien for gift tax. Except as otherwise provided in subsection (c), unless the gift tax imposed by chapter 12 is sooner paid in full or becomes unenforceable by reason of lapse of time, such tax shall be a lien upon all gifts made during the period for which the return was filed, for 10 years from the date the gifts are made. If the tax is not paid when due, the donee of any gift shall be personally liable for such tax to the extent of the value of such gift. Any part of the property comprised in the gift transferred by the donee (or by a transferee of the donee) to a purchaser or holder of a security interest shall be divested of the lien imposed by this subsection and such lien, to the extent of the value of such gift, shall attach to all the property (including after-acquired property) of the donee (or the transferee) except any part transferred to a purchaser or holder of a security interest. [Emphasis added.] C. STATUTES OF LIMITATIONS. Under IRC §6501, the general statute of limitations for assessment of federal taxes is 3 years after the return is filed.(149) There are exceptions under §6501(c): There is no limitation on the assessment of tax (a) in "the case of a false or fraudulent return with the intent to evade tax,"(150) in "the case of a willful attempt in any manner to defeat or evade tax,"(151) and in "the case of failure to file a return."(152) There is a six year statute in the case of a substantial omission from the estate tax return. (2) Estate and gift taxes.--In the case of a return of estate tax under chapter 11 or a return of gift tax under chapter 12, if the taxpayer omits from the gross estate or from the total amount of the gifts made during the period for which the return was filed items includible in such gross estate or such total gifts, as the case may be, as exceed in amount 25 percent of the gross estate stated in the return or the total amount of gifts stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 6 years after the return was filed. In determining the items omitted from the gross estate or the total gifts, there shall not be taken into account any item which is omitted from the gross estate or from the total gifts stated in the return if such item is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature and amount of such item.(153) Under §6502, the Government has 10 years to collect after assessment.(154) D. RELEASE FROM PERSONAL LIABILITY. a. Release From Estate Tax Liability Made Under §2204. IRC §2204(a) provides for a means by which an executor can be discharged from liability for estate taxes. §2204. Discharge of fiduciary from personal liability. (a) General rule. If the executor makes written application to the Secretary for determination of the amount of the tax and discharge from personal liability therefor, the Secretary (as soon as possible, and in any event within 9 months after the making of such application, or, if the application is made before the return is filed, then within 9 months after the return is filed, but not after the expiration of the period prescribed for the assessment of the tax in section 6501) shall notify the executor of the amount of the tax. The executor, on payment of the amount of which he is notified (other than any amount the time for payment of which is extended under section 6161, 6163, or 6166), and on furnishing any bond which may be required for any amount for which the time for payment is extended, shall be discharged from personal liability for any deficiency in tax thereafter found to be due and shall be entitled to a receipt or writing showing such discharge. There is no special form with which to request a release under §2204. The request should, however, be made in writing, and filed with the district or service director with whom the estate tax return is required to be filed as required in Treas. Reg. §20.6091-1. IRS Form 7990, U.S. Estate Tax Certificate of Release from Personal Liability, is the form that the IRS will issue, upon request, after all of the estate taxes have been paid and the §2204 request has been made. b. Release From Income and Gift Tax Liability Made Under §6905. IRC §6905 provides for a means by which an executor can be discharged from liability for income and gift taxes. §6905. Discharge of executor from personal liability for decedent's income and gift taxes. (a) Discharge of liability. In the case of liability of a decedent for taxes imposed by subtitle A or by chapter 12, if the executor makes written application (filed after the return with respect to such taxes is made and filed in such manner and such form as may be prescribed by regulations of the Secretary) for release from personal liability for such taxes, the Secretary may notify the executor of the amount of such taxes. The executor, upon payment of the amount of which he is notified, or 9 months after receipt of the application if no notification is made by the Secretary before such date, shall be discharged from personal liability for any deficiency in such tax thereafter found to be due and shall be entitled to a receipt or writing showing such discharge. The request is made on IRS Form 5495, Request For Discharge From Personal Liability Under Internal Revenue. IRS Form 7990A, U.S. Gift Tax Certificate of Release from Personal Liability, is the form that the IRS will issue, upon request, after all of the gift taxes have been paid and the §6905 request has been made. c. Request for Prompt Assessment Made Under §6501(d). IRC §6501(d) contains a procedure for shortening the statute of limitations for income and gift taxes to 18 months-- (d) Request for prompt assessment.--Except as otherwise provided in subsection (c), (e), or (f), in the case of any tax (other than the tax imposed by chapter 11 of subtitle B, relating to estate taxes) for which return is required in the case of a decedent, or by his estate during the period of administration, or by a corporation, the tax shall be assessed, and any proceeding in court without assessment for the collection of such tax shall be begun, within 18 months after written request therefor (filed after the return is made and filed in such manner and such form as may be prescribed by regulations of the Secretary) by the executor, administrator, or other fiduciary representing the estate of such decedent, or by the corporation, but not after the expiration of 3 years after the return was filed. A request for prompt assessment may be made on IRS Form 4810. This procedure does not apply to the estate tax. D. LIABILITY AND LIENS FOR STATE INHERITANCE TAXES. This article does not discuss the similar issue of transferor liability and liens for state inheritance taxes. There is a whole body of law on this subject, however.
The surviving spouse and certain other family members have rights in the homestead and in exempt property that survive death and which have priority over claims of creditors. In addition, under certain circumstances the surviving spouse and minor children may be entitled to a family allowance, in an amount sufficient to support them for one year. A. HOMESTEAD. There are two discrete characteristics of a Texas homestead that are present at death. On the one hand, there is the right of the surviving spouse (and in some cases the guardian of the minor children) to use and occupy the homestead. On the other hand, there is the right to receive the homestead free of debts. These two rights should not be confused. 1. WHAT IS THE HOMESTEAD. a. Art. §51 Of The Constitution. Art. §51 of The Constitution defines the homestead: "Sec. 51. The homestead, not in a town or city, shall consist of not more than two hundred acres of land, which may be in one or more parcels, with the improvements thereon; the homestead in a city, town or village, shall consist of lot or lots amounting to not more than one acre of land, together with any improvements on the land; provided, that the same shall be used for the purposes of a home, or as a place to exercise the calling or business of the homestead claimant, whether a single adult person, or the head of a family; provided also, that any temporary renting of the homestead shall not change the character of the same, when no other homestead has been acquired. "Amended Nov. 3, 1970; Nov. 6, 1973; Nov. 8, 1983." (Emphasis added.) b. No Restriction On Value Of Urban Homestead. Note that there is no longer a $10,000 restriction on the value of an urban homestead lot. This dollar limitation was removed in 1983. c. During Life, A Claimant Is Entitled To A Business As Well As A Residential Homestead. The Constitution recognizes the existence of a business homestead as well as a residential homestead. The two are not mutually exclusive, and it should be possible to claim both. An urban homestead need not consist of contiguous lots, and both residential and business properties are entitled to the exemption.(155) There are some very interesting possibilities in connection with the business homestead exemption which are sometimes overlooked. d. Leasehold Homestead. It is possible to claim a leasehold interest as a homestead.(156) 2. THE RIGHT TO USE AND OCCUPY THE HOMESTEAD. The surviving spouse has the right to use and occupy the homestead for life. a. Art. 16, §52 Of The Constitution. "§52. Descent and distribution of homestead; restrictions on partition "Sec. 52. On the death of the husband or wife, or both, the homestead shall descend and vest in like manner as other real property of the deceased, and shall be governed by the same laws of descent and distribution, but it shall not be partitioned among the heirs of the deceased during the lifetime of the surviving husband or wife, or so long as the survivor may elect to use or occupy the same as a homestead, or so long as the guardian of the minor children of the deceased may be permitted, under the order of the proper court having the jurisdiction, to use and occupy the same." b. Prob. Code §284. "§284. When Homestead Not Partitioned "The homestead shall not be partitioned among the heirs of the deceased during the lifetime of the surviving spouse, or so long as the survivor elects to use or occupy the same as a homestead, or so long as the guardian of the minor children of the deceased is permitted, under the order of the proper court having jurisdiction, to use and occupy the same. "Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Amended by Acts 1979, 66th Leg., p. 37, ch. 24, §13, eff. Aug. 27, 1979." c. Who Has Homestead Rights? The surviving spouse automatically has the right to use and occupy the homestead. This is true regardless of whether the homestead was the separate property of the decedent.(157) 2. THE RIGHT TO USE AND OCCUPY THE HOMESTEAD. The surviving spouse has the right to use and occupy the homestead for life. a. Art. 16, §52 Of The Constitution. "§52. Descent and distribution of homestead; restrictions on partition "Sec. 52. On the death of the husband or wife, or both, the homestead shall descend and vest in like manner as other real property of the deceased, and shall be governed by the same laws of descent and distribution, but it shall not be partitioned among the heirs of the deceased during the lifetime of the surviving husband or wife, or so long as the survivor may elect to use or occupy the same as a homestead, or so long as the guardian of the minor children of the deceased may be permitted, under the order of the proper court having the jurisdiction, to use and occupy the same." b. Prob. Code §284. "§284. When Homestead Not Partitioned "The homestead shall not be partitioned among the heirs of the deceased during the lifetime of the surviving spouse, or so long as the survivor elects to use or occupy the same as a homestead, or so long as the guardian of the minor children of the deceased is permitted, under the order of the proper court having jurisdiction, to use and occupy the same. "Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Amended by Acts 1979, 66th Leg., p. 37, ch. 24, §13, eff. Aug. 27, 1979." c. Who Has Homestead Rights? The surviving spouse automatically has the right to use and occupy the homestead. This is true regardless of whether the homestead was the separate property of the decedent.(158) Note further, the court can order that the guardian of the decedent's minor children may use and occupy the homestead.(159) However, the homestead cannot be claimed by the children if there is a surviving spouse asserting the right.(160) An unmarried child has no right to use and occupy the homestead following the death of the parents,(161) even though the existence of such a child may allow the homestead to pass free and clear of creditor claims.(162) This issue is discussed in more detail below. d. Limitations. The problem with the homestead is that there is no power of substitution. This means that if the surviving spouse desires to establish a homestead elsewhere, perhaps in a smaller home or in a more suitable location, the probate homestead may have to be abandoned. This often works a great inconvenience. This is one of the reasons that an estate does not get a marital deduction in Texas for the homestead interest passing to the surviving spouse. e. The Problem With The Mortgage And Other Expenses Associated With The Homestead. Expenses in connection with the homestead may arise during its use and occupancy, and questions may arise as to who should be liable for these expenses: the homestead claimant or the estate and the remaindermen. The Texas Supreme Court has held that a homestead is akin to a life estate.(163) Therefore, expenses will generally be apportioned on the same basis as if the homestead claimant were the owner of a legal life estate, with the heirs being the remaindermen. (1) Mortgage Payments. If the homestead is so burdened with debt as to be essentially worthless, the survivor may elect to receive an allowance in lieu of homestead. See below. Often however, the survivor chooses to assert his homestead rights despite the debt on the property. The question then becomes whether the decedent's estate should pay any portion of the debt, and if so how much. A life tenant is generally responsible for the portion of the mortgage payment representing interest; therefore, the surviving spouse as homestead claimant will usually bear this expense and the estate will be liable for its share of the principal payments. However, the will must be examined to determine if the executor intended otherwise. If the decedent directed that all debts be paid, and did not expressly authorize the executor to extend or continue existing indebtedness, an argument might be made that prepayment was required under the terms of the will. (2) Upkeep. The homestead claimant, like a life tenant, is responsible for the expenses of care and maintenance, such as cost of repairs.(164) (3) Taxes. The life tenant (and therefore, the homestead claimant) is responsible for ordinary taxes.(165) (4) Insurance. The life tenant is not under a duty to insure the remainder.(166) f. The Election Issue. If the spouse's homestead claim is inconsistent with a gift to the spouse under the will, the spouse may be deemed to have been put to an election between the two. Although it is said that for an election to be required, the will must be open to no other construction,(167) the courts are occasionally quick to find that an election is implied.(168) It will usually be sufficient if the testator purports to dispose of both halves of the community property under the will.(169) There appears, however, to be a decided trend in the more recent cases to require more in the way of affirmative evidence of an intent to force an election, on the theory that it is presumed the testatrix only intended to dispose of her own property.(170) For example, in Noble v. Noble(171)the court, citing Lieber v. Mercantile Nat'l Bank,(172) found no election to be implied where the will was simply silent on the subject: In this case, the will of decedent contains no hint of an intention on testator's part that appellee's acceptance of benefits under the will shall preclude her from claiming the statutory allowance in favor of a surviving spouse.(173) g. Distinction Between Right Of Occupancy And Title. The right of occupancy is said to be entirely distinct from the title to the land, which may be in someone other than the homestead claimant.(174) "§283. Homestead Rights of Surviving Spouse "On the death of the husband or wife, leaving a spouse surviving, the homestead shall descend and vest in like manner as other real property of the deceased and shall be governed by the same laws of descent and distribution. "Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Amended by Acts. 1979, 66th Leg., p. 37, ch. 24, § 12, eff. Aug. 27, 1979." 3. ALLOWANCE IN LIEU OF HOMESTEAD-PROB. CODE §273. If there is no homestead, the Probate Code provides for an allowance in lieu thereof, not to exceed $15,000. a. Probate Code §273. Probate Code §273 provides: §273. Allowance in Lieu of Exempt Property In case there should not be among the effects of the deceased all or any of the specific articles exempted from execution or forced sale by the Constitution and laws of this state, the court shall make a reasonable allowance in lieu thereof, to be paid to such surviving spouse and children, or such of them as there are, as hereinafter provided. The allowance in lieu of a homestead shall in no case exceed $5000 and the allowance for other exempted property shall in no case exceed $5000, exclusive of the allowance for the support of the surviving spouse and minor children which is hereinafter provided for. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Amended by Acts 1977, 65th Leg., p. 351, ch. 172, § 1, eff. Aug. 29, 1977; Acts 1979, 66th Leg., p. 36, ch. 24, § 4, eff. Aug. 27, 1979; Acts 1993, 73rd Leg., ch. 846, §19, eff. Sept 1, 1993. (Emphasis added.) b. Allowance Where Homestead Is "Incomplete" By Reason Of Large Encumbrance. The widow is entitled to an allowance in lieu of homestead if property is so heavily encumbered as to be useless.(175) c. Apportionment Of Allowance In Lieu Of Homestead-Prob. Code §275. Allowances in lieu of exempt property are paid solely to the surviving spouse, unless there are children by another parent.(176) If there are children of the deceased who are not the children of the surviving spouse, the surviving spouse receives half of the whole, plus the shares of the children of whom the survivor is the parent, and the remaining shares are paid to the children (or their guardian) of whom the survivor is not the parent.(177) For this purpose, there does not appear to be any distinction in the Probate Code between the allowance in lieu of exempt personal property and the allowance in lieu of homestead, both of which are treated as different species of "allowances in lieu of exempt property." This is interesting since children do not have homestead rights if there is a surviving spouse.(178) The "children" referred to are minor children and unmarried children living at home, though the statute does not say so explicitly. Is the allowance in lieu of homestead a community debt, like the family allowance? 4. THE LIABILITY OF THE HOMESTEAD FOR DEBTS. a. Art. 16, §50 Of The Constitution. Article 16, §50 of The Texas Constitution generally exempts the Texas homestead from forced sale, except in the case of a purchase money mortgage: "§50. Homestead; protection from forced sale; mortgages, trust deeds and liens "Sec. 50. The homestead of a family, or of a single adult person, shall be, and is hereby protected from forced sale, for the payment of all debts except for the purchase money thereof, or a part of such purchase money, the taxes due thereon, or for work and material used on constructing improvements thereon, and in this last case only when the work and material are contracted for in writing, with the consent of both spouses, in the case of a family homestead, given in the same manner as is required in making a sale and conveyance of the homestead; nor may the owner or claimant of the property claimed as homestead, if married, sell or abandon the homestead without the consent of the other spouse, given in such manner as may be prescribed by law. No mortgage, trust deed, or other lien on the homestead shall ever be valid, except for the purchase money therefor, or improvements made thereon, as hereinbefore provided, whether such mortgage, or trust deed, or other lien, shall have been created by the owner alone, or together with his or her spouse, in case the owner is married. All pretended sales of the homestead involving any condition of defeasance shall be void. This amendment shall become effective upon its adoption. "Amended Nov. 6, 1973." b. §270 Of The Probate Code. §270 of the Probate Code provides "§270. Liability of Homestead for Debts: "The homestead shall not be liable for the payment of any of the debts of the estate, except for the purchase money thereof, the taxes due thereon, or work and material used in constructing improvements thereon; and in this last case only when the work and material are contracted for in writing, with the consent of both spouses given in the same manner as required in making a sale and conveyance of the homestead. "Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Amended by Acts 1979, 66th Leg., p. 35, ch. 24, § 1, eff. Aug. 27, 1979." But §270 does not tell us what the "homestead" is, or under what conditions the home will be a homestead following the death of the owner. Here, we have to look to case law and 271, discussed below. c. The Basic Rule. The basic rule is that the homestead and other exempt property passes free and clear of the claims of creditors, other than the creditors specifically listed in §270 (purchase money, improvements and taxes), if the decedent is survived by a family member described in Probate Code §271.(179) d. Who Are The Constituent Family Members That Can Cause The Homestead To Survive? The family members described in Probate Code §271 are the surviving spouse, minor children, and unmarried adult children remaining with the family, sometimes referred to in the literature as the constituent family members. e. Once The Homestead Passes Free And Clear Of Debt, It Matters Not That It Ceases To Be Used As A Homestead In George v. Taylor, 296 S.W.2d 620 (Tex. Civ. App.-Fort Worth 1956, writ ref'd n.r.e.), the homestead was not liable for the decedent's debts, following the death of his widow. Anyone who inherits the property, receives it free from debts.(180) f. A Constituent Family Member Need Not Be A Beneficiary Of The Decedent's Estate In Order For The Homestead To Pass Free Of Debts Moreover, the homestead passes free of debt if the decedent is survived by a constituent family member, whether or not such family member inherits the homestead! In other words, the property can pass to a nonconstituent family member, free and clear of debt, if the decedent was survived by a constituent family member.(181) Consider that if only an unmarried adult daughter or son was living at home at the date of the decedent's death, the homestead could be partitioned under Probate Code §285(182); nevertheless an unmarried adult daughter or son living at home is within the class of constituent family members which cause the homestead to pass free and clear of debts, so, presumably, the property would pass free and clear in that event even if the decedent left the property to an unrelated third party who immediately took possession following administration.(183) B. EXEMPT PERSONAL PROPERTY-PROBATE ASSETS. 1. ART. 16, §49 OF THE TEXAS CONSTITUTION. Article 16, §49, of the Texas Constitution provides: "§49. Protection of personal property from forced sale "Sec. 49. The Legislature shall have power, and it shall be its duty, to protect by law from forced sale a certain portion of the personal property of all heads of families, and also of unmarried adults, male and female." 2. §42.001 and §42.002 OF THE TEXAS PROPERTY CODE. Pursuant to Article 16, §49, of the Texas Constitution, the Legislature has enacted Texas Property Code §42.001 and §42.002, which read as follows: §42.001 Personal Property Exemption (a) Personal property, as described in Section 42.002, is exempt from garnishment, attachment, execution, or other seizure if: (1) the property is provided for a family and has an aggregate fair market value of not more than $60,000, exclusive of the amount of any liens, security interests, or other charges encumbering the property; or (2) the property is owned by a single adult, who is not a member of a family, and has an aggregate fair market value of not more than $30,000, exclusive of the amount of any liens, security interests, or other charges encumbering the property. (b) The following personal property is exempt from seizure and is not included in the aggregate limitations prescribed by Subsection (a): (1) current wages for personal services, except for the enforcement of court-ordered child support payments; (2) professionally prescribed health aids of a debtor or a dependent of a debtor. (c) This section does not prevent seizure by a secured creditor with a contractual landlord's lien or other security in the property to be seized. (d) Unpaid commissions for personal services not to exceed 25 percent of the aggregate limitations prescribed by Subsection (a) are exempt from seizure and are included in the aggregate. [Acts 1983, 68th Leg., p. 3522, ch. 576, § 1, eff. Jan. 1, 1984. Amended by Acts 1991, 72nd Leg., ch. 175, § 1, eff. May 24, 1991. Section 2 of the 1991 amendatory act provides: The changes in law made by this Act do not apply to property that is, as of the effective date of this Act, subject to a voluntary bankruptcy proceeding or to valid claims of a holder of final judgment who has, by levy, garnishment, or other legal process, obtained rights superior to those that otherwise would be held by a trustee in bankruptcy if a bankruptcy petition were then pending against the debtor. That property is subject to the law as it existed immediately before the effective date of this Act, and the prior law is continued in effect for that purpose.] §42.002 Personal Property (a) The following personal property is exempt under Section 42.001(a): (1) home furnishings, including family heirlooms; (2) provisions for consumption; (3) farming or ranching vehicles and implements; (4) tools, equipment, books, and apparatus, including boats and motor vehicles used in a trade or profession; (5) wearing apparel; (6) jewelry not to exceed 25 percent of the aggregate limitations prescribed by Section 42.001(a); (7) two firearms; (8) athletic and sporting equipment, including bicycles; (9) a two-wheeled, three-wheeled, or four-wheeled motor vehicle for each member of a family or single adult who holds a driver's license or who does not hold a driver's license but who relies on another person to operate the vehicle for the benefit of the nonlicensed person; (10) the following animals and forage on hand for their consumption; (A) two horses, mules, or donkeys and a saddle, blanket, and bridle for each; (B) 12 head of cattle; (C) 60 head of other types of livestock; and (D) 120 fowl; (11) household pets; and (12) the present value of any life insurance policy to the extent that a member of the family of the insured or a dependent of a single insured adult claiming the exemption is a beneficiary of the policy. (b) Personal property, unless precluded from being encumbered by other law, may be encumbered by a security interest under Section 9.203, Business & Commerce Code, or Sections 41 and 42, Certificate of Title Act (Article 6687-1, Vernon's Texas Civil Statutes), or by a lien fixed by other law. [Acts 1983, 68th Leg., P. 3522, ch. 576, § 1, eff. Jan. 1, 1984. Amended by Acts 1991, 72nd Leg., ch. 175, § 1, eff. May 24, 1991. For applicability provision of the 1991 amendatory act, see note following § 42.001.] 3. EXEMPT PROPERTY TO BE SET APART-PROB. CODE §271. All property that is exempt from execution by creditors is required to be set aside for the family immediately after the approval of the inventory, or sooner, if an affidavit of need. 4. EXEMPT PROPERTY TO VESTS IN HEIRS IF ESTATE SOLVENT AND IN FAMILY IF ESTATE IS INSOLVENT-PROB. CODE §§278 AND 279. If, upon final settlement, the estate shall "appear" to be solvent, "the exempted property, except the homestead or any allowance in lieu thereof, shall be subject to partition and distribution among the heirs and distributees of such estate in like manner as the other property of the estate."(184) However, if the estate should "prove" to be insolvent, "the title of the surviving spouse and children to all the property and allowances set apart or paid to them under the provisions of this Code shall be absolute, and shall not be taken for any of the debts of the estate except as hereinafter provided."(185) 5. EXEMPT PROPERTY MAY BE LIABLE FOR CERTAIN DEBTS-PROB. CODE §281. §281 of the Probate Code provides: "§281. Exempt Property Liable for Certain Debts "The exempt property, other than the homestead or any allowance made in lieu thereof, shall be liable for the payment of Class 1 claims [i.e., 'funeral expenses and expenses of last sickness in a reasonable amount not to exceed $15,000, with any excess to be classified as an unsecured claim'], but such property shall not be liable for any other debts of the estate."(186) 6. ALLOWANCE IN LIEU OF EXEMPT PERSONAL PROPERTY-PROB. CODE §273. As indicated above, Probate Code §273 grants a surviving spouse and children an allowance in lieu of exempt property, not to exceed $5000, "In case there should not be among the effects of the deceased all or any of the specific articles exempted from execution or forced sale by the Constitution and laws of this state." The case law appears to make the allowance in lieu of exempt property all but automatic, whether the estate is solvent or not, and whether or not the spouse demonstrates a need for the allowance,(187) in the absence of an election.(188) Thus, the only issue is whether or not $5000 worth of exempt property is missing from the estate, which will usually be the case, for it is hard to imagine a decedent that owned all of the items of personal property enumerated above in Property Code 42.002.(189) Recall that although exempt property is to be set aside for the family, if the estate is solvent the exempt property, "except the homestead or any allowance in lieu thereof," is subject to partition and distribution.(190) However, if the estate is insolvent, "the title of the surviving spouse and children to all the property and [all] allowances shall be absolute, and shall not be taken for any of the debts of the estate."(191) Note that it is only the allowance in lieu of homestead that is specifically mentioned as not being subject to partition in a solvent estate, but that all allowances are specified as being exempt and remaining titled in the family, if the estate is insolvent. Does this imply that if the estate is solvent, the allowance in lieu of homestead may be retained, but the allowance in lieu of other exempt property must be returned? There are no cases that make this distinction, and although the Woodward and Smith treatise discusses the allowance in lieu of exempt property at length --emphasizing the categorical nature of the right-- the authors do not even hint at the existence of an obligation to return the allowance if the estate proves solvent.(192) 7. APPORTIONMENT OF ALLOWANCES BETWEEN SURVIVING SPOUSE AND MINOR CHILDREN-PROB. CODE §275. Allowances in lieu of exempt property are paid solely to the surviving spouse, unless there are children by another parent.(193) If there are children of the deceased who are not the children of the surviving spouse, the surviving spouse receives half of the whole, plus the shares of the children of whom the survivor is the parent, and the remaining shares are paid to the children (or their guardian) of whom the survivor is not the parent.(194) For this purpose, there does not appear to be any distinction in the Probate Code between the allowance in lieu of exempt personal property and the allowance in lieu of homestead, both of which are treated as different species of "allowances in lieu of exempt property." Is the allowance in lieu of exempt property a community debt, like the family allowance? C. FAMILY ALLOWANCE. The surviving spouse and minor children are entitled to an allowance for support sufficient for maintenance for one year from the time of the death of the decedent.(195) §286. Family Allowance to Surviving Spouses and Minors. Immediately after the inventory, appraisement, and list of claims have been approved, the court shall fix a family allowance for the support of the surviving spouse and minor children of the deceased. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Amended by Acts 1979, 66th Leg., p. 38, ch. 24, § 15, eff. Aug. 27, 1979. §287. Amount of Family Allowance. Such allowance shall be of an amount sufficient for the maintenance of such surviving spouse and minor children for one year from the time of the death of the testator or intestate. The allowance shall be fixed with regard to the facts or circumstances then existing and those anticipated to exist during the first year after such death. The allowance may be paid either in a lump sum or in installments, as the court shall order. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Amended by Acts 1979, 66th Leg., p. 38, ch. 24, §16, eff. Aug. 27, 1979. §288. When Family Allowance Not Made. No such allowance shall be made for the surviving spouse when the survivor has separate property adequate to the survivor's maintenance; nor shall such allowance be made for the minor children when they have property in their own right adequate to their maintenance. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. I, 1956. Amended by Acts 1979, 66th Leg., p. 38, ch. 24, § 17, eff. Aug. 27, 1979. §289. Order Fixing Family Allowance. When an allowance has been fixed, an order shall be entered stating the amount thereof, providing how the same shall be payable, and directing the executor or administrator to pay the same in accordance with law. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. §290. Family Allowance Preferred. The family allowance made for the support of the surviving spouse and minor children of the deceased shall be paid in preference to all other debts or charges against the estate, except expenses of the funeral and last sickness of the deceased. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Amended by Acts 1979, 66th Leg., p. 38, ch. 24, § 18, eff. Aug. 27, 1979. §291. To Whom Family Allowance Paid. The executor or administrator shall apportion and pay the family allowance: (a) To the surviving spouse, if there be one, for the use of the survivor and the minor children, if such children be the survivors. (b) If the surviving spouse is not the parent of such minor children, or of some of them, the portion of such allowance necessary for the support of such minor child or children of which the survivor is not the parent shall be paid to the guardian or guardians of such child or children. (c) If there be no surviving spouse, the allowance to the minor child or children shall be paid to the guardian or guardians of such minor child or children. (d) If there be a surviving spouse and no minor child or children, the entire allowance shall be paid to the surviving spouse. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Amended by Acts 1979, 66th Leg., p. 38, ch. 24, § 19, eff. Aug. 27, 1979. §292. May Take Property for Family Allowance. The surviving spouse, or the guardian of the minor children, as the case may be, shall have the right to take in payment of such allowance, or any part thereof, any of the personal property of the estate at its appraised value as shown by the appraisement; provided, however, that property specifically devised or bequeathed to another may be so taken, or may be sold to raise funds for the allowance as hereinafter provided, only if the other available property shall be insufficient to provide the allowance. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Amended by Acts 1979, 66th Leg., p. 39, ch. 24, § 20, eff. Aug. 27, 1979. §293. Sale to Raise Funds for Family Allowance. If there be no personal property of the deceased that the surviving spouse or guardian is willing to take for such allowance, or not a sufficiency of them, and if there be no funds or not sufficient funds in the hands of such executor or administrator to pay such allowance, or any part thereof, then the court, as soon as the inventory, appraisement, and list of claims are returned and approved, shall order a sale of so much of the estate for cash as will be sufficient to raise the amount of such allowance, or a part thereof, as the case requires. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Amended by Acts 1979, 66th Leg., p. 39, ch. 24, § 21, eff. Aug. 27, 1979. 1. AMOUNT OF THE ALLOWANCE. The allowance is to be in an amount sufficient for the maintenance of the surviving spouse and minor children for one year after the decedent's death. The allowance is to be fixed with regard to the facts or circumstances then existing and those anticipated to exist during the first year after death.(196) 2. TO WHOM IS THE ALLOWANCE PAID? The allowance is paid to the surviving spouse for the use of the survivor and the minor children, if the children are the survivor's.(197) If the surviving spouse is not the parent of all of the minor children, the portion of the allowance necessary for the support of the children of which the survivor is not the parent is paid to the guardian of those children.(198) 3. HOW IS THE ALLOWANCE CHARGED? The family allowance is a debt against the estate(199) in the nature of a support obligation.(200) Therefore the obligation is charged against both halves of the community estate first (not just the survivor's half).(201) Because the allowance is a community obligation, the estate is probably only liable for half of the allowance.(202) The decedent's separate property is liable to the extent that the community estate is insufficient.(203) Is the survivor's half of the community charged for the portion of the allowance payable to the minor children of which the survivor is not the parent? 4. CONSIDERATION OF THE SURVIVING SPOUSE'S (AND MINOR CHILDREN'S) OTHER ASSETS. No allowance is to be made if the surviving spouse (and minor children) have separate property sufficient for their maintenance.(204) Because of this requirement, it has been held that, in establishing the allowance, neither community property nor property inherited under the will shall be considered.(205) In all other respects the court has discretion to consider all of the surrounding facts and circumstances.(206) Of particular importance is the survivor's condition in life and accustomed manner of living.(207) What if the survivor has separate property but the minor children do not? Apparently, an allowance is to be made for the children and not the spouse, and it would paid to the survivor to be used solely for the children's benefit.(208) 5. WHEN IS THE ALLOWANCE DUE. The family allowance is ordinarily to be paid immediately after the inventory, appraisement, and list of claims have been approved by the court.(209) However, a recent amendment to the Probate Code provides: Before the approval of the inventory, appraisement, and list of claims, a surviving spouse or any person who is authorized to act on behalf of minor children of the deceased may apply to the court to have the court fix the family allowance by filing an application and a verified affidavit describing the amount necessary for the maintenance of the surviving spouse and minor children for one year after the date of the death of the decedent and describing the spouse's separate property and any property that the minor children have in their own right. The applicant bears the burden of proof by a preponderance of the evidence at any hearing on the application. The court shall fix a family allowance for the support of the surviving spouse and minor children of the deceased.(210) 6. APPLICATION TO INDEPENDENT ADMINISTRATIONS. Although the statute says that "the court shall fix a family allowance,"(211) the family allowance is a claim against the estate, and as such, is to be set, at least initially, by the independent executor,(212) free from court control, in those cases where an independent administration is pending: An independent executor, in his administration of an estate, although free from the control of the court, shall nevertheless, independently of and without application to, or any action in or by the court . . . set aside and deliver to those entitled thereto exempt property and allowances for support, and in lieu of homestead, as prescribed in this Code, to the same extent and result as if his actions had been accomplished in and under orders of, the court.(213) Presumably, Probate Code §146 operates in cases where §286(b) otherwise allows the spouse to "apply to the court to have the court fix the family allowance" prior to the approval of the inventory. If so, the application by the spouse should be made to the independent executor rather than the court. If the independent executor refuses to set the allowance, or if the surviving spouse is dissatisfied with the size of the allowance set, then the spouse may prosecute a claim against the estate in the manner of any other dissatisfied creditor.(214) 7. THE ELECTION ISSUE. The election issue is ubiquitous. It exists with respect to all of the various statutory rights that to which the survivor is otherwise entitled. As was the case with the homestead, if the widower claims allowances that are inconsistent with a gift under the Will, he will be put to an election.(215) However, the more recent decisions are cautious in applying this doctrine and will not infer an election requirement unless the will is very explicit.(216) 8. PAYMENT, CLASSIFICATION AND PRIORITY. The family allowance is to be paid in preference to all other debts or charges against the estate, except expenses of the funeral and last sickness of the deceased.(217) However, it may be inferior to claims by the federal government. In general, claims of the United States are given superior priority over all other "debts".(218) The family allowance is not, strictly speaking, a "debt", and the 1977 8th Circuit decision of Schwartz v. Commissioner,(219) indicates that such allowances are not subject to the superior priority of United States claims. This issue has yet to be squarely determined and there is contrary authority.(220) D. EXEMPT PROPERTY-NON-PROBATE ASSETS. An interesting question is the extent to which creditors can reach non-probate assets. Just because an asset is a non-probate asset does not mean that it is automatically exempt from the decedent's debts, but in many instances this may be the result. Recall that there is at least one significant species of property that is a probate asset in the sense that it is subject to testamentary disposition, and yet is not subject to administration without the consent of the surviving spouse, viz., the decedent's interest in the surviving spouse's special community estate. In this context it is important to remember that with respect to certain community debts, the survivor may be jointly liable with the decedent. 1. LIFE INSURANCE. a. General Creditors Under The Common Law Exemption. Death benefit proceeds under a life insurance policy have historically been held to be beyond the reach of the decedent's creditors unless paid to the estate, or unless there was an intent to defraud creditors (whatever that means).(221) The theory was that when the beneficiary is designated, the decedent has made a revocable gift which becomes irrevocable at death. Whether or not the transfer is in fraud on creditors was, therefore, generally to be made at the time the beneficiary is designated. If the decedent was insolvent at the time of the beneficiary designation, the fraudulent transfer rules were likely to operate to prevent the exemption. b. Estate Taxes. Unless the decedent directs otherwise in his will, the executor is entitled to recover from the beneficiary of life insurance proceeds, the pro rata share of Federal estate taxes attributable to such proceeds. Internal Revenue Code §2206. A similar rule applies under Internal Revenue Code §2207 with respect to property over which the decedent had a power of appointment under §2041. (Interestingly, there is no corresponding provision for property includable in the decedent's Federal gross estate (for Federal estate tax purposes) by virtue of a retained power under §2036.) Texas now has an apportionment statute (Prob. Code §322A), which may serve as enabling legislation giving the executor the power under State law to enforce Internal Revenue Code §§2206 and 2207. c. Article 21.22 Of The Texas Insurance Code. This exemption described above has been incorporated in a much expanded form into the insurance code. The first broad exemption was added in 1987, but the courts limited its application. In 1991 the statute was amended again. The statute was further amended in 1993 to include individual annuities. The 1993 amendments are indicated in italics below. The pertinent provisions of the statute are set forth verbatim below: Art. 21.22. Unlimited Exemption of Insurance Benefits and Certain Annuity Proceeds From Seizure Under Process Sec. 1 Notwithstanding any provision of this code other than this article, all money or benefits of any kind, including policy proceeds and cash values, to be paid or rendered to the insured or any beneficiary under any policy of insurance or annuity contract issued by a life, health or accident insurance company, including mutual and fraternal insurance, or under any plan or program of annuities and benefits in use by any employer or individual, shall: (1) inure exclusively to the benefit of the person for whose use and benefit the insurance or annuity is designated in the policy or contract; (2) be fully exempt from execution, attachment, garnishment or other process; (3) be fully exempt from being seized, taken or appropriated or applied by any legal or equitable process or operation of law to pay any debt or liability of the insured or of any beneficiary, either before or after said money or benefits is or are paid or rendered, and (4) be fully exempt from all demands in any bankruptcy proceeding of the insured or beneficiary. Sec. 2 The exemptions provided by Section 1 of this article apply without regard to whether: (1) the power to change the beneficiary is reserved to the insured; or (2) the insured or the insured's estate is a contingent beneficiary. Sec. 3 The exemptions provided by Section 1 of this article do not apply to: (1) premium payments made in fraud of creditors subject to the applicable statute of limitations for the recovery of the premium payments; or (2) a debt of the insured or beneficiary secured by a pledge of the policy or its proceeds. Sec. 4 This article does not prevent the proper assignment of any money or benefits to be paid or rendered under an insurance policy or annuity contract to which this article applies, or any rights under the policy or contract, by the insured, owner, or annuitant in accordance with the terms of the policy or contract. Sec. 5 Wherever any policy of insurance, annuity contract, or plan or program of annuities and benefits mentioned in Section 1 of this article shall contain a provision against assignment or commutation by any beneficiary thereunder of the money or benefits to be paid or rendered thereunder, or any rights therein, any assignment or commutation or any attempted assignment or commutation by such beneficiary of such money or benefits or rights in violation of such provision shall be wholly void. [Emphasis added.] Sec. 6 For purposes of regulation under this code, an annuity contract issued by a life, health, or accident insurance company, including a mutual company or fraternal company, or under any plan or program of annuities or benefits in use by an employer or individual, shall be considered a policy or contract of insurance. d. Limitations on Application of Statute. It seems clear that the legislature intended by the amendment for the exemption to extend to the cash value of life insurance without a dollar limitation, in response to a case that had held that the prior version of the statute was limited by the overall exemption dollar limitation for personal property found in Property Code §42.001(a)(1). However, this question is still not free from doubt. Article 21.22 was amended in 1991. When Section 1 was added in 1987 there was doubt as to whether it would be literally construed. At least one bankruptcy case held that Section 1 of Article 21.22 was limited by Property Code §42.001 which limits the exemption for personal property to $60,000 in the case of a family and $30,000 in the case of a single individual.(222) The 1991 amendment added the phrase "Notwithstanding any provision of this code other than this article" to the first sentence of section 1. My interpretation of this article is that it should not be read literally without limitation; however, in the context where the statute is found, the "code" is the Insurance Code and not the Property Code. Therefore, it is possible that contrary to the apparent intent of the legislature, a court may once again seek to limit the application of the statute. The Texas Attorney General considered this issue in Opinion No. DM-125, and concluded that "the total exemption provided for the cash value of a life insurance policy in article 21.22, section 1 of the Insurance Code to prevail over the limited exemption provided in sections 42.001 and 42.002 of the Property Code. Life insurance proceeds and cash values thus are wholly exempt from seizure under process." A 1993 bankruptcy case recognized that there is no limitation on the amount of life insurance exempted under 21.22, but held that any exemption claimed under 21.22 will reduce the amount available under the personal property exemption found in the Property Code, which is limited to $60,000.(223) Note further that this exemption arguably does not apply to the owner as such, unless the owner is also the insured or a beneficiary. The exemption applies to "policy proceeds and cash values, to be paid or rendered to the insured or any beneficiary." Cf. In re Gould (Gould v. Phillips, 457 F.2d 393 (5th Cir. 1972); Bartholow v. Garner, 43 Bankr. 463 (N.D. Tex. 1984). Private annuities were made exempt under the statute in 1993. The exemption for annuities was recognized by the 5th Circuit in a 1994 decision Walden v. McGinnes (5th Cir. 1994) Case No. 93-8207. Query: What is an annuity? Traditionally an annuity was thought of as the opposite of a life insurance contract. Under the terms of a true, traditional life contingency only annuity, the annuitant received annuity payments at regular fixed intervals and in fixed amounts. On the death of the annuitant the annuity payments ceased. If the annuitant outlives his life expectancy, the annuitant wins; if the annuitant does not outlive his life expectancy, the annuity company wins: the opposite of life insurance. A common variation on the traditional theme is to put a term certain feature in the contract, thereby limiting the risk of premature death to the annuitant. There is a price for this--the periodic payments will be reduced somewhat to reflect this additional obligation of the annuity company. An annuity contract for the life of the participant or for ten years, whichever is longer, is a common annuity feature. Modern annuity contracts, like life insurance contracts, are beginning to look more an more like investment contracts, little different from an investment in a mutual fund, in the case of certain variable contracts. The IRS has struggled with this issue for years, and periodically Congress responds with legislation such as that we have seen in recent years under TEFRA and TRA '86 where restrictions have been placed on single premium deferred contracts, modified endowment contracts and the like. The question posed here is when is a contract that is defined as an "annuity" or "life insurance" under the contract what it purports to be under Art. 21.22. Perhaps the question could favorably be resolved by asking whether the contract is subject to regulation under the Insurance Code, which it probably is, in which case it ought to benefit from the exemption described by the Code. 2. MULTIPLE PARTY ACCOUNTS. The creditor can reach non-probate assets owned by the decedent in a multiple party account only if other probate assets are insufficient to pay the decedent's debts.(224) 3. IRAs. Prior to the passage of Tex. Prop. Code §42.0021, effective September 1, 1987, a general creditor probably could reach assets held in an IRA, both during the decedent's lifetime and after death. The prohibition on alienation found in ERISA §206(d) and its IRC counterpart, §401(a)(13), does not apply to IRAs. However, at death, the analogy to life insurance would seem to have been apt. Effective September 1, 1987, an IRA account was added to the list of items constituting property exempt from execution from creditors under State law.(225) For a Texas case holding that IRA proceeds are not probate assets and do not belong to the estate beneficiaries in the absence of fraud, see Ashmore v. Carter, 716 S.W.2d 171 (Tex. App.-Beaumont 1986, no writ). Of course the problem in Texas continues to be what happens to the nonparticipant spouse's community property interest in the IRA when it is the nonparticipant spouse that dies first. If this interest passes under the nonparticipant spouse's will as a probate asset, it is somewhat ironic that if the participant had died it would have been a nonprobate asset. Perhaps, however, the irony is no different than when the noninsured spouse dies owning a community property interest in a life insurance policy standing in the name of the survivor. 4. QUALIFIED PLAN ASSETS. ERISA §206(d) and Internal Revenue Code §401(a)(13) require that a qualified plan, as a condition of qualification, contain a prohibition against alienation. With the exception of bankruptcy, the courts have generally held qualified plan assets to be generally exempt from execution by creditors.(226) Bankruptcy was thought for a while to be an exception to the rule, unless the trust would constitute a spendthrift trust under local law.(227) However, the United States Supreme Court has settled this issue in favor of the debtor. In Patterson v. Shumate the Court held that the antialienation provision of ERISA is applicable nonbankruptcy law under §541(c)(2) of the Bankruptcy Code, and therefore, assets in a qualified plan are exempt even in bankruptcy.(228) The decision affects Texas plan participants, because even though Texas residents have the benefit of a state exemption for qualified plan benefits,(229) it had been argued (so far unsuccessfully) that this exemption was preempted under ERISA §514(a) because it "relates" to an employee benefit plan.(230) However, this issue may have been mostly irrelevant to a decedent's estate (unless the decedent was in bankruptcy at the date of his death) because an estate is not subject to the Bankruptcy laws!(231) 5. EMPLOYEE DEATH BENEFITS. Property Code §§121.051 and 121.055 exempts certain employer sponsored death benefits, including nonqualified salary continuation arrangements, from execution by creditors. 6. JOINT TENANCY WITH RIGHT OF SURVIVORSHIP. It may be the case that upon the death of one joint tenant, the other joint tenant takes the property free and clear of the claims of the deceased joint tenant. A. COMMUNITY AND SEPARATE PROPERTY IN A NUTSHELL. Property owned or claimed prior to marriage is separate property. Property acquired during marriage by gift or inheritance is separate property. The recovery for personal injuries sustained during marriage, except any recovery for loss of earning capacity during marriage, is also separate property.(232) All other property acquired during marriage by either spouse is generally community property, including the income from separate property,(233) except as may have been provided by a marital property agreement. If one spouse makes a gift of property to the other, the gift is presumed to include all the income and property which may arise from that property.(234) If separate property is sold or exchanged, the property received is still separate property, but only if it can be traced. Community property is property, other than separate property, that is acquired by either spouse during marriage. All property is presumed to be community property unless it can be proven not to be by clear and convincing evidence.(235) Separate property cannot ordinarily be converted into community property by agreement or otherwise; however, because of the community property presumption, separate property may be presumed to be community property in the absence of clear and convincing evidence to the contrary. The character of property acquired in another state, while the owner is domiciled in that state, will generally be determined by the laws of that state. However, if the property would have been community if acquired in Texas, the property is capable of division on divorce as if it were community property.(236) For this reason such property is sometimes referred to as quasi-community property. Although quasi-community property is divisible upon divorce, for most other purposes it will be treated according to its actual characterization. Thus, the concept has no application at death.(237) Because of the anomalous difference between the probate and divorce treatment of quasi-community property, there have been indications that the legislature may change the probate rule to make it more consistent with the divorce laws. During marriage, each spouse has the sole management, control, and disposition of the community property that he or she would have owned if single, including but not limited to personal earnings, revenue from separate property, recoveries for personal injuries and the increase and mutations of, and the revenue from, all property subject to his or her sole management, control, and disposition.(238) This is called sole management community property, and is also sometimes referred to as the special community of the controlling spouse. A spouse may make gifts to third parties out of his or her special community, without the consent of the other spouse, within reason. However, if, by reason of the size of the gift in relation to the total size of the community estate, the adequacy of the estate to support the other spouse, and the relationship of the donor to the donee, the gift constitutes constructive fraud, the burden will be on the donor to prove that the gifts of his share of the community property are fair, otherwise the gift will be set aside.(239) If one spouse makes a gift to a third person of community property, and the other spouse either cannot or does not set the gift aside under state law, the IRS will treat the non-donor spouse as having made a gift for gift tax purposes.(240) The characterization of borrowed money and property purchased on credit as either community or separate may depend on the characterization of the collateral used to secure the loan if any, or upon whether the creditor has agreed to look only to the separate property of the debtor for satisfaction of the debt. A debt contracted during marriage is rebuttably presumed to be against the credit of the community and money or other property thereby acquired would therefore probably be community property, unless the creditor agreed to look solely to the separate property of the debtor. Property which is community or separate at the time title is acquired, usually remains separate or community under a doctrine known as the "inception of title rule." Many of the rules described in this Outline may be altered by a valid Marital Property Agreement. For example, the Texas Constitution and the Texas Family Code allow spouses to partition and exchange community property, thereby converting it into separate property, and to agree that the income from any of their separate property, then owned or to be acquired, shall be the separate property of the owner.(241) However, by changing the form of property ownership a spouse may be increasing her exposure to creditor claims. For instance, a tort creditor could satisfy a claim against a spouse out of both halves of the community property. If the property is divided, it may be that the property given away or transferred is not available for this purpose. This could definitely work to a spouse's disadvantage because it could force the spouse into bankruptcy when this otherwise might have been avoided, or at a minimum, it could mean that after satisfying all claims, a spouse may have less disposable property remaining than if the partition had not been made. This is a major disadvantage of a partition. When property is sold, the difference between the sales price and the seller's basis is subject to capital gains tax if the property is sold for a profit. Basis is ordinarily equal to the original purchase price, adjusted for depreciation and capital improvements, perhaps. However, at death, the decedent's basis is increased or decreased to the fair market value of the property at date of death. An interesting feature of community property is that both halves of the property get a new basis at the death of either party to the marriage. The partition of community property into separate property will therefore cause the loss of a step-up in income tax basis of the surviving spouse's separate property ownership interest in partitioned property upon the death of the other spouse if the property interest has appreciated in value. A divorce court can make an unequal division of community property if it finds such an unequal division to be "just and right" under the circumstances. However, a court's power to award the separate property of one spouse to the other spouse is extremely limited or nonexistent, outside of a spousal support order, except in the case of quasi-community property. B. ADMINISTRATION OF MARITAL PROPERTY AFTER DEATH. Not all of the community property is automatically subject to the control of the executor. A spouse's special community is not subject to administration, unless the spouse files a written instrument with the clerk, waiving the right to exercise powers as community survivor.(242) It may, therefore, develop that there is a bone of contention as between the executor and the surviving spouse as to which of the decedent's assets are liable for certain community debts, particularly if Probate Code §§45 and 156 change the lifetime rules of marital property liability. If both halves of the community will be liable for the decedent's debts and taxes, the executor may be entitled to contribution and reimbursement from the surviving spouse. This may be difficult if the surviving spouse has control over most of the community property. Consider what happens if the non income producing spouse dies, and all of the community property assets are in the name of the income producing survivor. C. MANAGEMENT CONTROL AND DISPOSITION OF MARITAL PROPERTY DURING LIFE-FAMILY CODE §5.21-27. The issue of whether or not the decedent had sole or joint management over the community property during life is important, because the executor does not have the power to administer the special community property of the survivor. See above. It is also important because the liability of the community property is in part determined by who controls it. See below. During marriage, each spouse has the sole management, control, and disposition of the community property that he or she would have owned if single, including but not limited to personal earnings, revenue from separate property, recoveries for personal injuries and the increase and mutations of, and the revenue from, all property subject to his or her sole management, control, and disposition.(243) This is called sole management community property, and is also sometimes referred to as the special community of the controlling spouse. If the spouses mix their special community, the mixed property will be subject to joint control, "unless the spouses provide otherwise by power of attorney in writing or other agreement."(244) Similarly, unless the property is special community, the property will be joint management property, "unless the spouses provide otherwise by power of attorney in writing or other agreement."(245) §3.102(c) of the Family Code provides: (c) Except as provided in Subsection (a) [the section defining what is sole management community property], the community property is subject to the joint management, control, and disposition of the husband and wife, unless the spouses provide otherwise by power of attorney in writing or other agreement. [Emphasis added.] I believe that the italicized clause modifies the entire sentence, not just the immediately preceding clause, and that a husband and wife may agree that what would otherwise be the sole management community property of one spouse or the joint management property of both, is to be the sole management community property of either. The cases establish not only that spouses may alter the management rights in community property by oral agreement, but that the rules of marital property liability will be applied in accordance with the agreement.(246) As a general rule, neither spouse may transfer or encumber joint community property without the agreement of the other.(247) There are cases to the contrary, however, discussed below. Assuming the spouses agree, can one spouse's special community be made subject to the sole control and management of the other spouse? Must the property be "mixed" first? Apparently spouses may simply agree, either orally or in writing, that any community property will be subject to the sole control and management of one spouse or the other,(248) in which event, it follows that the such property will ordinarily not be subject to the nontortious debts of the noncontrolling spouse.(249) Third parties are, however, entitled to rely upon certain presumptions as to who has control and management. "During marriage, property is presumed to be subject to the sole management, control, and disposition of a spouse if it is held in his or her name, as shown by muniment, contract, deposit of funds, or other evidence of ownership, or if it is in his or her possession and is not subject to such evidence of ownership."(250) A third party is entitled to rely on the presumption in the absence of fraud or actual or constructive notice to the contrary.(251) D. LIABILITY OF MARITAL PROPERTY DURING LIFE-IN A NUTSHELL. The rules of marital property liability can be briefly summarized as follows: A person is personally liable for the acts of the person's spouse only if the spouse acts as an agent for the other spouse, or the spouse incurs a debt for necessaries under the duty of support described in Family Code §4.02.(252) Except as provided by §5.61 of the Family Code, community property is not subject to a liability that arises from an act of a spouse.(253) A spouse does not act as agent for the other spouse solely because of the marriage relationship.(254) A spouse's separate property is not subject to liabilities of the other spouse unless both spouses are personally liable "by other rules of law."(255) The spouse's separate property and special community property may be liable under Family Code §4.031 for necessaries or if the spouse is acting as agent for the other.(256) Each spouse owes a duty of support to the other spouse and to his or her minor children.(257) Unless both spouses are liable under Family Code §4.031 (for necessaries or as agent), the community property subject to a spouse's sole management, control and disposition (the spouse's "special community") is not subject to any liabilities of the other spouse incurred before marriage, nor for any nontortious liabilities that the other spouse incurs during marriage.(258) The community property subject to a spouse's sole or joint management, control and disposition is liable for that spouse's liabilities, whether incurred before or during the marriage.(259) All community property is liable for torts committed during marriage by either spouse.(260) A spouse's separate property is basically liable to the same extent as a spouse's special community, except with respect to torts committed by the other spouse. A spouse's special community is liable for the torts of the other spouse. A spouse's separate property is not liable for the torts of the other spouse. Assuming the spouses agree, can one spouse's special community be made subject to the sole control and management of the other spouse? Must the property be "mixed" first? Apparently spouses may simply agree, either orally or in writing, that any community property will be subject to the sole control and management of one spouse or the other,(261) in which event, it follows that such property will ordinarily not be subject to the nontortious debts of the noncontrolling spouse.(262) Third parties are, however, entitled to rely upon certain presumptions as to who has control and management. "During marriage, property is presumed to be subject to the sole management, control, and disposition of a spouse if it is held in his or her name, as shown by muniment, contract, deposit of funds, or other evidence of ownership, or if it is in his or her possession and is not subject to such evidence of ownership."(263) A third party is entitled to rely on the presumption in the absence of fraud or actual or constructive notice to the contrary.(264) E. LIABILITY OF MARITAL PROPERTY AFTER DEATH. Probate Code §§45 and 156 appear to impose liability on a decedent's interest in community property at death, whether or not such property was subject to the decedent's management and control during lifetime. If so, then in some instances death may change the lifetime liability rules contained in Family Code §5.61(b), which, during the life of both spouses, protects a spouse's special community from nontortious liabilities that the other spouse incurs during marriage. The last sentence of Probate Code §45 provides: "In every case, the community estate passes charged with the debts against it." Probate Code §156 states in part: The community property subject to the sole or joint management, control, and disposition of a spouse during marriage continues to be subject to the liabilities of that spouse upon death. In addition, the interest that the deceased spouse owned in any other nonexempt community property passes to his or her heirs or devisees charged with the debts which were enforceable against such deceased spouse prior to his or her death. [Emphasis added.] It could be argued that the interest that the deceased spouse owned in any other nonexempt community property (i.e., the special community of the survivor) is charged only with the debts which, as to that property, "were enforceable against such deceased spouse prior to his or her death." But this seems to me to be stretching the language of the statute to the breaking point in order to achieve a more reasonable interpretation. However, such a reading has a great deal of merit in that it would be much more consistent with the rules of liability set forth in the Family Code and would avoid the anomaly of having to apply different rules of marital property liability. It also resolves much of the need for administering the special community of the survivor, since in the ordinary case the decedent's debts will be nontortious and the survivor's special community will not be liable for them.(265) It does not resolve the issue of how to pay estate taxes, but here, the Texas apportionment statute, Prob. Code §322A, may be of assistance. In case most of the community is under the sole control of the survivor, the executor may be entitled to contribution and reimbursement. Care should be taken in drafting wills to avoid the argument that a "pay all debts clause" was intended to operate as a gift to the surviving spouse, such that reimbursement or contribution would not be applicable. The most common example of a situation where the surviving spouse may be personally liable for the decedent's contractual debts, is where the debts were for necessaries.(266) It is perhaps worth remembering that if a creditor somehow fails to perfect his claim against the estate, he may still proceed against the surviving spouse, if any, if the claim is a community debt for which the spouse is liable under other rules of law.(267) F. UNILATERAL TRANSFER OF JOINT MANAGEMENT COMMUNITY PROPERTY DURING LIFE. Unless otherwise agreed, transactions affecting joint management community property require the joinder of both spouses.(268) The Texas Supreme Court has not yet determined whether one spouse can assign his or her own undivided one-half interest in joint community property without the joinder of the other spouse. The view most consistent with the overall statutory scheme would void such a unilateral attempt as an attempt to unilaterally partition; partitions require the joinder of both spouses. The courts of appeals are divided.(269) A. IS THE DECEDENT'S PROPERTY SUBJECT TO A STATUTORY LIEN FOR UNSECURED DEBTS? A person vested with property under the terms of a probated will or by virtue of the laws of intestacy, generally takes the property "subject . . . to the payment of the debts of the testator or intestate".(270) It is generally the case that if an administration has been opened, a bona fide purchaser from the estate will be protected from the claims of the decedent's creditors. However, if a purchaser is purchasing from an heir or devisee, the statutory lien must be considered. The purchaser may want to ask, has enough time passed so that, even if a creditor or a will turns up, the statute of limitations will bar a subsequent claim against the property? If an alternative to a regular dependent or independent administration is employed, the third party purchaser will want to inquire as to the measure of protection from the statutory lien that such procedure affords. B. IMPORTANCE OF THE FOUR YEAR RULES. An application for letters testamentary or of administration will not be granted unless filed within four years after the death of the testator or intestate.(271) (There appears to be an exception if the administration is necessary in order to receive or recover funds or other property due to the estate of the decedent.(272)) This rule may be of consequence to the secured creditor who is concerned about a foreclosure being set aside upon a subsequent administration. Therefore, if four years have elapsed from the date of death, secured parties and purchasers and foreclosure purchasers will have a certain measure of protection. C. PROBATE OF WILL AS MUNIMENT OF TITLE. In order for a will to be probated as a muniment of title, the proponent must show that there are no debts other than secured debts against real estate.(273) Can the third party purchaser rely upon this, as against the claim of the statutory lien holder? Tex. Prob. Code §89 explicitly provides, in the third paragraph, that the order admitting the will to probate as a Muniment of Title constitutes sufficient legal authority for persons owing money to the estate or having custody of estate property to pay or transfer it to the persons described in the will, and to persons purchasing from or otherwise dealing with the estate, to pay or transfer or receive the property without administration, but does the Order also constitute a judicial finding that there are no unsecured debts, sufficient to give BFP status to a purchaser in good faith? It would seem that it should. D. ORDER OF NO NECESSITY OF ADMINISTRATION. TEX. PROB. CODE §180. This is the intestate counterpart to the Muniment of Title procedure. It appears to be aimed at an intestate situation because it refers to an application for letters of administration and not letters testamentary. §180 essentially calls for the applicant to apply for letters of administration, but to cause the application to be defective, by affirmatively showing that there is no necessity for administration; for example, by showing that there are no debts owing by the estate. The court will then enter an order refusing the application and shall recite in the order that there exists no necessity for administration. The order shall constitute sufficient legal authority to all persons owing money, having custody of property, or acting as transfer agent, of any interest, indebtedness or property belonging to the estate, and for persons purchasing or otherwise dealing with the estate, for payment or transfer to the distributees. Does the order offer protection against the statutory lien for debts? The order should not be granted if there are debts outstanding, and the statute on its face indicates that purchasers are to be protected; therefore, it would seem that purchasers relying upon the order should be afforded BFP status. Note the similarity between the protection granted under §180 and the protection granted third parties by §89 under the Muniment of Title procedure. E. STATUTORY SMALL ESTATE PROCEEDINGS. 1. COLLECTION OF SMALL ESTATE BY AFFIDAVIT. TEX. PROB. CODE §137-138. The distributees of an estate shall be immediately entitled to the assets of the estate to the extent they exceed the known liabilities, without awaiting the appointment of a personal representative, provided no petition for the appointment of a personal representative is pending or has been granted and the value of the entire assets of the estate, not including homestead and exempt property, does not exceed $50,000.(274) An affidavit, sworn to by two disinterested witnesses and the distributees, is then filed with the clerk. The affidavit must list all known assets and liabilities of the estate, the names and addresses of the distributees, and their right to receive the property of the estate. The affidavit must be approved by the judge.(275) The principal effect of the affidavit is that person making payment, delivery, transfer or issuance pursuant to the affidavit shall be released to the same extent as if made to a personal representative and he is not required to see to the application of the property or to inquire into the truth of any statement in the affidavit.(276) It is clear, however, that the distributees will be liable to creditors or anyone else having a prior right, and shall be liable for any damages arising out of reliance on the affidavit. With the exception of the homestead under certain circumstances, §137 does not vest title. Tex. Prob. Code §137(b) provides: "This section does not affect the disposition of property under the terms of a will or other testamentary document nor, except as provided in Subsection (c) of this section, does it transfer title to real property." §137(c) now provides for the transference of the homestead to certain bona fide purchasers, if certain conditions are first met. Except for the homestead, which is a special case, Section 137 may protect persons transferring property to the heirs, but it does not protect persons purchasing property from the heirs. 2. ORDER OF NO ADMINISTRATION. TEX. PROB. CODE §§139-142. If the value of the entire assets of an estate, not including homestead and exempt property, does not exceed the amount to which the surviving spouse and minor children are entitled as a family allowance, and if an administration has not been opened, then the spouse or children may request the court to make a family allowance and to enter an order that no administration shall be necessary. The family allowance is the amount necessary to maintain the spouse and children for one year.(277) The order that no administration be had on the estate shall constitute sufficient legal authority to all persons owing money or having possession of estate property, or acting as transfer agent, and persons dealing with the estate, for payment or transfer to the persons described in the order.(278) Does this also protect the transferees from the decedent's statutory lien creditors? It ought to, since it constitutes a judicial finding that the property is exempt. (In order to be protected against takers under a subsequently discovered will, however, a Muniment of Title proceeding would appear to be in order.) 3. SUMMARY PROCEEDINGS FOR SMALL ESTATES AFTER PERSONAL REPRESENTATIVE APPOINTED. TEX. PROB. CODE §143. When a personal representative has already been appointed, Tex. Prob. Code §143 provides for a summary procedure for closing the estate, under much the same circumstances and with much the same effect as in the case of the order of no administration under Tex. Prob. Code §139. When the estate, exclusive of homestead, exempt property and family allowance, does not exceed the amount necessary to pay the remaining claims (classes one through four), the representative may apply for an order to pay the claims to the extent permitted by the assets subject to the claims, and thereafter present an account for final settlement, whereupon the court is to decree final distribution, discharge the representative, and close the administration. This is an effective way to close an insolvent estate, and should afford subsequent protection against the decedent's creditors. It applies in both testate and intestate estates, and will be effective where the value of the estate (not including homestead and exempt property and before reduction for valid claims) exceeds the family allowance, a circumstance which would not permit the use of the order of no administration. F. PROCEEDINGS TO DECLARE HEIRSHIP. TEX. PROB. CODE §§48-56. When a person dies intestate owning property in Texas and there has been no administration or where an administration or will fails to dispose of all of the decedents property the court may declare who are the heirs and their respective shares of the estate in a proceeding to declare heirship.(279) The declaration need not take place within four years of death, but if it does, the proceeding may be combined with an order of no necessity for administration. Tex. Prob. Code §48(b). If it the order recites that there is no necessity for administration it should protect against the statutory lien. §55(c) explicitly provides that if the judgment states that there is no necessity for administration, this recital shall constitute authorization to all persons owing money or having custody of property belonging to the decedent, or acting as transfer agent, and to persons dealing with the heirs, to pay, deliver or transfer to or purchase property from the heirs, without liability to any creditor. Furthermore, whether or not the judgment is later modified or set aside, it shall be conclusive in any suit between an heir omitted from the judgment and a bona fide purchaser for value. Any person who has delivered funds or property of the decedent to the persons declared to be heirs in the judgment, or who has in good faith entered into any other transaction with them after the judgment, shall be similarly protected. Tex. Prob. Code §56 provides that a certified copy of the judgment can be filed for record in any county in which any of the real property described in the judgment is located, and shall constitute constructive notice of the facts set forth. G. PREVENTING ADMINISTRATION BY CREDITORS. TEX. PROB. CODE §80. There may be an occasion where the heirs seek to thwart the opening of an administration by a creditor. This can easily be accomplished by either paying the debt, proving to the satisfaction of the court that the debt is invalid, or by posting a bond in an amount double in value to the claim. Apportionment of estate taxes and the order in which gifts abate are two crucial concerns to the insolvent or potentially insolvent estate. Why is apportionment of concern, since in order to be subject to estate tax, the estate must be fairly large? The answer is that the probate estate may be small compared with nonprobate estate, and yet the non probate assets are still includible in the estate for estate tax purposes. Until recently, no Texas statutes directly governed the order of abatement or estate tax apportionment. This has been changed by the enactment of new Probate Code §§322A and 322B. A. ESTATE TAX APPORTIONMENT. 1. APPORTIONMENT UNDER FEDERAL LAW. The Internal Revenue Code has a number of sections in the 2200 series that entitle the decedent's representative to recover from persons receiving nonprobate assets estate taxes paid with respect to those assets. In most the tax is averaged, but in the case of §2044 property in which the decedent had a qualified income interest for life (QTIP), the recovery is at the margin. §2206 allows the executor to recover a prorata share of estate taxes from the beneficiary of life insurance includable in the decedent's gross estate by reason of §2042. §2207 allows the executor to recover a prorata share of estate taxes from the beneficiary of property over which the decedent had a §2041 general power of appointment, unless the decedent directs otherwise in his will. This statute will not apply to property includible in the decedent's estate under Code §2036 (certain transfers with a retained interest), in a situation where if §2036 didn't apply, §2041 would.(280) §2207A gives the estate the right to recover estate taxes paid as a result of the inclusion of §2044 property (QTIP). Unlike the other recovery statutes, §2207A allows for recovery at the highest margin. §2207 does not address the situation where the decedent retained an interest under §§2036-2038 because such a transfer was under the decedent's control when he made it. §2207B now covers this situation. 2. APPORTIONMENT UNDER STATE LAW. New Texas Probate Code §322A provides a comprehensive estate tax apportionment statute affecting Texas decedent's estates. In the absence of a contrary direction in the decedent's will,(281) the personal representative is directed to charge each person interested in the estate a portion of the estate tax assessed against the estate. The portion of the total estate tax that is charged to each person interested in the estate must represent the same ratio as the taxable value of that person's interest in the estate bears to the total taxable value of the interests of all persons interested in the estate. This ratio of the taxable value of the recipient's interest to the taxable value of all recipient's is certainly intended to cover all of the tax; however, there is some question as to the proper size of the denominator. The taxable value of the interests of all persons interested in the estate ought to exclude marital and charitable deduction property and property subject or subjected to a charge for debts and expenses. Whether the statute literally describes this intended reduction is an interesting question. Expenses incurred in connection with the determination or collection of estate taxes are likewise apportionable. The executor is charged with the duty to make recovery unless the cost would be economically impractical. No estate tax is charged to a gift qualifying for the marital or charitable deduction, nor is a charge made against a temporary interest such as a life estate or a term for years. Probate Code §322A is not confined to probate assets, but allows recovery against any person interested in the decedent's estate, including anyone who is entitled to receive property included in the decedent's taxable estate. Probate Code §322A(b)(2) allows the decedent to direct in the non-testamentary instrument whether or not the assets therein described will escape apportionment, but if the issue is not addressed, either in the will or other instrument, the general apportionment rules will apparently apply. (Under some circumstances, this may have the effect of allowing the settlor to amend an otherwise irrevocable unamendable trust.) Note that §322A(b)(2) (last sentence) provides that "A direction for the apportionment or nonapportionment of estate tax, whether contained in a will or in a nontestamentary instrument, is limited to the estate tax on the property passing under the instrument that contains the direction unless the instrument provides otherwise." Language in a will stating that all taxes shall be paid from the residuary estate (without more) should not be sufficient to override the rule requiring apportionment of nonprobate assets under §322A. The new statute is effective for estates of persons who die after September 1, 1987. An estate of a person who dies prior to that date is governed by prior law. The law in Texas, prior to the enactment of Code §322A was somewhat uncertain. It is thought that the residuary estate would ordinarily be the primary source for payment of debts and expenses, including estate taxes, absent a contrary direction in the will, although inheritance taxes may have been apportionable.(282) B. ABATEMENT, EXONERATION, AND CLASSIFICATION OF BEQUESTS. Debts and expenses must be paid from somewhere. The source of property used to pay debts and expenses obviously has a profound impact on the beneficiaries of the estate if the beneficiaries are not all the same. Probate §322A is concerned with taxes. Probate Code §322B is concerned with other claims and expenses. 1. PRIOR LAW. The order in which gifts are abated was recently the subject of a Texas Supreme Court decision, arising under facts occurring prior to the enactment of Probate Code §322B.(283) In that case, the Supreme Court refused to be bound by a "ritualistic" priority scheme determined according to the traditional classification of bequests. The Court held under the facts of that case that a number of general pecuniary bequests had priority over a "specific" bequest of "the balance of all cash . . . after the payment of all just debts." Texas cases establishing the order of abatement when the will is unclear, decided prior to Hurt and prior to the enactment of §322B, include Sinnott v. Gidney, 322 S.W.2d 507 (1959); Arnold v. Dean, 61 Tex. 249; Thompson v. Thompson, 149 Tex. 632, 236 S.W.2d 779 (1951); Avery v. Johnson, 192 S.W. 542 (Tex. 1917); and Warren v. Smith, 620 S.W.2d 725 (Tex. Civ. App.-Dallas 1981, writ ref'd n.r.e.). 2. PROBATE CODE §322B. New Probate Code §322B prescribes that if the assets of the probate estate are sufficient to pay all of the claims and expenses, excluding estate taxes apportioned under §322A, but are not sufficient thereafter to pay all of the gifts under the will, then, in the absence of a will provision to the contrary, abatement will take place in the following order: 1. Probate assets not disposed of in the will, passing by intestacy, abate first. 2. Personal property of the residuary estate. 3. Real property of the residuary estate. 4. General gifts of personal property. 5. General gifts of real property. 6. Specific gifts of personal property. 7. Specific gifts of real estate abate last. Probate Code §322B is effective for estates of persons who die after September 1, 1987. An estate of a person who dies prior to that date is governed by prior law, whatever that was. It is thought that the new statute probably codified prior law, but the special effective date and Hurt v. Smith,(284) causes one to wonder. Frequently, it will be the case that debts are paid from whatever source is convenient, rather than by selling a fractional share of each and every asset in the same class. Thus, some form of internal accounting and adjustment must be made. Query: in such a case, when should assets which have not actually been disposed of be valued for abatement purposes? Date of death? Date of distribution? Some other date? 3. CLASSIFICATION OF GIFTS. Whether or not a gift under the will shall be used to pay expenses and debts depends on its classification under Probate Code §322B. §322B recognizes general, specific and residuary gifts. This is a time honored approach. However, the classification of gifts is not always as easy as one might suppose. How is one to classify, for example, a gift of "all of my tangible personal property" or a gift of "100 acres of land," or a gift of all of "my cattle and other livestock owned by me at the date of my death." The problem is that there may be more than one kind of specific gift: generic and individual, the former sometimes being referred to as a specific gift of a general nature. This is a distinction the authors of Page on Wills take pains to make in that treatise,(285) and is one that the Texas Supreme Court has recently approved.(286) However, there are many definitions of "specific gifts" in the literature that would not apply to gifts that are essentially specific gifts of a general nature, even though the courts routinely classify such gifts as being specific: for example, "all my cattle."(287) a. Specific Gifts. A specific gift is a gift of a specific and identifiable asset of the estate as distinguished from other assets. The Texas Supreme Court recently described a gift as specific if (1) it is described with such particularity that it can be distinguished from all of the testator's other property and (2) the testator intended for the beneficiary to receive that particular item, rather than cash or other property from his general estate.(288) The Court of Civil Appeals in Pinkston described a specific gift by in turn quoting form 28 R.C.L., p. 289, par. 263, as follows: A specific legacy is a gift by will of a specific article, or a particular part of the testator's estate which is identified and distinguished from all others of the same nature, and which can be satisfied only by the delivery and receipt of the particular thing given. . . . No special words are required to make a bequest specific, though such words as 'my', 'owned by me', 'standing in my name', or 'in my possession' are indicative of the specific character of the legacy.(289) A fundamental characteristic of a specific gift is that it will adeem if the asset is not a part of the estate at death, which is to say that the gift will not be satisfied by resort to other assets of equivalent value.(290) In a sense this is also characteristic of residuary gifts and to a certain extent it is characteristic of certain forms of gifts routinely classified as general. It is also sometimes said in the treatises, incorrectly, that as to specific legacies, the will speaks as of the time of its execution. "A specific legacy disposes of property identified by the will at the time of its execution and does not include property thereafter acquired and not included in a testamentary provision when viewed as of the date of execution."(291) This is a true statement with respect to individual specific gifts, but is untrue with respect to certain generic specific gifts: specific gifts of a general nature such as "all of the books in my library." It is clear that a gift of all of my cattle may be treated as specific even though the cattle owned at death may not be the same as the cattle owned when the will was signed.(292) Two examples of generic specific gifts are found in the Texas Supreme Court case of Hurt v. Smith, 741 S.W.2d 1, 4 (Tex. 1987). We note that sections 4 and 5 of Smith's will each devised a one-half interest of "all" Smith's mineral interests. See Brady v. Nichols, 308 S.W.2d 100 (Tex. Civ. App.-San Antonio 1957), reformed 158 Tex. 382, 312 S.W.2d 381 (1958). Although the bequests do not identify each of the mineral interests owned by Smith, the description is specific enough to distinguish the gifts from the remainder of Smith's property. Brady, 308 S.W.2d at 111 (a bequest of "all the Stock on all my ranches" constituted a specific description of all the cattle on all the testator's ranches). In addition, the legacies clearly indicate that Smith only intended for the beneficiaries to receive the mineral interests that he owned when he died, rather than cash or other property from his general estate. Thus, even though the mineral interests passing under section 4 and 5 are generically described, the description is definite enough to constitute a specific gift.(293) Section 8 bequeathed "[t]he remaining balance of all cash, checking accounts, certificates of deposit, savings certificates, and money market certificates I have at the time of my death, after the payment of all my just debts, funeral expenses, expenses of last illness, and costs and expenses incurred in the probate of this Will, shall pass to and vest . . . Although this section does not set forth the amount of money or value of the accounts or certificates passing under it, the section identifies the assets and funds bequeathed to the charities. Thus, the legacies passing under section 8 are specific bequests. See Brady, 308 S.W.2d 100, 109-11 (a bequest of "all my moneys in Banks" is a specific bequest).(294) Logically, one might think that as between a specific gift of an individual item, such as "my red 1965 Ford Mustang that Sally used to ride around in," and a specific gift of a general nature, such as "all automobiles owned by me at the date of my death," that the specific gift of a general nature ought to abate before the specific gift of an individual item. However, no such distinction is made in Probate Code §322B, which may make it more likely in a tough case to classify a specific gift of a general nature as a general gift. b. Demonstrative Gifts. Few of us have actually ever seen a real life demonstrative gift, much less had an abatement problem associated with one. Nevertheless they must be discussed. The Texas Supreme Court recently described a demonstrative gift as follows: Demonstrative legacies are bequests of sums of money, or of quantity or amounts having a pecuniary value and measure, not in themselves specific, which the testator intended to be charged primarily to a particular fund or piece of property.(296) A demonstrative gift is in a special category, having the characteristics of both a specific and general gift. A demonstrative gift is unusual in that it is to be satisfied primarily from a particular fund or source of property; however, unlike a specific gift, if the source of payment is exhausted or otherwise does not exist at death, then, to that extent, the gift does not adeem, but is treated as a general gift, abating with other general gifts in the same general category.(297) The peculiar characteristic of a demonstrative gift, that it be treated as general to the extent the primary source of payment is insufficient, appears to be a question of intent, rather than a canon of construction. Unless the testator manifests an intent to treat a gift as demonstrative, it will probably be treated as specific. Demonstrative gifts are not covered by §322B, but if the intent is clear, it is a good guess that demonstrative gifts would abate only after general gifts, but before specific gifts, and that a demonstrative bequest of personal property would abate before a demonstrative bequest of real estate. c. General Gifts. If a gift is classified as a general gift, it means that it will normally abate before gifts classified as specific. True, the Texas Supreme Court recently held otherwise,(298) however this decision appears to have been overridden by statute.(299) A general legacy is not a charge upon any specific property.(300) "The outstanding characteristic of the general legacy or devise is that it does not attempt to dispose of any specific article of property . . ."(301) The Texas Supreme Court recently described a general gift as follows: A legacy is a general bequest if (1) it bequeaths a designated quantity or value of property or money and (2) the testator intended for it to be satisfied out of his general assets rather than disposing of, or being charged upon, any specific fund or property.(302) Another way of defining a general legacy is to say that it is a gift that is not specific or demonstrative.(303) Because a pecuniary legacy has all of the attributes of a general gift it may serve as a paradigm.(304) It may be hard to think of other examples. "My executor is directed to purchase an annuity for my wife that will pay her $100 a month for her life" might be one example. The treatise writers give the following as examples of general bequests: A bequest of all moneys or legacies from any source. A gift of one-half of all investments.(305) A bequest of a certain number of indistinguishable shares of stock if the testator owns a great number. A gift of all personal property less certain items.(306) A gift of stock may be specific or general, depending on the facts. If it appears that the testator intended to give certain identifiable shares, the gift will be specific, but a gift of a specific number of shares, without further distinguishing characteristics has been held to be a general bequest, even if the testator owned the exact number of shares given.(307) Despite the examples given by the treatise writers, the Texas Courts tend to find generically described gifts to be specific.(308) Sometimes it is difficult to tell whether a gift is specific or general. In such case, it is the intention of the testator that governs; however, it is sometimes said that there is a presumption that a gift is general if in doubt.(309) For example, what about a gift of "all of my real property"? Such a gift has many of the surface characteristics of a generic specific gift. First of all, the gift would adeem if the decedent didn't own real property. The word "my" is used in the gift.(310) Such a gift can't possibly be satisfied out of other assets of the estate. It can be distinguished from all of the testator's other property, namely, his personal property. Nevertheless, it is horn book law and the cases are legion that a gift of all of a testator's personal property is a general legacy.(311) For instance, there is a reference in Currie v. Scott to a "general legatee to whom all the personal property is given."(312) It may be that a gift of "all my personal property" is just too "general" to be specific, and the determining factor may be the rule of construction that a gift is presumed to be general if the determination is doubtful. d. Residuary Gifts. According to the Texas Supreme Court: A legacy should be classified as a residuary bequest if the testator intended for the gift to bequeath everything left in the estate, after all debts and legal charges have been paid, and after all specific, demonstrative and general gifts have been satisfied. See Shriner's Hospital for Crippled Children of Texas v. Stahl, 610 S.W.2d 147, 152 (Tex. 1980); see also [Atkinson]Law of Wills §132 at 736; Page on Wills §48.10, at 35.(313) e. Testator's Intent. Before concluding the discussion on forms of gifts, it may be helpful to consider that it is the testator's intent that is paramount in making the classification.(314) But it is not really a question of whether the testator intended the gift to be specific, general or residuary, since testator's don't think in those terms; rather, it is a question of what the result of the classification would be. In other words the question is would the testator have wanted the gift to abate to pay debts before resorting to other property in the estate. If so, then it is much more likely that a court will find that the gift was a general or residuary gift rather than a specific gift. In fact, this question of intent may be a part of the definition of a general bequest, no matter how the gift is described.(315) In this regard it is important to reexamine the Hurt (316)case. The opinion has been cited above for its definitions of specific, general and residuary gifts. The opinion was most surprising, however, in its holding that pecuniary gifts that it classified as general, were not to abate before specific gifts, despite the general rule. It reached this conclusion based on the intent of the testator as found in the will. (To be candid, this intent was anything but clear, notwithstanding the Court's conclusion.) Our analysis, however, does not end here. In ascertaining what we believe to be the intent of the testator as to the priority of payment, it is important to consider these legacies in the overall context of this will. We believe the testator intended for the [general] legacies in sections 1, 2 and 3 to be paid before the [specific] bequest in section 8. Sections 1, 2 and 3 provide for legacies of specific dollar amounts of cash, while section 8 refers, inter alia, to the "remaining balance of all cash." Under a ritualistic application of the rules governing classification, sections 1, 2 and 3 are general bequests, and section 8 is a specific bequest. Consequently, to the extent that the residuary estate is insufficient to pay the estate tax, these general legacies are exhausted before the specific bequest is reached, under the general rule discussed earlier herein. We believe, however, that this is an inappropriate result, given the relationship of these two bequests in the overall context of this will. Therefore, although we recognize the legacies in sections 1, 2 and 3 are ordinarily viewed as general bequests, while those under section 8 are classified as specific bequests, we hold that under the facts of this case, the section 8 bequests should be utilized for the payment of estate taxes before those bequests described in section 1, 2 and 3.(317) It is remotely possible that Hurt is still good law if one considers that it was decided on the basis of intent. Recall that §322B(d) states that "A decedent's intent as expressed in a will, controls over the abatement of bequests provided by this section. 4. EXONERATION OF MORTGAGES ON SPECIFIC GIFTS. The doctrine of exoneration involves the question of whether or not the beneficiary of a specific devise of real property that is encumbered by a mortgage loan (for which the decedent was personally liable) ought to take the property charged with the debt. Note at the outset that the doctrine of exoneration ought to no longer apply in Texas since the advent of Probate Code §322B. The authors of the Texas Practice series on Wills close the chapter on exoneration by saying "Although there is no case law on the issue, Section 322B appears to set forth the priority of bequests for exoneration purposes."(318) Nevertheless, because the doctrine has historical significance and could still apply if the testator intends to vary from the statutory scheme, it may be worthwhile to explore it. It is sometimes said that the idea behind the doctrine is that if a testator makes a specific gift of encumbered real estate, that the debt ought to be paid by someone other than the recipient. However, in operation the result is more likely to be the opposite, since without the doctrine the ordinary abatement rules would operate to discharge the debt out of other property. The concept ought more properly to be called the doctrine of unexoneration, since the rule operates as an exception to the general principles of abatement. First of all, the doctrine ought to have no application at all in the ordinary case, if the real or personal property in the residuary estate is sufficient and if the testator directed (or §322B directs) that the residuary estate pay the debt. Further, general bequests of property (real or personal) should be used to discharge the debt against specific property after the residuary estate is exhausted, before consideration of exoneration: When the testator owes a debt secured by a lien upon specific property belonging to him, the debt, like any other personal debt, is to be paid out of the testator's personal estate, in the absence of provisions in the will showing a contrary intention; and that, as between the devisee or legatee of the encumbered property and a general legatee to whom all the personalty is given, or a residuary legatee or next of kin, the debt must be paid out of the personalty. (319) [Emphasis added.] But this is no more than the normal rule of abatement. (In Currie there was no residuary estate and there was no direction as to how to pay debts.) The issue squarely presented in Currie (320) and Brady(321) was whether or not an encumbrance against specifically devised real estate should be discharged by other specific legacies. The court refused to allow specific gifts, whether real or personal, to be abated to discharge the debt. The court has twice held that encumbered property specifically devised should alone bear the expense of discharging a mortgage against it, contrary to the general rule that personal property abates before real estate, and that property in the same class abates pro rata.(322) (In Currie the reference to personal property may have been dictum.) [P]ersonalty which is specifically bequeathed cannot be applied to the mortgage debt. 4 Page on Wills, pp. 298, 299, Sec. 1486. We have found no decisions permitting exoneration by resort to realty which has been specifically devised.(323) The result of the doctrine of unexoneration is not consistent with §322B which requires that specific gifts of real estate abate last. But consider whether §322B is overridden by a contrary intent expressed in the will. Under the Hurt case, decided prior to §322B, that intent, though not explicit, was found in the "the relationship of these two bequests in the overall context of this will."(324) It is a good practice to address the exoneration issue in any will where mortgaged property is being specifically devised. On the other hand, if it is intended that the property is to pass encumbered by a lien, or subject to a mortgage, the will should definitely say so, and any "pay all debts" clause should be modified accordingly so as not to create a conflict. C. WHO IS LIABLE FOR THE TAX ON IRA PROCEEDS OR QUALIFIED PLAN ASSETS? Even if the estate is solvent, the residuary beneficiaries may be very concerned with the question of who pays estate taxes associated with qualified plan assets or IRA proceeds. If the estate is insolvent, or potentially insolvent these issues may appear more important still. 1. CODE §§2039 AND 4980A(D). A decedent's interest in a qualified plan (whether or not the decedent is the participant) will ordinarily be includible in the decedent's estate for estate tax purposes under Code §2039. A decedent's interest in an IRA will be includible in the decedent's estate for estate tax purposes under the general principles of §§2031 and 2033. The new tax under §4980A(d) for excess retirement plan accumulations will also operate to increase in the estate tax. 2. PROBATE CODE §322A AND ESTATE TAX APPORTIONMENT. Under normal circumstances, the decedent's interest in a qualified plan is going to be a nonprobate asset. Questions are raised as to whether or not the executor can reach such assets for the payment of estate taxes attributable thereto. New Probate Code §322A, discussed supra, may alleviate the problem somewhat by charging the executor with the duty to collect from "any person interested in the estate" the estate tax attributable to such person's interest. However, the anti-alienation rule of ERISA may operate to prohibit the executor from imposing a charge on a qualified trust.(325) a. Apportioning The Estate Tax On The Nonparticipant's Community Property Interest In A Qualified Plan Or IRA. A particularly thorny problem concerns the tax on the community property interest of the nonparticipant spouse. The 1986 Tax Reform Act repealed Code §2039(c) which previously allowed an exclusion from estate taxes for qualified plan interests which are includible in the decedent's gross estate solely by reason of the decedent's interest in community income under the community property laws of the state. This means that the nonparticipant decedent spouse's interest in the surviving participant spouse's qualified plan will now be includible in the nonparticipant decedent spouse's estate, whether or not the decedent had any lifetime or testamentary power of disposition over the property! Once again, new Probate Code §322A might be of some help, but it is believed that this statute cannot be used to collect the estate tax from the plan itself, because of the anti-alienation rule, and there is Federal preemption to consider. Thus, the executor might have to wait many years before reimbursement could be obtained, and the new statute does not contemplate an interest charge for the wait. (In the case of an IRA, however, there is no anti-alienation rule to impede the executor.) It may be that the nonparticipant has no power of testamentary disposition over his community property interest in the survivor's plan, depending upon how the Federal Courts ultimately resolve the preemption issue. Alternatively, the nonparticipant's interest may be a probate asset for the nonparticipant and a nonprobate asset for the participant.(326) In either case, if the benefit is not in pay status, it is going to be difficult to collect the tax. b. A Marital Deduction Would Help, But Will Not Be Automatically Available. So long as the decedent's estate obtains a marital deduction for this property, all is well. The availability of the marital deduction with respect to qualified plan interests is sometimes problematic. At this point, however, it is important to recall that the terms of the plan and beneficiary designation will ordinarily govern whether or not a marital deduction is available. And, once again, one must consider whether it is the participant or the nonparticipant who dies first. If the nonparticipant dies first, it is certainly open to debate whether the interest "passing" from the nonparticipant to the participant spouse is so great as to constitute virtual ownership such that it is not a terminable interest.(327) A TAMRA technical correction makes it clear that if a joint and survivor annuity is the forced upon a participant, that the gift tax will not apply to the forced transfer of the future interest to the wife.(328) If the participant dies first, and the survivor is the beneficiary, whether or not a marital deduction will apply may depend on whether or not there is an event or contingency under which the surviving spouse's interest might pass to someone else; if so, the survivor's interest is a classic terminable interest. New regulations under Code §411(d)(6)(329) take away the discretion of the plan administrator as to the form and timing of benefits, and this should go a long way toward making the availability of the marital deduction more likely. D. WHO IS LIABLE FOR ADMINISTRATION EXPENSES ATTRIBUTABLE TO SPECIFIC GIFTS Since the beneficiary of a specific gift is generally entitled to the net income attributable to that gift during administration(330), it would stand to reason that expenses incurred in the generation of that income would likewise be chargeable to the gift, even if this occurs indirectly in arriving at net income in the first place. However, consider whether a direction under the will that the residuary estate shall be responsible for all expenses of administration could be construed as overruling the common sense approach. It is suggested that this is a matter which should be addressed in the will. Since an estate is not subject to the Bankruptcy laws,(331) scant treatment has been given herein to that body of law. The emphasis of this article is upon the insolvent and potentially insolvent estate, and not upon asset protection or creditor's rights during a debtor's lifetime. One reason for this lack of emphasis is that there have been a number of articles at various recent advanced institutes in Texas dealing explicitly with the subject of asset protection. Two of the best are Estate Planning and Creditor Claims-Should We (and Can We) Help the Financially 'Distressed' Client, by Santo (Sandy) Bisignano, Jr., 1987 Advanced Estate Planning and Probate Course, State Bar of Texas Professional Development Program, and Protecting Assets, by Rhonda H. Brink, 1986 Advanced Estate Planning and Probate Course, State Bar of Texas Professional Development Program. Nevertheless, the subject is hardly irrelevant to the matter at hand, and some treatment is in order. A. FRAUDULENT TRANSFERS. Although decedents' estates are not subject to the bankruptcy laws, the Uniform Fraudulent Transfer Act(332) (the "Act") as adopted by the State of Texas (as part of the Business and Commerce Code) is applicable to estates, and importantly, is also applicable during lifetime, both in and out of bankruptcy, since §544(b) of the Bankruptcy Code empowers the trustee in bankruptcy with the rights of an unsecured creditor of the bankrupt debtor. The trustee in bankruptcy can use this power to void any transfer that could have been voided by a creditor under state law. This is important for a Texas debtor since the trustee may rely on the Texas four year statute of limitations, rather than on the one year statute described in Bankruptcy Code §548. 1. A TRANSFER INTENDED TO HINDER CREDITORS IS VOID. Literally read, this statute is very broad indeed. A transfer, no matter when made, is defined to be fraudulent if it was done with intent to hinder or delay a future creditor whose claim, if it will arise at all, will arise many years after the transfer is made. Moreover, a gratuitous transfer is fraudulent, no matter when made, if at the time of the transfer the debtor believed that he would (might?) incur debts (in the indeterminate future?) beyond his ability to pay as they become due, notwithstanding a lack of intent to hinder creditors. At this point an examination of the statute might be helpful. (Emphasis has been added.) §24.005. Transfers Fraudulent as to Present and Future Creditors (a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose within a reasonable time before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: (1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or (2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: (A) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (B) intended to incur, or believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due. (b) In determining actual intent under Subsection (a)(1) of this section, consideration may be given, among other factors, to whether: (1) the transfer or obligation was to an insider; (2) the debtor retained possession or control of the property transferred after the transfer; (3) the transfer or obligation was concealed; (4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit; (5) the transfer was of substantially all the debtor's assets; (6) the debtor absconded; (7) the debtor removed or concealed assets; (8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred; (9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred; (10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and (11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.(333)
§24.006. Transfers Fraudulent as to Present Creditors (a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation. (b) A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.(334) It should be noted that it is unclear whether the term "reasonable" as contained in §24.005(a) is susceptible to two different interpretations. The reference to the transfer arising within a reasonable time before the claim was a Texas addition to the Uniform Fraudulent Transfer Act. Apparently, it is thought that the statute was meant to apply to future creditors only if the claim arose within a reasonable time after the transfer. However, the statute appears to say that the transfer will be fraudulent whether or not the claim arose within a reasonable time after the transfer. §24.006 of the Act does not particularly concern me. It may be negotiated. We don't generally encourage or assist insolvent clients to make gratuitous transfers of their assets, nor do we generally assist clients to make transfers if insolvency is the result. But §24.005 concerns me a great deal. While none of us would intentionally assist a client to gratuitously transfer assets so as not to have to pay an existing creditor, it does not strike me as intrinsically wrong to make a gift to a close family member, motivated by a vague notion that it might be remotely possible some time in the indefinite future to be financially ruined as a result of bad luck, even if bad luck is foreseeable. That §24.005 will be construed so broadly appears to me doubtful, but not impossible. If a surgeon comes into your office and tells you that she is worried about a malpractice judgment being taken against her someday for an amount in excess of her policy limits, and that, to protect her husband and children against a change in lifestyle in the event of that contingency, she would like to make gifts to them now (with no strings attached), what do you tell her? She has just said in language that could not be any clearer that the reason she wants to make the gifts is so that her family will get her money instead of her future creditors. Does she intend to "hinder" them. Is the contemplated transfer "fraudulent" or is just reasonable and prudent? Let us take another example, using contemporary language: The surgeon tells you that she is interested in "asset protection." Now you might ask, "Why are you interested in asset protection?", but you would probably be able to guess the answer in advance. Let us stick however to the contemporary nomenclature, by framing the next question this way: "Protection" against whom?" It may be that the surgeon gives several answers, but, as may be expected, if one of the answers is "creditors," then it would be a specious exercise (not to say intellectually dishonest) to maintain that a transfer in furtherance of this plan is not intended to hinder them. However is the word "hinder" synonymous with "protect against" or "put outside the reach of?" Doesn't the word "hinder" as used in the statute, have a less inclusive meaning? Is the statute to be interpreted broadly and literally, or narrowly and reasonably? It would be unreasonable (though not literally contrary to the statute) to maintain that the Act prohibits all forms of "asset protection" where the "intent" is to "protect the assets" from creditors. What if you help this surgeon to make gifts to her children and spouse. The surgeon is quite solvent both before and after the gifts are made. Shortly after the gifts are made, the surgeon's husband has lost all of the money he was given at the race track, and the children have squandered their share as well. Later the surgeon incurs a malpractice judgment in excess of her insurance, and is forced to file for bankruptcy? The Plaintiff's lawyer, whose heart is in his pocket book, then sues you for conspiracy to defraud his client (a foreseeable future creditor), and on the stand the surgeon admits that "asset protection" was one of the reasons she made the gifts. The plaintiff's lawyer then asks, "Protection against whom?" The question is rhetorical. In McElhanon v. Hing, 728 P.2d 256 (Ariz. App. 1985), aff'd in part and vacated in part, 728 P.2d 273 (Ariz. 1987) an attorney was held liable under a conspiracy theory for close to $300,000 in damages for assisting a client to "defraud" a judgment creditor.(335) What if all the surgeon wants to do is to get out from under the community property system by partitioning existing community property into equal undivided separate shares and by entering into a marital agreement that the future earnings of either spouse will be similarly (equally) partitioned? The reason, the client tells you, is because, in Texas, a spouse's separate property is not liable for the torts of the other spouse. Is that "fraudulent" or is that just being reasonable and prudent? There are no cases on point, but a strict construction of the statute might subject even this last example to the Act, which seems a bit ridiculous. It is submitted that the examples given above are among the mildest of the various forms of "asset protection," and we have all seen schemes that are far more elaborate, more intricate, and more clearly designed to thwart the collection efforts of foreseeable creditors. Furthermore, it is most often the case that when the client approaches the lawyer, the financial picture is already looking pretty bleak, making the effectiveness of any gratuitous transfers bleaker still. These are hard cases for the lawyer. On the other hand, where the factors listed in §24.005(b) are not present, the client is solvent, and the likelihood of future insolvency as a result of specifically foreseeable creditor claims is remote (though possible), the law should be applied differently. This client is aware that economic ruination can unexpectantly strike anyone at anytime, is concerned about the vicissitudes of fate, the general unpredictability of life, and knows that the slings and arrows of outrageous fortune can impact anyone (particularly a professional). This client would like to insure that his family and those financially dependent upon him will not be left destitute and helpless in the event of a financial or legal disaster, and would therefore like the lawyer to assist him in making gifts to them. In such a case I have little hesitation in asserting that it is proper and ethical for the lawyer to assist in this process even if one of the purposes is to obviously "hinder"(336) unknown contingent future creditors. 2. STATUTES OF LIMITATIONS UNDER THE ACT. Since the Act applies to hindered creditors "whether the creditor's claim arose within a reasonable time before or after the transfer was made," the applicable statute of limitation assumes great significance. §24.010. Extinguishment of Cause of Action (a) A cause of action with respect to a fraudulent transfer or obligation under this chapter is extinguished unless action is brought: (1) under Section 24.005(a)(1) of this code [i.e., with actual intent to hinder, delay, etc.], within four years after the transfer was made or the obligation was incurred or, if later, within one year after the transfer or obligation was or could reasonably have been discovered by the claimant; (2) under Section 24.005(a)(2) [i.e., a gratuitous transfer plus a certain potential for insolvency] or 24.006(a) of this code [i.e., with respect to preexisting creditors only, a gratuitous transfer to anyone while insolvent], within four years after the transfer was made or the obligation was incurred; or (3) under Section 24.006(b) of this code [i.e., with respect to preexisting creditors only, any transfer, whether or not gratuitous, to an insider while insolvent], within one year after the transfer was made or the obligation was incurred. (b) A cause of action with respect to a fraudulent transfer of obligation under this chapter is extinguished as to a spouse, minor, or ward unless the action is brought within two years after the cause of action accrues, or if later, within one year after the transfer or obligation was or could reasonably have been discovered by the claimant, subject to the provisions relating to disabilities under Chapter 16, Civil Practice and Remedies Code. 3. INSOLVENCY UNDER THE ACT. If the transferor is insolvent or would be rendered insolvent by the transfer, the conveyance will be fraudulent within the meaning of the Act, and the lawyer should not assist in the transfer. The Act defines insolvency as follows: §24.003. Insolvency (a) A debtor is insolvent if the sum of the debtor's debts is greater than all of the debtor's assets at a fair valuation. (b) A debtor who is generally not able to pay the debtor's debts as they become due is presumed to be insolvent. (c) A partnership is insolvent under Subsection (a) of this section if the sum of the partnership's debts is greater than the aggregate, at a fair valuation, of all of the partnership's assets an the sum of the excess of the value of each general partner's nonpartnership assets over the partner's nonpartnership debts. (d) Assets under this section do not include property that has been transferred, concealed, or removed with intent to hinder, delay, or defraud creditors or that has been transferred in a manner making the transfer voidable under this chapter. (e) Debts under this section do not include an obligation to the extent it is secured by a valid lien on property of the debtor not included as an asset. 4. HEIRS AND PERSONAL REPRESENTATIVE HAVE NO STANDING TO SET ASIDE FRAUDULENT CONVEYANCE OF THE DECEDENT. Note that the neither the decedent's heirs nor his personal representative may seek to set aside a conveyance made by the decedent during life on the grounds that the transfer was fraudulent as to his creditors.(337) 5. DISCLAIMER IS NOT A FRAUDULENT CONVEYANCE. It has been held that a transfer is not a fraudulent conveyance.(338) B. PAYING AN ANTECEDENT DATE/ CONVERSION OF NONEXEMPT PROPERTY INTO EXEMPT PERSONAL PROPERTY. If the transfer is for value, it is not covered by the Fraudulent Conveyance statute (Chapter 24 of the Business and Commerce Code), but it might be covered by §42.004 of the Property Code, which places a two year(339) (rather than a four year) statute of limitations on the conversion of nonexempt property to exempt personal property with the intent to defraud, hinder, etc., the claims of creditors. C. SPENDTHRIFT TRUST. The all time, number one, all star, preeminently effective, asset protection tool, has always been and continues to be the "Spendthrift Trust" (provided its not self settled or established in fraud on the grantor's creditors). Here, thank goodness, the ethical dilemmas described above are not so pressing, at least if you are the beneficiary. 1. SPENDTHRIFT TRUSTS GENERALLY EFFECTIVE IN TEXAS. a. The Statute And The Cases. Texas courts have long recognized the validity of spendthrift trusts.(340) This rule was incorporated in §112.035(a) the Texas Trust Code as a codification of existing law, in a manner consistent with RESTATEMENT (SECOND) OF TRUSTS §§ 152 and 153 (1957): §112.035. Spendthrift Trusts (a) A settlor may provide in the terms of the trust that the interest of a beneficiary in the income or in the principal or in both may not be voluntarily or involuntarily transferred before payment or delivery of the interest to the beneficiary by the trustee. (b) A declaration in a trust instrument that the interest of a beneficiary shall be held subject to a "spendthrift trust" is sufficient to restrain voluntary or involuntary alienation of the interest by a beneficiary to the maximum extent permitted by this subtitle. (c) A trust containing terms authorized under Subsection (a) or (b) of this section may be referred to as a spendthrift trust. (d) If the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of his beneficial interest does not prevent his creditors from satisfying claims from his interest in the trust estate.(341) [Emphasis added.] b. Support Trusts May Also Be Valid Spendthrift Trusts. The Texas Supreme Court, in an important decision, held that a Department of the State of California could not force a spendthrift support trust to reimburse the State for expenses incurred in the maintenance of an incompetent beneficiary.(342) 2. SPENDTHRIFT TRUSTS GENERALLY NOT EFFECTIVE WITH RESPECT TO CLAIMS FOR CHILD SUPPORT. Citing the Page On Wills, Scott on Trusts and Bogart on Trusts, at least one Texas case has squarely held that a judgment for unpaid child support could be collected out of the net income of a spendthrift trust.(343) 3. SELF SETTLED SPENDTHRIFT TRUSTS GENERALLY NOT EFFECTIVE IN TEXAS AS TO CREDITORS OF THE GRANTOR. Prior to enactment of the Texas Trust Code, it was hornbook law that a settlor may not establish a spendthrift trust for his own benefit. This rule, which at the time represented existing case law, was codified in §112.035(d) of the Texas Trust Code.(344) This provision of the Code is consistent with RESTATEMENT (SECOND) OF TRUSTS §§ 156 (1957). There is some uncertainty regarding the extent to which a creditor can reach the assets in a self settled trust in which there are beneficiaries other than the settlor.(345) If the trust is discretionary, or subject to a standard, are the creditors limited to whatever the settlor might, in the exercise of trustee discretion, be entitled, or, instead, to whatever distributions the settlor could legally demand and receive? Is that which the settlor can demand or might receive the same as the settlor's "interest"? The settlor's interest may be greater than that which the settlor has the unqualified right to demand, but the creditors are entitled to this interest even if the settlor would not be(346); however, what about the interests of the other beneficiaries? Can the creditor invade that interest too, simply because the settlor was a permissible beneficiary? The case law is wanting in clear examples.(347) If the settlor reserves a general power of appointment, whether inter-vivos or testamentary, the settlor's creditors will probably be able to reach the assets over which the power of appointment may be exercised.(348) A very good discussion of the cases dealing with the issue of the extent to which a settlor may possibly achieve some measure of protection through a self settled trust is found in Protecting Assets, by Rhonda H. Brink, 1986 Advanced Estate Planning and Probate Course, State Bar of Texas Professional Development Program. 4. SPENDTHRIFT TRUSTS FOR LIFE SHOULD BE CONSIDERED IN TESTAMENTARY PLANNING. Lifetime spendthrift trusts for children and spouses (especially children and spouses who are professionals) should be considered by virtually all testators disposing of substantial assets. Not only can a lifetime trust be utilized to achieve certain generation skipping tax objectives and to give protection in the event of divorce, but as a spendthrift trust it can afford considerable security by protecting the trust assets from the claims of the beneficiary's creditors. If the only reason why a testator or a beneficiary would not want such a trust is because of the trustee's fees and fear that the beneficiary will not have sufficient control over the assets, consider appointing the beneficiary as trustee, or give the beneficiary the power to appoint and remove the trustee. Use an ascertainable standard relating to health, education, support and maintenance, and give the trustee discretion as to whether or not to consider other sources of support. This ought to be a valid spendthrift trust. The fact that the beneficiary is also the trustee with the power to make distributions to himself ought not to make any difference. Neither the Texas Trust Code nor the cases contain any language which should limit the application of the spendthrift trust doctrine in cases where the beneficiary was acting in a fiduciary capacity. Query: Who is the settlor of a trust having Crummey type withdrawal right provisions.(349) D. LIFETIME TRANSFERS AND PARTITIONS. The decedent may have made transfers or partitions during lifetime which the creditors may attempt to have set aside. Is a partition a transfer? E. FRAUD ON THE SPOUSE AND GIFTS OF NONPROBATE ASSETS. A deceased spouse does not have the power to dispose of the survivor's half of the community by will, without his consent. However, the spouse does have the power, with respect to community property under the spouse's sole management and control, to purchase insurance and make lifetime gifts with community property, within reason. This power also exists at death, with respect to nonprobate property (property passing outside of the will and not subject to the intestacy). 1. GIFTS OF COMMUNITY PROPERTY. If, by reason of the size of the gift in relation to the total size of the community estate, the adequacy of the estate to support the other spouse, and the relationship of the donor to the donee, the gift constitutes constructive fraud, the burden will be on the donor to prove that the gifts of his share of the community property are fair, otherwise the gift will be set aside.(350) 2. LIFE INSURANCE. Life insurance proceeds purchased with community property will ordinarily be paid to the beneficiary named in the policy, unless, under all the circumstances, this would constitute a fraud on the surviving spouse. The gift of life insurance cases are based upon equitable notions.(351) The line of analysis in the cases construing this principle employs reasoning similar to that used when a husband or wife makes gifts to third persons out of community assets. In most cases, but not always, if the donee is a related party, the disposition will be allowed to stand. If the donee is an unrelated party, the gift will usually be set aside. "The 'fraud on the community' or 'fraud on the spouse' doctrine is a judicially created concept based on the theory of constructive fraud. Givens v. Girard Life Insurance Company of America, 480 S.W.2d 421, 425 (Tex.Civ.App.--Dallas 1972, writ ref'd n.r.e.). Constructive fraud is the breach of a legal or equitable duty which violates a fiduciary relationship, as exists between spouses. A presumption of constructive fraud arises where one spouse disposes of the other spouse's one-half interest in community property without the other's knowledge or consent. See Redfearn v. Ford, 579 S.W.2d 295, 296-97 (Tex.Civ.App.--Dallas 1979, writ ref'd n.r.e.). The burden of proof is then on the disposing spouse or his donee to prove the fairness of the disposition of the other spouse's one-half community ownership. Estate of Korzekwa v. Prudential Insurance Company of America, 669 S.W.2d 775, 777 (Tex.App.--San Antonio 1984, writ dism'd); Redfearn, 579 S.W.2d at 297; Givens, 480 S.W.2d at 425. Where the donee or beneficiary is related to the disposing spouse or decedent, the courts look to three factors in determining the fairness of the disposition: (1) the relationship of the beneficiary to the decedent; (2) whether special circumstances tend to justify the gift; and (3) whether the community funds used were reasonable in proportion to the remaining community assets. Givens, 480 S.W.2d 421, 426, cited with approval in Great American Reserve Insurance Co. v. Sanders, 525 S.W.2d 956, 958-59 (Tex.1975); Redfearn, 579 S.W.2d at 297. We hold that the disposing spouse or his donee has the burden to prove these three factors in order to rebut the presumption of constructive fraud."(352) Even if the nonprobate disposition would be in fraud on the spouse, if the spouse is left anything at all under the will, the spouse could be put to an election so that benefits under the will would be eliminated if the fraud on spouse doctrine were to be asserted. Note that Business and Commerce Code §24.003 voids gratuitous transfers made at a time when the transferor is insolvent. In Pope Photo Records, Inc. v. Malone, 539 S.W.2d 224 (Tex. Civ. App.-Amarillo 1976, no writ), the court held that the determination of insolvency is made at the time of the beneficiary designation.(353) 3. SPOUSE HAS MADE TAXABLE GIFT FOR GIFT TAX PURPOSES IF OTHER SPOUSE MAKES GIFT OF COMMUNITY PROPERTY OUTSIDE THE MARRIAGE. If one spouse makes a gift to a third person (say, to a paramour) of community property, and the other spouse either cannot or does not set the gift aside under state law, the irs will treat the non-donor spouse as having made a gift for gift tax purposes.(354) This may be adding insult to injury, especially where the spouse has no control over the transfer, and in fact strenuously objects to it. Where is this situation most graphic? In the case of a community property life insurance on the life of a predeceasing spouse where the transfer is not sufficiently egregious to amount to fraud on the spouse.(355) 4. INTER-VIVOS GIFTS IN TRUST-LAND V. MARSHALL. There is another interesting doctrine that leads to a considerably different result than the constructive fraud cases involving gifts of life insurance. In the seminal case of Land v. Marshall,(356) the decedent placed a large portion of the community property under his management and control in an inter-vivos trust for the benefit of himself and his wife. The decedent retained the power to revoke and amend the trust. On the decedent's death, the wife challenged the conveyance. The Texas Supreme Court was not interested in the fraud issue. In fact, the Court opined that there was neither actual nor constructive fraud involved. However, the Court, nevertheless, set aside the entire trust on the grounds that the trust was "illusory." The Court would probably have allowed the decedent to dispose of his half of the community under the terms of the trust instrument had it not believed that the failure of the instrument to dispose the wife's half defeated the underlying purpose of the trust. Although under ordinary circumstances, the power to revoke or amend would not render a trust ineffective, the Court held that where the wife's community share was involved in the transfer, the trust would be set aside, unless a more permanent disposition of the assets were made. This is a hard case to square with other analogous principles of law. It is to be contrasted that those cases in which the one spouse actually disposes of the other spouse's share of the community in an unalterable fashion. In such cases, the courts will apparently apply the constructive fraud doctrine to determine whether or not the transfer will stand. Also, if the spouse makes a disposition of life insurance proceeds, retaining the power to revoke, amend, sell, change the beneficiary designation, etc., the courts also apply the constructive fraud doctrine. Where however, the same thing is accomplished through use of a trust, the Texas Supreme Court has laid down the "illusory trust" doctrine as a means by which the conveyance may be set aside. The distinction is not easily reconciled. The difference between a completed gift, which will be tested under constructive fraud principles, and "an illusory trust," which is apparently invalid even in the absence of constructive fraud, may be a public policy decision that the donor spouse should not be allowed to use an inter-vivos trust as a means of disposing of the other spouse's community one-half interest after the donor spouse's death, where the donor spouse did not part with anything during lifetime. What if the manager of the community places the life insurance contract in a revocable trust? Which doctrine applies: Land v. Marshall or constructive fraud? At least one eminent law professor has opined informally that the Land theory could be used to defeat any death time transfer of a spouse's community property interest in assets over which the decedent retained the power of disposition during life. This would presumably include the transfer by an insured of a surviving spouse's interest in life insurance proceeds payable as a result of the insured's death, unless the insured relinquished control over the policy during life. It was suggested that the reason this hasn't happened to date is merely because no one has raised the issue. 5. NAMING ESTATE AS BENEFICIARY OF COMMUNITY PROPERTY LIFE INSURANCE POLICY. In Street v. Skipper(357) the decedent (husband) named his estate as beneficiary of a community property life insurance policy on his life. The decedent's wife argued that "it was error for the court to fail to issue one-half of the policies' proceeds to appellant because her husband was not empowered to make a gift of his wife's community property to himself (or his estate) without his wife's consent."(358) Although one would think that the wife's argument would be very compelling in light of Land v. Marshall(359) the Court of Appeals affirmed the trial court's finding in favor of the deceased husband, citing Texas Insurance Code art. 3.49-3, which provides: A spouse shall have management, control and disposition of any contract of life insurance or annuity heretofore or hereafter issued in his or her name or to the extent provided by the contract or any assignment thereof without the joinder or consent of the other spouse.(360) Thus, even though the decedent, in effect, named himself as beneficiary, making a taxable gift for his spouse to himself in the process, the court held that the traditional test of actual fraud would have to be met before the wife could be awarded her community one-half interest under the policy. Sales of property in a decedent's estate during administration are governed by Part 5 of Chapter VIII, §§331-358 of the Texas Probate Code. Because the procedures discussed in this part of the outline are so heavily governed by Chapter VIII, the approach that will be taken is to follow the statute, by analyzing and highlighting the more relevant parts. The reader should assume that any emphasis in the statutes quoted in this part of the outline has been added. A. SALES MUST BE AUTHORIZED BY THE COURT OR BY THE WILL. 1. WHERE THERE IS NO WILL OR IF THE WILL DOES NOT SPECIFICALLY AUTHORIZE SALES, AN ATTEMPTED SALE WILL BE VOID UNLESS MADE PURSUANT TO COURT ORDER. Without a court order, a personal representative can: (1) Release liens upon payment at maturity of the debt secured thereby; (2) Vote stocks by limited or general proxy; (3) Pay calls and assessments; (4) Insure the estate against liability in appropriate cases; (5) Insure property of the estate against fire, theft, and other hazards; (6) Pay taxes, court costs, bond premiums.(361) There is very little else that a dependent executor can do without a court order. With a court order a personal representative may: (1) Purchase or exchange property; (2 Take claims or property for the use and benefit of the estate in payment of any debt due or owing to the estate; (3 Compound bad or doubtful debts due or owing to the estate; (4 Make compromises or settlements in relation to property or claims in dispute or litigation; (5 Compromise or pay in full any secured claim which has been allowed and approved as required by law against the estate by conveying to the holder of such claim the real estate or personalty securing the same, in full payment, liquidation, and satisfaction thereof, and in consideration of cancellation of notes, deeds of trust, mortgages, chattel mortgages, or other evidences of liens securing the payment of such claim. (6) Abandon the administration of property of the estate that is burdensome or worthless. Abandoned real or personal property may be foreclosed by a secured party, trustee, or mortgagee without further order of the court.(362) No sale of property in a dependent probate estate is permissible without a court order. This rule applies to all property, whether real or personal, tangible or intangible.(363) §331. Court Must Order Sales Except as hereinafter provided, no sale of any property of an estate shall be made without an order of court authorizing the same. The court may order property sold for cash or on credit, at public auction or privately, as it may consider most to the advantage of the estate, except when otherwise specially provided herein. A sale made without court order is said to be void.(364) However, some cases have held that a sale is not subject to collateral attack for want of an order, unless the record affirmatively shows that no order was entered, particularly if there is an order confirming the sale.(365) 2. SALES MAY BE MADE IN ACCORDANCE WITH THE TERMS OF THE WILL WITHOUT A COURT ORDER. If the will authorizes a sale of probate property, no court order is necessary. If the will specifies the terms or conditions of a sale, those directions must be followed. §332. Sales Authorized by Will Whenever by the terms of a will an executor is authorized to sell any property of the testator, no order of court shall be necessary to authorize the executor to make such sale, and the sale may be made at public auction or privately as the executor deems to be in the best interest of the estate and may be made for cash or upon such credit terms as the executor shall determine; provided, that when particular directions are given by a testator in his will respecting the sale of any property belonging to his estate, the same shall be followed, unless such directions have been annulled or suspended by order of the court. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. 3. SALES BY INDEPENDENT EXECUTOR. a. Sales to Pay Debts. An independent administration presents a special case. An independent executor has the inherent power to sell property to pay debts.(366) If the will expressly authorizes a sale of property to pay debts, the existence of debts will be presumed.(367) A purchaser is not required to see to the proper application of the proceeds of sale, but will be able to sustain his title merely by showing the existence of a debt at the time of sale.(368) b. Partitions And Sales By Independent Executor Without a Court Order. Generally, anything that a dependent executor could do with a court order an independent executor can do without an order. It has been held, however, that an independent executor has no power to partition property, or to sell property for the purposes of partitioning the proceeds, unless the will expressly grants this power.(369) The cases supporting this limitation may have been overruled by statute, where it can be shown that the partition or sale was in the best interests of the estate. §341(a)(6) of the Probate Code now even authorizes sales of real estate with a court order where it is found to be in the best interest of the estate to do so. c. Partitions And Sales By Independent Executor With a Court Order. Probate Code §150 now gives the probate court the authority to order sale or partition of any part of the estate that is incapable of a fair and equal partition and distribution. §150. Partition and Distribution or Sale of Property Incapable of Division If the will does not distribute the entire estate of the testator, or provide a means for partition of said estate, or if no will was probated, the independent executor may file his final account in the county court in which the will was probated, or if no will was probated, in the county court in which the order appointing the independent executor was entered and ask for either partition and distribution of the estate or an order of sale of any portion of the estate alleged by the independent executor and found by the court to be incapable of a fair and equal partition and distribution, or both; and the same either shall be partitioned and distributed or shall be sold, or both, in the manner provided for the partition and distribution of property and the sale of property incapable of division in estates administered under the direction of the county court. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Amended by Acts 1975, 65th Leg., p. 1065, ch. 390, § 7, eff. Sept. 1, 1977; Acts 1979, 66th Leg., p. 1751, ch. 713, § 20, eff. Aug. 27, 1979. d. Caution Indicated Regarding Estate Tax Lien. IRC §6324(a)(1) provides: Unless the estate tax imposed by chapter 11 is sooner paid in full, or becomes unenforceable by reason of lapse of time, it shall be a lien upon the gross estate of the decedent for 10 years from the date of death, except that such part of the gross estate as is used for the payment of charges against the estate and expenses of its administration, allowed by any court having jurisdiction thereof, shall be divest of such lien. It has been held that this statute will not protect an authorized sale by an independent executor without a court order.(370) 4. NEITHER AN INDEPENDENT EXECUTOR NOR A DEPENDENT EXECUTOR HAS THE AUTHORITY TO GIVE A WARRANTY OF TITLE ABSENT A PROVISION AUTHORIZING SUCH POWER IN THE WILL. As a general rule, a fiduciary does not have the inherent authority to give warranties of title.(371) B. REPRESENTATIVE IS UNDER A DUTY TO SELL PROPERTY THAT IS LIABLE TO PERISH, WASTE, OR DETERIORATE IN VALUE OR THAT WILL BE AN EXPENSE OR DISADVANTAGE TO THE ESTATE IF KEPT. §333. Certain Personal Property to Be Sold The representative of an estate, after approval of inventory and appraisement, shall promptly apply for an order of the court to sell at public auction or privately, for cash or on credit not exceeding six months, all of the estate that is liable to perish, waste, or deteriorate in value, or that will be an expense or disadvantage to the estate if kept. Bonds, securities, or other personal property deemed by the court not to be so liable, property exempt from forced sale, specific legacies, and personal property necessary to carry on a farm, ranch, factory, or any other business which it is thought best to operate, shall not be included in such sales. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Note the exemption for specific legacies and exempt property. Does this mean that the executor is under no duty to sell property subject to a specific legacy, even if it is clear that the property will otherwise deteriorate in value? The statutory duty does not arise until after approval of the inventory. Does this mean than no liability can arise for holding property to the detriment of the estate prior to that time? It is suggested that the representative ought to be held to the same fiduciary standard otherwise applicable in the absence of the statute, on the theory that the statute was not meant to limit liability that would otherwise apply, so much as to impose liability under the circumstances indicated no matter what the common law rule. Despite the heading, this statute does not appear on its face to be limited to personal property. This statute can be a shield to the executor, as well as a sword for the beneficiaries.(372) C. SALES OF OTHER PERSONAL PROPERTY AUTHORIZED IF IN THE BEST INTEREST OF THE ESTATE IN ORDER TO PAY EXPENSES OF ADMINISTRATION OF CLAIMS. §334. Sales of Other Personal Property Upon application by the personal representative of the estate or by any interested person, the court may order the sale of any personal property of the estate not required to be sold by the preceding Section, including growing or harvested crops or livestock, but not including exempt property or specific legacies, if the court finds that so to do would be in the best interest of the estate in order to pay expenses of administration, funeral expenses, expenses of last illness, allowances, or claims against the estate, from the proceeds of the sale of such property. In so far as possible, applications and orders for the sale of personal property shall conform to the requirements hereinafter set forth for applications and orders for the sale of real estate. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. D. SALES OF LIVESTOCK. As is becoming of our Texas heritage, Probate Code §335 contains special provisions applicable to sales of livestock. E. SALES OF PERSONAL PROPERTY AT PUBLIC AUCTION. The notice provisions, and the permissible terms of credit, applicable for sales of personal property at public auction, are set forth in Probate Code §§336 and 337, respectively. §336. Sales of Personal Property at Public Auction All sales of personal property at public auction shall be made after notice has been issued by the representative of the estate and posted as in case of posting for original proceedings in probate, unless the court shall otherwise direct. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. §337. Sales of Personal Property on Credit No more than six months credit may be allowed when personal property is sold at public auction, based upon the date of such sale. The purchaser shall be required to give his note for the amount due, with good and solvent personal security, before delivery of such property can be made to him, but security may be waived if delivery is not to be made until the note, with interest, has been paid. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Private sales are more often used than public sales or auctions. F. SALES OF MORTGAGED PROPERTY. A creditor has the right to force the sale of an asset subject to his lien; however, the court may order that the lien be discharged out of general assets of the estate or be refinanced if the court finds it advisable. §338. Sale of Mortgaged Property Any creditor holding a claim secured by a valid mortgage or other lien, which has been allowed and approved or established by suit, may obtain from the court in which the estate is pending an order that said property, or so much thereof as necessary to satisfy his claim, shall be sold, by filing his written application therefor. Upon the filing of such application, the clerk shall issue citation requiring the representative of the estate to appear and show cause why such application should not be granted. If it appears to the court that it would be advisable to discharge the lien out of the general assets of the estate or that it be refinanced, he may so order; otherwise, he shall grant the application and order that the property be sold at public or private sale, as deemed best, as in ordinary cases of sales of real estate. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Query whether there are any limits on the court's power to order the debt refinanced. Note that such a sale is not a foreclosure sale and consequently will not have the effect of discharging liens not satisfied with the proceeds.(373) G. REPORTING THE SALE OF PERSONAL PROPERTY IS NECESSARY TO VEST TITLE/REGULATIONS GOVERNING REPORT AND CONFIRMATION OF REAL ESTATE ARE APPLICABLE TO SALES OF PERSONAL PROPERTY. To the uninitiated, the language in the Probate Code governing sales is somewhat arcane, or at least contrary to normal usage. As will be noted, the court first orders the property "sold"; title is not technically transferred until after the "sale." Sales of personal property are to be reported and confirmed under the laws regulating sales of real estate. §339. Sales of Personal Property to Be Reported; Decree Vests Title All sales of personal property shall be reported to the court, and the laws regulating sales of real estate as to confirmation or disapproval of sales shall apply, but no conveyance shall be necessary. The decree confirming the sale of personal property shall vest the right and title of the estate of the intestate or ward in the purchaser who has complied with the terms of the sale, and shall be prima facie evidence that all requirements of the law in making the sale have been met. The representative of an estate may, upon request, issue a bill of sale without warranty to the purchaser as evidence of title, the expense thereof to be borne by the purchaser. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. H. SALE OF PROPERTY OF A MINOR WITHOUT A GUARDIANSHIP. §889 of the Probate Code is an important statute that allows property of a minor to be sold and the proceeds held in the registry of the court, if the value of the minor's interest in the property does not exceed $50,000, and if the minor is not a ward. §889. Sale of Property of a Minor by a Parent Without Guardianship (a) A natural or adoptive parent of a minor who is not a ward may apply to the court for an order to sell real or personal property of a minor in an estate without being appointed guardian, when the value of the minor's interest in the property does not exceed $50,000. A sale of property pursuant to an order of the court under this section is not subject to disaffirmance by the minor. (b) The parent shall make application under oath to the court for the sale of the property. Venue for the application shall be the same as in applications for the appointment for guardians of a minor. The application shall contain the following information: (1) a legal description of real property and a description identifying personal property; (2) the name of the minor or minors and his interest in the property; (3) the name of the purchaser; (4) that the sale of the minor's interest is for cash; and (5) that all funds received by the parent shall be used for the use and benefit of the minor. (c) The court, on receipt of the application, shall set the application for hearing at a date not less than five days from date of the filing of the application and, if it deems necessary, may cause citation to be issued. (d) At the time of the hearing of the application, the court shall order the sale of the property, if it is satisfied from the evidence that the sale is in the best interest of the minor. The court may require an independent appraisal of the property to be sold to establish the minimum sale price. (e) When the order of sale has been entered by the court, the purchaser of the property shall pay the proceeds of the sale belonging to the minor or minors into the registry of the court. (f) Nothing in this section shall prevent the proceeds so deposited from being withdrawn from the registry of the court under Section 144 of the Texas Probate Code. Acts 1979, 66th Leg., p. 1754, ch. 713, § 26, eff. Aug. 27, 1979. Amended by Acts 1983, 68th Leg., p. 749, ch. 180, § 1, eff. Sept. 1, 1983; Acts 1987, 70th Leg., ch. 759, § 1, eff. Aug. 31, 1987; Acts 1989, 71st Leg., ch. 1035, § 14, eff. Sept. 1, 1989. The 1997 legislature added the following new Section to the Probate Code: Sec. 890. SALE OF PROPERTY OF WARD WITHOUT GUARDIANSHIP OF THE ESTATE. (a) This section applies only to a ward who has a guardian of the person but does not have a guardian of the estate. (b) When a ward has an interest in real or personal property in an estate and the net value of the interest does not exceed $50,000, the guardian may apply under oath to the court for an order to sell the ward's interest in the property without being appointed guardian of the estate. A ward may not disaffirm a sale of property pursuant to a court order under this section. (c) Venue for an application under this section is the same as venue for an application for the appointment of a guardian for the ward. The application must contain the same information required by Section 889(b) of this code. (d) On receipt of the application, the court shall set the application for hearing at a date not earlier than five days from the date of the filing of the application. If the court considers it necessary, the court may cause citation to be issued. (e) The procedures and evidentiary requirements for a hearing of an application filed under this section are the same as the procedures and evidentiary requirements for a hearing of an application filed under Section 889 of this code. (f) When the court enters the order of sale, the purchaser of the property shall pay the proceeds of the sale belonging to the ward into the court registry. (g) Nothing in this section prevents the proceeds deposited in the court registry from being withdrawn as prescribed by Section 887 of this code. Added by HB 1126, enacted May 26, 1997, effective September 1, 1997. I. PURPOSES FOR WHICH REALITY CAN BE SOLD. 1. COURT SELECTS PROPERTY. The court shall select the real property of the estate that is to be sold to pay expenses or claims. §340. Selection of Real Property to Be Sold for Payment of Debts Real property of the estate which is selected to be sold for the payment of expenses or claims shall be that which the court deems most advantageous to the estate to be sold. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. 2. REAL ESTATE CAN ONLY BE SOLD FOR STATUTORY PURPOSE. Real estate can only be sold for one of the purposes listed in §341,(374) however, one of those purposes is now "when it is deemed to the best interest of the estate to sell such interest." §341. Application for Sale of Real Estate (a) Application may be made to the court for an order to sell property of the estate when it appears necessary or advisable in order to: (1) Pay expenses of administration, funeral expenses and expenses of last sickness of decedents and allowances and claims against the estates of decedents and wards. (2) Make up the deficiency when the income of a ward's estate, and the personal property thereof, and the proceeds of previous sales, are insufficient for the education and maintenance of the ward, or to pay debts against the estate. (3) Dispose of property of the estate of a ward which consists in whole or in part of an undivided interest in real estate, when it is deemed to the best interest of the estate to sell such interest. (4) Dispose of real estates of a ward, any part of which is nonproductive or does not produce sufficient revenue to make a fair return upon the value of such real estate, when the improvement of same with a view to making it productive is not deemed advantageous or advisable, and it appears that the sale of such real estate and the investment of the money derived therefrom would be to the best interest of the estate. (5) Conserve the estate of a ward by selling mineral interest and/or royalties on minerals in place owned by a ward. (6) Dispose of any interest in real property of the estate of a decedent, when it is deemed to the best interest of the estate to sell such interest. [!] (b) to (g) Repealed by Acts 1979, 66th Leg., p 1755, ch. 713, § 27, eff. Aug. 27, 1979. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Amended by Acts 1969, 61st Leg., p. 2030, ch. 695, § 1, eff. June 12, 1969; Acts 1973, 63rd Leg., p. 408. ch. 182, § 4, eff. May 25, 1973; Acts 1975, 64th Leg., p. 975, ch. 372, § 1, eff. June 19, 1975; Acts 1975, 64th Leg., p. 976, ch. 373, § 1, eff. June 19, 1975; Acts 1979, 66th Leg., p. 1755, ch. 713, § 27, eff. Aug 27, 1979. 3. IF PROPERTY IS SOLD PURSUANT TO WILL PROVISION AUTHORIZING SALE, §341 DOES NOT APPLY. Recall that Probate Code §332 makes it clear that an order need not be obtained in order to authorize a sale authorized by the will. The will may authorize a sale for reasons other than those authorized by §341.(375) J. CONTENTS OF THE APPLICATION TO SELL REAL ESTATE. The requirements of the contents of the application to sell real estate are succinctly set forth in Probate Code §342 and are self explanatory. §342. Contents of Application for Sale of Real Estate An application for the sale of real estate shall be in writing, shall describe the real estate or interest in or part thereof sought to be sold, and shall be accompanied by an exhibit, verified by affidavit, showing fully and in detail the condition of the estate, the charges and claims that have been approved or established by suit, or that have been rejected and may yet be established, the amount of each such claim, the property of the estate remaining on hand liable for the payment of such claims, and any other facts tending to show the necessity or advisability of such sale. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. K. DEFECTS IN THE CONTENTS OF THE APPLICATION TO SELL REAL ESTATE. An order confirming sale of real estate will generally not be subject to collateral attack because of a defect in the application.(376) Even a direct attack must allege injury as a result of the defect.(377) There have even been cases upholding a sale where an order of sale is found in the record, but the application was not, it being presumed in the absence of evidence to the contrary that an application was made.(378) There are limits to this theory, however, such as where there is evidence that there was an application but that it was addressed to the wrong court.(379) L. HEARING, CITATION AND OPPOSITION TO AN APPLICATION TO SELL REAL ESTATE. Probate Code §§343-345 govern the procedure for setting the hearing, citation and opposition to an application to sell real estate. §343. Setting of Hearing on Application Whenever an application for the sale of real estate is filed, it shall immediately be called to the attention of the judge by the clerk, and the judge shall designate in writing a day for hearing said application, any opposition thereto, and any application for the sale of other land, together with the evidence pertaining thereto. The judge may, by entries on the docket, continue such hearing from time to time until he is satisfied concerning the application. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Amended by Acts 1979, 66th Leg., p. 1755, ch. 713, § 28, eff. Aug. 27, 1979. §344. Citation and Return on Application Upon the filing of such application and exhibit, the clerk shall issue a citation to all persons interested in the estate, describing the land or interest or part thereof sought to be sold, requiring them to appear at the time set by the court as shown in the citation and show cause why the sale should not be made, if they so elect. Service of such citation shall be by posting. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. §345. Opposition to Application When an application for an order of sale is made, any person interested in the estate may, before an order is made thereon, file his opposition to the sale, in writing, or may make application for the sale of other property of the estate. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. M. ORDER OF SALE OF REAL ESTATE. After the hearing, the court shall order the property sold if it determines that the sale is necessary or advisable. If it does not find the sale to be necessary or advisable, the court may order the sale of other property. 1. TERMS OF ORDER. §346. Order of Sale If satisfied upon hearing that the sale of the property of the estate described in the application is necessary or advisable, the court shall order the sale to be made; otherwise, the court may deny the application and may, if it deems best, order the sale of other property the sale of which would be more advantageous to the estate. An order for the sale of real estate shall specify: (a) The property to be sold, giving such description as will identify it; and (b) Whether the property is to be sold at public auction or at private sale, and, if at public auction, the time and place of such sale; and (c) The necessity or advisability of the sale and its purpose; and (d) Except in cases in which no general bond is required, that, having examined the general bond of the representative of the estate, the court finds it to be sufficient as required by law, or finds the same to be insufficient and specifies the necessary or increased bond, as the case may be; and (e) That the sale shall be made and the report returned in accordance with law; and (f) The terms of the sale. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. The order of sale is in a sense really no more than an order to list the property. The terminology is misleading. The fact that the court has ordered the property sold, and the fact that the property is "sold" in accordance with the order does not mean that title to the property passes. This does not take place until a report of sale is made and an order confirming sale is entered. 2. IRREGULARITIES IN ORDER. If there are irregularities in the order, for example if the order fails to list all of the items set forth in §346, the sale will not be subject to collateral attack, since any defects will be cured by the order confirming sale.(380) Even a direct attack may not be effective unless some definite injury can be shown. N. FORCING THE SALE OF PROPERTY. A creditor can force the sale of property under certain circumstances by invoking §347. §347. Procedure When Representative Neglects to Apply for Sale When the representative of an estate neglects to apply for an order to sell sufficient property to pay the charges and claims against the estate that have been allowed and approved, or established by suit, any interested person may, upon written application, cause such representative to be cited to appear and make a full exhibit of the condition of such estate, and show cause why a sale of the property should not be ordered. Upon hearing such application, if the court is satisfied that a sale of the property is necessary or advisable in order to satisfy such claims, it shall enter an order of sale as provided in the preceding Section. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. O. TERMS OF SALE OF PROPERTY. 1. STATUTORY TERMS. The terms of the sale of real estate are set forth in detail in §348. §348. Permissible Terms of Sale of Real Estate (a) For Cash or Credit. The real estate may be sold for cash, or for part cash and part credit, or the equity in land securing an indebtedness may be sold subject to such indebtedness, or with an assumption of such indebtedness, at public or private sale, as appears to the court to be for the best interest of the estate. When real estate is sold partly on credit, the cash payment shall not be less than one-fifth of the purchase price, and the purchaser shall execute a note for the deferred payments payable in monthly, quarterly, semi-annual or annual installments, of such amounts as appears to the court to be for the best interest of the estate, to bear interest from date at a rate of not less than four percent (4%) per annum, payable as provided in such note. Default in the payment of principal or interest, or any part thereof when due, shall, at the election of the holder of such note, mature the whole debt. Such note shall be secured by vendor's lien retained in the deed and in the note upon the property sold, and be further secured by deed of trust upon the property sold, with the usual provisions for foreclosure and sale upon failure to make the payments provided in the deed and notes. (b) Reconveyance Upon Redemption. When an estate owning real estate by virtue of foreclosure of vendor's lien or mortgage belonging to the estate either by judicial sale or by a foreclosure suit or through sale under deed of trust or by acceptance of a deed in cancellation of a lien or mortgage owned by the estate, and it appears to the court that an application to redeem the property foreclosed upon has been made by the former owner of the real estate to any corporation or agency now created or hereafter to be created by any Act or Acts of the Congress of the United States or of the State of Texas in connection with legislation for the relief of owners of mortgaged or encumbered homes, farms, ranches, or other real estate, and it further appears to the court that it would be to the best interest of the estate to own bonds of one of the above named federal or state corporations or agencies instead of the real estate, then upon proper application and proof, the court may dispense with the provisions of credit sales as provided above, and may order reconveyance of the property to the former mortgage debtor, or former owner, reserving vendors lien notes for the total amount of the indebtedness due or for the total amount of bonds which the corporation or agency above named is under its rules and regulations allowed to advance, and, upon obtaining such an order, it shall be proper for the representative to indorse and assign the notes so obtained over to any one of the corporations or agencies above named in exchange for bonds of that corporation or agency. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Amended by Acts 1957, 56th Leg., p. 636, ch. 290, § l. Usually the sale will be a private rather than a public sale, because the rules governing private sales are much more flexible, as a comparison between §§349 and 350 of the statute makes clear. §349. Public Sales of Real Estate (a) Notice of Sale. Except as hereinafter provided, all public sales of real estate shall be advertised by the representative of the estate by a notice published in the county in which the estate is pending, as provided in this Code for publication of notices or citations. Reference shall be made to the order of sale, the time, place, and the required terms of sale, and a brief description of the property to be sold shall be given. It need not contain field notes, but if rural property, the name of the original survey, the number of acres, its locality in the county, and the name by which the land is generally known, if any, shall be given. (b) Method of Sale. All public sales of real estate shall be made at public auction to the highest bidder. (c) Time and Place of Sale. All such sales shall be made in the county in which the proceedings are pending, at the courthouse door of said county, or other place in such county where sales of real estate are specifically authorized to be made, on the first Tuesday of the month after publication of notice shall have been completed, between the hours of ten o'clock A.M. and four o'clock P.M., provided, that if deemed advisable by the court, he may order such sale to be made in the county in which the land is situated, in which event notice shall be published both in such county and in the county where the proceedings are pending. (d) Continuance of Sales. If sales are not completed on the day advertised, they may be continued from day to day by making public announcement verbally of such continuance at the conclusion of the sale each day, such continued sales to be within the same hours as hereinbefore prescribed. If sales are so continued, the fact shall be shown in the report of sale made to the court. (e) Failure of Bidder to Comply. When any person shall bid off property of an estate offered for sale at public auction, and shall fail to comply with the terms of sale, such property shall be readvertised and sold without any further order; and the person so defaulting shall be liable to pay to the representative of the estate, for its benefit, ten per cent of the amount of his bid, and also any deficiency in price on the second sale, such amounts to be recovered by such representative by suit in any court having jurisdiction of the amount claimed, in the county in which the sale was made. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. §350. Private Sales of Real Estate All private sales of real estate shall be made in such manner as the court directs in its order of sale, and no further advertising, notice, or citation concerning such sale shall be required, unless the court shall direct otherwise. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Acts 1979, 66th Leg., p. 1755, ch. 713, § 29, eff. Aug. 29, 1979. §351. Sales of Easements and Right of Ways It shall be lawful to sell and convey easements and rights of ways on, under, and over the lands of an estate being administered under orders of a court, regardless of whether the proceeds of such a sale are required for payment of charges or claims against the estate, or for other lawful purposes. The procedure for such sales shall be the same as now or hereafter provided by law for sales of real property of estates of decedents or wards at private sale. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. 2. NONCOMPLIANCE WITH ORDER OF SALE. As is the case with most of the statutory procedures, failure to follow all of the procedural niceties will not subject the sale to collateral attack if an order confirming the sale is later entered, at least according to all but the earliest decisions.(381) The cases are not in agreement on whether or not a direct attack will lie if there is no injury to the estate.(382) P. REPORT OF SALE. 1. CONTENT OF REPORT. The "sale" is to be reported to the court within thirty days, showing the items enumerated in §353, infra. §353. Reports of Sale All sales of real property of an estate shall be reported to the court ordering the same within thirty days after the sales are made. Reports shall be in writing, sworn to, and filed with the clerk, and noted on the probate docket. They shall show: (a) The date of the order of sale. (b) The property sold, describing it. (c) The time and place of sale. (d) The name of the purchaser. (e) The amount for which each parcel of property or interest therein was sold. (f) The terms of the sale, and whether made at public auction or privately. (g) Whether the purchaser is ready to comply with the order of sale. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. 2. DEFECTS IN REPORT. The failure to render the report in the proper form or in the proper time will not void the sale if a subsequent order confirming the sale is entered. This point was abundantly illustrated in a recent case in which all of the terms of the sale were actually set forth in the order of sale, and thus, it was held that a report of sale would be superfluous.(383) Q. BOND ON SALE OF REAL ESTATE. §354. Bond on Sale of Real Estate If the personal representative of the estate is not required by this Code to furnish a general bond, the sale may be confirmed by the court if found to be satisfactory and in accordance with law. Otherwise, before any sale of real estate is confirmed, the court shall determine whether the general bond of said representative is sufficient to protect the estate after the proceeds of the sale are received. If the court so finds, the sale may be confirmed. If the general bond be found insufficient, the sale shall not be confirmed until and unless the general bond be increased to the amount required by the court, or an additional bond given, and approved by the court. The increase, or the additional bond, shall be equal to the amount for which such real estate is sold, plus, in either instance, such additional sum as the court shall find necessary and fix for the protection of the estate; provided, that where the real estate sold is encumbered by a lien to secure a claim against the estate and is sold to the owner or holder of such secured claim and is in full payment, liquidation, and satisfaction thereof, no increased general bond or additional bond shall be required except for the amount of cash, if any, actually paid to the representative of the estate in excess of the amount necessary to pay, liquidate, and satisfy such claim in full. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. R. HEARING ON REPORT OF SALE/DECREE CONFIRMING SALE. After the report of sale has been filed, the court is to hear evidence for and against the report and if satisfied that the price was fair, that the sale was properly made, etc., the court is to enter a decree confirming the sale. The decree confirming sale has the effect of a final judgment. It is for this reason, perhaps, that any defects in the procedures leading to the decree are usually not subject to collateral attack. §355. Action of Court on Report of Sale After the expiration of five days from the filing of a report of sale, the court shall inquire into the manner in which the sale was made, hear evidence in support of or against such report, and determine the sufficiency or insufficiency of the representative's general bond, if any has been required and given; and, if he is satisfied that the sale was for a fair price, was properly made and in conformity with law, and has approved any increased or additional bond which may have been found necessary to protect the estate, the court shall enter a decree confirming such sale, showing conformity with the foregoing provisions of the Code, and authorizing the conveyance of the property to be made by the representative of the estate upon compliance by the purchaser with the terms of the sale, detailing such terms. If the court is not satisfied that the sale was for a fair price, was properly made, and in conformity with law, an order shall be made setting the same aside and ordering a new sale to be made, if necessary. The action of the court in confirming or disapproving a report of sale shall have the force and effect of a final judgment; and any person interested in the estate or in the sale shall have the right to have such decrees reviewed as in other final judgments in probate proceedings. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Amended by Acts 1975, 64th Leg., p. 2197, ch. 701, § 6, eff. June 21, 1975. S. DELIVERY OF DEED CONVEYING TITLE TO REAL ESTATE. A deed conveying title to real estate in a dependent administration is not effective until the decree confirming sale has been entered. After the decree has been entered the executor shall make a deed "which shall refer to and identify the decree." Note that such a judicially ordered sale is not a foreclosure sale and consequently will not have the effect of discharging liens not satisfied with the proceeds,(384) and this is true even if the court order recites that the sale is free of all liens.(385) §356. Deed Conveys Title to Real Estate When real estate is sold, the conveyance shall be by proper deed which shall refer to and identify the decree of the court confirming the sale. Such deed shall vest in the purchaser all right, title, and interest of the estate to such property, and shall be prima facie evidence that said sale has met all applicable requirements of the law. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. § 357. Delivery of Deed, Vendor's and Deed of Trust Lien After a sale is confirmed by the court and the terms of sale have been complied with by one purchaser, the representative of the estate shall forthwith execute and deliver to the purchaser a proper deed conveying the property. If the sale is made partly on credit, the vendors lien securing the purchase money note or notes shall be expressly retained in said deed, and in no event waived, and before actual delivery of said deed to purchaser, he shall execute and deliver to the representative of the estate a vendors lien note or notes, with or without personal sureties as the court shall have ordered, and also a deed of trust or mortgage on the property as further security for the payment of said note or notes. Upon completion of the transaction, the personal representative shall promptly file or cause to be filed and recorded in the appropriate records in the county where the land is situated said deed of trust or mortgage. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. T. FAILURE TO DELIVER DEED CONVEYING TITLE TO REAL ESTATE. If the deed is not made, but the decree confirming the sale has become final, a purchaser of land who has complied with the terms of the sale will have equitable title to the land.(386) Further, the statute imposes liability on the representative and the sureties on his bond, shall be liable for the use of the property by the estate and for all damages. It is also grounds for removal. §358. Penalty for Neglect Should the representative of an estate neglect to comply with the preceding Section, or to file the deed of trust securing such lien in the proper county, he and the sureties on his bond shall, after complaint and citation, be held liable for the use of the estate, for all damages resulting from such neglect, which damages may be recovered in any court of competent jurisdiction, and he may be removed by the court. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. U. PROHIBITION AGAINST SELF DEALING. Texas has long had a strict prohibition against any type of self dealing by fiduciaries. The cases holding personal representatives liable for self dealing are legion, and it is fair to say that the courts will go out of the way to set aside any transaction that even remotely smacks of self dealing.(387) In the case of a decedent's estate, the prohibition is found in §352 of the Probate Code. In the case of a trust, the proscription is found in Trust Code §113.053. 1. SELF DEALING UNDER THE PROBATE CODE. Until recent memory, the Probate Code prohibition against self dealing was absolute on its face. The statute has been liberalized several times. The statute has been amended to allow for self dealing if the will expressly authorizes the sale, or if the sale is pursuant to the terms of an executory contract entered into by the decedent with the representative during life.(388) In addition, the court may now authorize self interest if notice is given and if the court finds the transaction to be in the best interest of the estate. A self dealing transaction is voidable by any person interested in the estate, upon complaint to the court. The statute as most recently amended reads as follows: §352. Representative Purchasing Property of the Estate (a) Except as provided by Subsection (b), (c) or (d) of this section, the personal representative of an estate shall not become the purchaser, directly or indirectly, of any property of the estate sold by him, or by any co-representative if one be acting. (b) A personal representative of an estate may purchase property from the estate if the will, duly admitted to probate, appointing the personal representative expressly authorizes the sale. (c) A personal representative of a decedent or of a ward who has been adjudged incompetent may purchase property from the estate of the decedent or ward in compliance with the terms of a written executory contract signed by the decedent or by the ward before the ward became incompetent, including a contract for deed, earnest money contract, buy/sell agreement, or stock purchase or redemption agreement. (d) After issuing the notice required by this subsection, a personal representative of an estate, including an independent administrator, may purchase property from the estate on the court's determination that the sale is in the best interest of the estate. The personal representative shall give notice by certified mail, return receipt requested, unless the court requires another form of notice, to each distributee of a deceased person's estate and to each creditor whose claim remains unsettled after presenting a claim within six months of the original grant of letters. In the case of an application filed by the guardian of the estate of a ward, the court shall appoint an attorney ad litem to represent the ward with respect to the sale. The court may require additional notice or it may allow for the waiver of the notice required for a sale made under this subsection. (e) If a purchase is made in violation of this section, any person interested in the estate may file a written complaint with the court in which the proceedings are pending, and upon service of citation upon the representative, after hearing and proof, such sale shall be by the court declared void, and shall be set aside by the court and the property ordered to be reconveyed to the estate. All costs of the sale, protest, and suit, if found necessary, shall be adjudged against the representative. Acts 1955, 54th Leg., p. 88, ch. 55, eff. Jan. 1, 1956. Amended by Acts 1985, 69th Leg., ch. 709, § 1, eff. Aug. 26, 1985; Acts 1989, 71st Leg., ch. 651, § 1, eff. June 14, 1989; Acts 1991, 72nd Leg., ch. 895, §14, eff. Sept. 1, 1991 Section 2 of the 1985 amendatory act provides: "The change in Section 352, Texas Probate Code, made by this Act applies only to the purchase of property from an estate that is the subject of a will filed for probate on or after the effective date of this Act. The purchase of property from an estate that is the subject of a will filed for probate before the effective date of this Act is covered by the law in effect when the will was filed, and the former law is continued in effect for that purpose." Section 2 of the 1989 amendatory act provides: "(a) The intent of the legislature is to clarify the law relating to the purchase of estate property from and estate of a decedent or ward by the personal representative of the estate. "(b) Subsection (c), Section 352, Probate Code, as added by Section 1, Chapter 709, Acts of the 69th Legislature, Regular Session, 1985, applies only to the purchase of estate property from an estate of a decedent or ward by a personal representative of the estate whose application for appointment was filed on or after August 26, 1985. The purchase of estate property from an estate by a personal representative whose application for appointment was filed before August 26, 1985, is governed by the law in effect when the application for appointment was filed, and the former law is continued in effect for that purpose." Section 20(c) of the 1991 amendatory act provides: "The change in the law made by Section 14 of this Act applies only to sales made on or after the effective date o this Act. A sale of property made under Section 14 before the effective date of this Act is governed by the law in effect when the sale of property was made, and the former law is continued in effect for that purpose." 2. SELF DEALING UNDER THE TRUST CODE. The Trust Code prohibition against self dealing is not in pari materia with the Probate Code. The Trust Code rule is both more liberal in some respects and more conservative in others. The biggest difference is that there is an absolute prohibition against a trustor relieving a corporate trustee (i.e., a bank) from the rule. This is important to consider where a will leaves an estate to a testamentary trust. If the family wants to allow an inter-trust transaction, say, between two testamentary trusts that have the same corporate trustee, it must do it during the administration of the estate, before the trusts are funded. § 113.053 Purchase or Sale of Trust Property by Trustee (a) Except as provided by Subsections (b), (c), (d), (e), and (f) a trustee shall not directly or indirectly buy or sell trust property from or to: (1) the trustee or an affiliate; (2) a director, officer, or employee of the trustee or an affiliate; (3) a relative of the trustee,(389) or (4) the trustee's employer, partner, or other business associate. (b) A national banking association or a chartered corporation with the right to exercise trust powers that is serving as executor, administrator, guardian, trustee, or receiver may sell shares of its own capital stock held by it for an estate to one or more of its officers or directors if a court: (1) finds that the sale is in the best interest of the estate that owns the shares; (2) fixes or approves the sales price of the shares and the other terms of the sale; and (3) enters an order authorizing and directing the sale. (c) If a corporate trustee, executor, administrator, or guardian is legally authorized to retain its own capital stock in trust, the trustee may exercise rights to purchase its own stock if increases in the stock are offered pro rata to shareholders. (d) If the exercise of rights or the receipt of a stock dividend results in a fractional share holding and the acquisition meets the investment standard required by this subchapter, the trustee may purchase additional fractional shares to round out the holding to a full share. (e) A trustee may: (1) comply with the terms of a written executory contract signed by the settlor, including a contract for deed, earnest money contract, buy/sell agreement, or stock purchase or redemption agreement; and (2) sell the stock, bonds, obligations, or other securities of a corporation to the issuing corporation or to its corporate affiliate if the sale is made under an agreement described in Subdivision (1) or complies with the duties imposed by Section 113.056. (f) A national banking association, a state-chartered corporation, including a state chartered bank or trust company, a state or federal savings and loan association that has the right to exercise trust powers and that is serving as trustee, or such an institution that is serving as custodian with respect to an individual retirement account, as defined by Section 408, Internal Revenue Code,1 or an employee benefit plan, as defined by Section 3(3), Employee Retirement Income Security Act of 1974(29 U.S.C. Section 1002(3)), regardless of whether the custodial account is, or would otherwise be, considered a trust for purposes of this subtitle, may: (1) employ an affiliate or division within a financial institution to provide brokerage, investment, administrative, custodial, or other account services for the trust or custodial account and charge the trust or custodial account for the services, provided, however, nothing in this section shall allow an affiliate or division to engage in the sale or business of insurance if not otherwise permitted to do so; and (2) receive compensation, directly or indirectly, on account of the services performed by the affiliate or division within the financial institution, whether in the form of shared commissions, fees, or otherwise, provided that any amount charged by the affiliate or division for the services is disclosed and does not exceed the customary or prevailing amount that is charged by the affiliate or division, or a comparable entity, for comparable services rendered to a person other than the trust. Amended by Acts 1983, 68th Leg., p. 3332, ch. 567, art. 2, § 2, eff. Jan. 1, 1984; Acts 1985, 69th Leg., ch. 974, §§ 1, 2, eff. Aug. 26, 1985; Acts 1989, 71st Leg., ch. 341, § 1, eff. Aug. 28, 1989. 126 U.S.C.A. § 408. 3. POWER OF TRUSTOR TO WAIVE RULE AGAINST SELF DEALING IS LIMITED IN THE CASE OF A CORPORATE TRUSTEE. The Texas Trust Code, and formerly, the Texas Trust Act, both allow self dealing among non corporate trustees where authorized by the trust instrument. §113.059. Power of Trustor to Alter Trustee's Responsibilities (a) Except as provided by Subsection (b) of this section, the settlor by provision in an instrument creating, modifying, amending, or revoking the trust may relieve the trustee from a duty, liability, or restriction imposed by this subtitle. (b) A settlor may not relieve a corporate trustee from the duties, restrictions, or liabilities of Section 113.052 or 113.053 of this Act. Amended by Acts 1983, 68th Leg., p. 3332, ch. 567, art. 2, § 2, eff. Jan. 1, 1984; Acts 1984, 68th Leg., 2nd C.S., ch. 18, § 12, eff. Oct. 2, 1984.
A. WILL PROVISIONS CONTROL OVER STATUTE. In the absence of a Will provision to the contrary, §241 of the Probate Code establishes the commissions to which an executor is entitled in Texas. However, if the Will sets forth a different amount or formula, then the Will provision governs and §241 does not apply.(390) If the Will provides for reasonable executor's fees, the question arises, is the statutory rate per se reasonable, such that an executor could always rely that it was at least enough? While the statutory rate is always available when the Will is silent --whether it is reasonable or not-- if the Will provides for reasonable compensation, then the statutory rate is relevant but not dispositive, which means that it could result in a commission that is too high. B. PROBATE CODE §241--THE 5% IN AND OUT RULE. Where there is no will, or where the will is silent, the Texas statutory scheme uses what we call the 5% in and out method. Under this method fiduciaries are "entitled to receive, and may retain in their hands, a commission of five per cent (5%) on all sums they may actually receive in cash, and the same per cent on all sums they may actually pay out in cash."(391) [Emphasis added.] The following important modifications to the 5% in and out rule are set forth in the statute and should be noted. C. PROBLEMS WITH AND LIMITATIONS ON THE 5% IN AND OUT RULE. There are many problems in applying the 5% in and out rule in real life. 1. SALE OF MORTGAGED PROPERTY. A common issue is determining the size of the commission on the sale of mortgaged real estate. (392)2. MISCELLANEOUS ISSUES-- LOANS, TAXES, RECEIPTS FROM A BUSINESS, ETC.. It has been held that fiduciaries are entitled to a commission on amounts borrowed,(393) and amounts paid out for federal estate and state inheritance taxes.(394) The commission does not apply to receipts and disbursements incurred in the operation of a business held by the estate.(395) However, the statute allows special compensation for operating a business. Such special compensation does not deprive the fiduciary of the statutory commission on other transactions not related to the operation of the business.(396) No commission is allowed for cash payments to the beneficiaries.(397) 3. JOINT FIDUCIARIES. If there is more than one fiduciary, the commission is the same as if there were only one, and the fiduciaries should divide the commissions equally.(398) (Corporate fiduciaries are often able to avoid this rule by providing in a fee agreement, a contract, that fees will not be shared.(399)) 4. COURT FINDINGS REQUIRED BEFORE COMMISSION CAN BE PAID. An amendment to the statute now requires before receiving the commission, the court must first specifically find that the fiduciary has "taken care of and managed the estate in compliance with the standards of this Code..."(400) However, this rule is thought not to apply to an independent executor.(401) 1. 1As will be discussed later in the outline, many of the procedural rules do not apply to an independent administration. 2. 2Note that there is no longer a requirement that funeral expenses and expenses of last illness be presented within 60 days to be given class one status. The expense limit was raised from $5000 to $15,000 effective Setember 1, 1997. 3. 3There is no longer a requirement that the first $15,000 of funeral expenses and expenses of last illness be presented within 60 days, as was the case prior to 1996, thus removing an inconsistency that previously existed between Class One claims under §322 and the priority specified in §320(a)(1). 6. 1Tex. Prob. Code §146(c)(2). 8. 2See Ertel v. O'Brien, 852 S.W.2d 17 (Tex. Civ. App.-- Waco 1993, writ den.). Cf., Humane Society v. Austin National Bank , 531 S.W.2d 574, 577 (Tex.1975). 9. 7Woods v. Bradford, 284 S.W. 673 (Tex. Civ. App. --El Paso 1926, no writ). Jenkins v. First National Bank of Coleman, 101 S.W.2d 845 (Tex. Civ. App. --Austin 1937, no writ). Ertel v. O'Brien, 852 S.W.2d 17 (Tex. Civ. App.-- Waco 1993, writ den.). 13. 4George v. First National Bank of Tulia, 67 S.W.2d 324 (Tex. Civ. App.-1933, writ ref'd); Dallas Joint Stock Land Bank In Dallas v. Maxey, 112 S.W.2d 305 (Tex. Civ. App.-Dallas 1937, no writ); and Woodward and Smith, Probate and Decedents' Estates, 18 TEXAS PRACTICE (1971), §913. 15. 5Hammond v. Carthage Sulphite Pulp and Paper Co., 34 F. 2d 155 (D.C. N.Y., 1928); U.S. v. Weisburn, 48 F. Supp. 393 (D.C. Pa. 1943). 17. 7Schwartz v. Commissioner, 560 F.2d 311 (8th Cir. 1977). 18. 8Federal Reserve Bank of Dallas v. Smylie, 134 S.W.2d 838 (Tex. Civ. App.-Amarillo 1939, no writ). 19. 9United States v. Kimbell Foods, Inc., 440 U.S. 715, 99 S.Ct. 1448, 59 L. Ed. 2d 711 (1979). 20. 11Tex. Prob. Code 306(d), second clause. Wyatt v. Morse, 129 Tex. 199, 102 S.W.2d 396 (1937); and Gross Nat'l Bank of San Antonio v. Merchant, 459 S.W.2d 483 (Tex. Civ. App.-San Antonio 1970, no writ). 21. 12San Antonio Savings Association v. Beaudry, 769 S.W.2d 277 (Tex. Civ. App.-- Dallas 1989, writ den.). 23. 10Tex. Prob. Code §§298(a) and 306(a)(1). 24. 11Tex. Prob. Code 306(d), second clause. Wyatt v. Morse, 129 Tex. 199, 102 S.W.2d 396 (1937); and Gross Nat'l Bank of San Antonio v. Merchant, 459 S.W.2d 483 (Tex. Civ. App.-San Antonio 1970, no writ). 25. 12Woodward and Smith, Probate and Decedents' Estates, 18 TEXAS PRACTICE (1971) §916; Furguson v. Mounts, 281 S.W. 616 (Tex. Civ. App.-1926, writ dism'd); Burke v. Guilford Mortgage Co., 161 S.W.2d 574 (Tex. Civ. App.-1942, writ ref'd wom); and Wyatt v. Morse, 129 Tex. 199, 102 S.W.2d 396, 398 (1937). 26. 14Tex. Prob. Code §306(a)(2). 27. 13Tex. Prob. Code 306(d), second clause. Wyatt v. Morse, 129 Tex. 199, 102 S.W.2d 396 (1937); and Gross Nat'l Bank of San Antonio v. Merchant, 459 S.W.2d 483 (Tex. Civ. App.-San Antonio 1970, no writ). 28. 14Tex. Prob. Code §306(a)(2). 29. 15Tex. Prob. Code §306(b). 30. 16Bunting v. Pearson, 430 S.W.2d 470 (Tex. 1978). 31. 15Joffrion v. Texas Bank of Tatum, 780 S.W.2d 451 (Tex. App.-Austin 1989, writ granted) and Texas Commerce Bank-Austin, N.A. v. Estate of George Cox, Deceased, 783 S.W.2d 16 (Tex. App.-Texarkana 1989, writ denied). Cf., Gibraltar Mortgage and Loan Corporation v. Lerman, 346 S.W.2d 487, 488 (Tex. App.-Waco 1961, no writ). 32. 16Texas Commerce Bank, N.A. v. Geary, 1996 Tex. App. LEXIS 4126, Docket No. 05-94-01210-CV (Tex. App.--Dallas Dallas [5th Dist.] 1996, n.w.h. to date). 33. 17In 1997 the phrase "by certified or registered mail" was deleted at this point from the statute. 34. 18Tex. Prob. Code §146(b). 35. 17See Black v. Gray, 280 S.W. 573 (Comm'n. App. 1926); Smalley v. Trammel, 11 Tex. 10; and Mitchell v. Rucker, 22 Tex. 66 (1958). 36. 19Bandy v. First State Bank, 1992 WL 80260 (Tex. 1992) (not yet reported?). Real Estate, Probate and Trust Law Newsletter, July 1992, Vol. 30, No. 4. 37. 20See Albiar v. Arguello, 612 S.W.2d 219 (Tex. Civ. App.-Eastland 1980, no writ). 38. 18Harms v. Ehlers, 179 S.W.2d 582 (Tex. Civ. App.-Austin 1944, writ ref'd); Long v. Castaneda, 475 S.W.2d 578 (Tex. Civ. App.-Corpus Christi 1971, writ ref'd n.r.e.); Dent v. A. Harris & Co., 255 S.W. 221 (Tex. Civ. App.-- 1923, no writ), and First National Bank v. Cone, 170 S.W.2d 782 (Tex. Civ. App.- Fort Worth 1943, writ ref'd). 39. 21Flournoy Drilling Company v. Walker, 750 S.W.2d 911 (Tex. App.-Corpus Christi 1988, writ denied). 40. 22Kiolbassa v. Raley, 23 S.W. 253 (Tex. Civ. App.-- 1892); First National Bank v. Cone, 170 S.W.2d 782 (Tex. Civ. App.- Fort Worth 1943, writ ref'd). 41. 23Harms v. Ehlers, 179 S.W.2d 582 (Tex. Civ. App.-Austin 1944, writ ref'd). 42. 24See Creditor Problems From The Estate's Viewpoint, by Joseph S. Horrigan, 1988 Advanced Estate Planning and Probate Course, State Bar of Texas Professional Development Program at page O-29 for an interesting discussion of this issue. 43. 25Flournoy Drilling Company v. Walker, 750 S.W.2d 911 (Tex. App.-Corpus Christi 1988, writ denied) 45. 20Tex. Prob. Code §295(c). 47. 22Hume v. Perry, 136 S.W. 594 (Tex. Civ. App. 1911, writ dism'd). 49. 23See Anderson v. First National Bank of El Paso, 120 Tex. 313, 38 S.W.2d 768 (1931). See also, Comment, "Contingent Claims Against Decedent's Estates: A Need for Legislation in Texas," 28 S.W.L.J. 561 (1964). 50. 27Rivera v. Morales, 733 S.W.2d 677 (Tex. App.-San Antonio 1987, writ ref'd n.r.e.). 51. 28Connelly v. Paul, 731 S.W.2d 657 (Tex. App.-Houston [1st Dist.] 1987, writ ref'd n.r.e.). 52. 29Bullion v. Campbell & Strong, 27 Tex. 653 (1864); Robinson v. McDonald's Widow & Heirs, 11 Tex. 385 (1854). 53. 30Lusk v. Mintz, 625 S.W.2d 774 (Tex. App.-Houston [14th Dist.] 1981, no writ). 54. 24Ullrich v. Estate of Anderson, 740 S.W.2d 481 (Tex. App.-Houston [1st Dist.] 1987, no writ ). 55. 25Ditto Investment Co. v. Ditto, 293 S.W.2d 267 (Tex. Civ. App.- Fort Worth 1956, no writ). See also Collins v. State, 506 S.W.2d 293 (Tex. Civ. App.-San Antonio 1973, no writ). 56. 26Tex. Prob. Code §303, last sentence. (Emphasis added.) 57. 27Compare Boney v. Harris, 557 S.W.2d 376 (Tex. Civ. App.-Houston [1st Dist.] 1977, no writ), with City of Austin v. Aguilar, 607 S.W.2d 310 (Tex. Civ. App.-Austin 1980, no writ). See also, Parsons v. Parsons, 275 S.W. 200 (Tex. Civ. App.-Texarkana 1925, aff'd on other grounds), 284 S.W. 933 (Tex. Comm'n App. 1926, Jdgmt Adopted); Furniture Dynamics, Inc. v. Estate of Hurley, 560 S.W.2d 486 (Tex. Civ. App.-Dallas 1977, no writ); Hooks v. Martin, 279 S.W.2d 592 (Tex. Civ. App.-Beaumont 1921, no writ); Small v. Small, 434 S.W.2d 940 (Tex. Civ. App.-Waco 1968, writ ref'd n.r.e.); Lusk v. Mintz, 625 S.W.2d 774 (Tex. App.-Houston [14th Dist.] 1981, no writ); and cf. Cessna Finance Corp. v. Morrison, 667 S.W.2d 580 (Tex. App.-Houston [1st Dist.] 1984, no writ). 59. 29Tex. Prob. Code §306(b). 60. 31Tex. Prob. Code §306(b), last sentence, and (in the case of an independent administration) §146(b). 64. 33Tex. Prob. Code §312(d). 66. 34Bunting v. Pearson, 430 S.W.2d 470 (Tex. 1968). 68. 36Russell v. Dobbs, 163 Tex. 282, 354 S.W.2d 373 (Tex. 1962). 69. 37Russell v. Dobbs, 163 Tex. 282, 354 S.W.2d 373, at 376 (Tex. 1962). 70. 33First State Bank of Bedias, id, at p. 736. (Emphasis added.) 72. 38Anderson v. Oden, 780 S.W.2d 463 (Tex. App.-Texarkana 1989, n.w.h.). See also Trammel v. Blackburn, 116 Tex. 388, 292 S.W. 169 (1927); Jones v. Gibbs, 133 Tex. 627, 130 S.W.2d 265 (1939); and Woodward and Smith, Probate & Decedents' Estates, 18 TEXAS PRACTICE (1971) §936. 73. 35See Cocke v. Smith, 142 Tex. 396, 179 S.W.2d 954 (Tex. 1944) & Pearce v. Stokes, 155 Tex. 564, 291 S.W.2d 309 (1956); and cf., Mackey v. Lucey Products Corp., 150 Tex. 188, 239 S.W.2d 607 (1951) and First National Bank of Bowie v. Cone, 170 S.W.2d 782 (Tex. Civ. App.-Fort Worth 1943, writ ref'd). 74. 39American Savings and Loan Association of Houston v. Jones, 482 S.W.2d 62 (Tex. Civ. App.-Houston [14th Dist.] 1972, writ ref'd n.r.e.). 75. 40See Bozeman v. Folliott, 556 S.W.2d 608 (Tex. Civ. App.-Corpus Christi 1977, writ ref'd n.r.e.) See the paragraph below, relating to independent administrations. 76. 36Tex. Prob. Code §317(a). 77. 41Tex. Prob. Code §317(c). 78. 42Dean v. Driscoll, 56 S.W.2d 503 (Tex. Civ. App--San Antonio 1933, writ dism'd). Cf., El Paso National Bank v. Leeper, 538 S.W.2d 803 (Tex. Civ. App--El Paso 1976, writ ref'd n.r.e.) and Bunting v. Pearson, 430 S.W.2d 470 (Tex. 1968). 79. 43Tex. Prob. Code §317(c). 82. 44Clements v. Chajkowski, 208 S.W.2d 841 (Tex. 1948). 83. 39Tex. Prob. Code §399(a). 84. 45Tex. Prob. Code §405(3) & (4). 85. 40Tex. Civ. Prac. and Rem Code §16.003. 86. 46Tex. Civ. Prac. and Rem Code §16.004. 88. 47Palfrey v. Harborth, 158 S.W.2d 326 (Tex. Civ. App.-San Antonio 1942, writ ref'd). 90. 49Rejection of a claim by an independent executor does not start the special ninety day statute of limitations running.Bunting v. Pearson, 430 S.W.2d 470 (Tex. 1968). 91. 42Bunting v. Pearson, 430 S.W.2d 470 (Tex. 1968). 92. 43Tex. Prob. Code §298(a), prior to 1996. 93. 50Tex. Prob. Code §306(b). 94. 44§16.062 Texas Civil Practice and Remedies Code. Formerly Tex. Rev. Civ. Stat. Ann. art 5538. 95. 45When an independent administration has been created and the inventory has been filed and approved, further action of any nature shall not be had in the county court, except where the Tex. Prob. Code "specifically and explicitly provides." Tex. Prob. Code §145(h). (Emphasis added.) See also, Corpus Christi Bank and Trust v. Alice National Bank, 444 S.W.2d 632 (Tex. 1969). 96. 51Bunting v. Pearson, 430 S.W.2d 470 (Tex. 1968). 97. 52Tex. Prob. Code §145(h). 98. 46In 1997 the phrase "by certified or registered mail" was deleted at this point from the statute. 99. 53A provision similar to 146(c)(2) was added as Probate Code Section 320(d) in the case of an dependent administration. 100. 54§146(d) & (e) were added in 1997, effective September 1, 1997. 102. 47Tex. Prob. Code §146(a)(1). For prior law, see Roberts v. Carlisle, 4 S.W.2d 144 (Tex. Civ. App.-Dallas 1928, writ dism'd), and Woodward and Smith, Probate and Decedents' Estates, 17 TEXAS PRACTICE (1971) §500 and the first sentence of the last paragraph of §901. 104. 56Bunting v. Pearson, 430 S.W.2d 470 (Tex. 1968). See also Collins v. State, 506 S.W.2d 293 (Tex. Civ. App.-San Antonio 1973, no writ). 105. 57Tex. Prob. Code §146(d). 106. 58For prior law, see Fischer v. Britton, 125 Tex. 505, 83 S.W.2d 305 (1935) and Woodward and Smith, Probate and Decedents' Estates, Vol. 18 TEXAS PRACTICE (1971) §915, and the discussion infra. But see also Gross Nat'l Bank of San Antonio v. Merchant, 459 S.W.2d 483 (Tex. Civ. App.-San Antonio 1970, no writ). 107. 59In 1997 the phrase "by certified or registered mail" was deleted at this point from the statute. 108. 60Tex. Prob. Code §146(b). 109. 49Fischer v. Britton, 125 Tex 505, 83 S.W.2d 305 (Tex. 1935). 110. 61Collins v. State, 506 S.W.2d 293 (Tex. Civ. App.-San Antonio 1973, no writ). 111. 62Ditto Investment Co. v. Ditto, 293 S.W.2d 267 (Tex. Civ. App.- Fort Worth 1956, no writ). See also Collins v. State, 506 S.W.2d 293 (Tex. Civ. App.-San Antonio 1973, no writ). 112. 63Ditto Investment Co. v. Ditto, 293 S.W.2d 267 at 269 (Tex. Civ. App.- Fort Worth 1956, no writ). 113. 64Tex. Prob. Code §146(d)&(e). 114. 50Bunting v. Pearson, 430 S.W.2d 470 at 473 (Tex. 1968). 115. 65Fischer v. Britton, 125 Tex 505, 83 S.W.2d 305 (Tex. 1935); Sloan v. Dahl, 127 S.W.2d 284 (Tex. Civ. App. 1930); Ditto Investment Co. v. Ditto, 293 S.W.2d 267 (Tex. Civ. App.- Fort Worth 1956, no writ); Ball v. Parks, 278 S.W.2d 189 (Tex. Civ. App.-Fort Worth 1955, writ dism'd w.o.j.); Pottinger v. Southwestern Life Insurance Co., 138 S.W.2d 645 (Tex. Civ. App.-Waco 1940, no writ). 116. 66Bunting v. Pearson, 430 S.W.2d 470 (Tex. 1968). 117. 67Bozeman v. Folliott, 556 S.W.2d 608 (Tex. Civ. App.-Corpus Christi 1977, writ ref'd n.r.e.). 118. 51Bunting v. Pearson, 430 S.W.2d 470 at 473 (Tex. 1968). 119. 52Beaumont Bank, N.A. v. Buller, 806 S.W. 2d 223 (Tex. 1991). 122. 69Civil Practice and Remedies Code §31.002. 123. 70Beaumont Bank, N.A. v. Buller, 806 S.W.2d 223 (Tex. 1991). 124. 54Nutt v. Anderson, 87 S.W.2d 760 (Tex. Civ. App. --Fort Worth 1935, writ dism'd); Batten v. Mercer, 149 S.W.2d 198 (Tex. Civ. App. --Beaumont 1941, no writ); Cole v. Lewis, Tex. Civ. App. -- Fort Worth 1913). 125. 71Nutt v. Anderson, 87 S.W.2d 760 (Tex. Civ. App. --Fort Worth 1935, writ dism'd). 126. 72Tex. Prob. Code §306(d)-(k). 127. 73Tex. Prob. Code §306(e)(1)-(3). 129. 56Price v. U.S., 269 U.S. 492, 499 (1926). Want v. Commissioner, 280 F.2d 777 (2nd Cir. 1960); Viles v. Commissioner, 233 F.2d 376, 379-380 (6th Cir. 1956); Beckwith v. Commissioner, 69 TCM 1678, 1680 (1995). 130. 74Treas. Reg. §20.2002-1, second sentence, third paragraph. 131. 75Abrams v. U.S., 274 F.2d 8, 12-13 (8th Cir., 1960). 132. 76Schwartz v. Commissioner, 560 F.2d 311, 314 (8th Cir., 1977). Contra, Federal Reserve Bank of Dallas v. Smylie, 134 S.W.2d 838 (Tex. Civ. App.-Amarillo 1939, no writ). 133. 77Rev. Rul. 80-112, 1980-x C.B. xxx. 134. 78Bramwell v. U.S. Fidelity & Guaranty Co., 269 U.S. 483 (1926); United States v. Bond, 279 F.2d 837, 841 (4th Cir. 1960), cert. den., 364 U.S. 895 (1960). 135. 79U.S. v. Moore, 423 U.S. 77 (1975); U.S. v. Key, 397 U.S. 322 (1970); U.S. v. Vermont, 377 U.S. 351 (1964). 136. 57United States v. Oklahoma, 261 U.S. 253, 260 (1923). 137. 80Schwartz v. Commissioner, 560 F.2d 311, 314 (8th Cir., 1977). Contra, Federal Reserve Bank of Dallas v. Smylie, 134 S.W.2d 838 (Tex. Civ. App.-Amarillo 1939, no writ). 138. 81Hatch v. Morosco Holding Company, 50 F.2d 138, 139 (2nd Cir. 1931), cert. den. sub. nom., 284 U.S. 668 (1931). 139. 82Schwartz v. Commissioner, 560 F.2d 311, 314 (8th Cir., 1977). United States v. Lutz, 295 F.2d 736, 742 (5th Cir. 1961). United States v. Giger, 26 F. Supp. 624 (W.D. Ark. 1939). 140. 58Lee v. Com'r, 72 T.C. 1105 (1979); Want v. Com'r, 280 F.2d 777 (2nd Cir. 1960); United States v. Vibradamp Corp., 257 F. Supp. 931, 935-936 (S.D. Cal. 1966); Irving Trust Co. v. Com'r, 36 B.T.A. 146 (1937); The Estate of Richard M. Frost (1993) TC Memo 1993-94. 141. 83H.D. Wright (Dean) (1933) 28 BTA 543. 142. 84United States v. Vibradamp Corp., 257 F. Supp. 931, 935-936 (S.D. Cal. 1966). 143. 59Nesbitt v. U.S., 445 F. Supp. 824, 829 (N.D. Dist. Cal. 1978), aff'd, 622 F.2d 433 (9th Cir. 1980), cert. den., 451 U.S. 984 (1981); Durham v. U.S., 545 F. Supp. 1093, 1096 (D.N.J. 1982), aff'd mem., 720 F.2d 661 (2nd Cir. 1983). 144. 85U.S. Blakeman, 750 F. Supp. 216, 224 (N.D. Tex. 1990), aff'd in part, rev'd in part on other grounds, 997 F.2d 1084 (5th Cir. 1992). 145. 86In Re Schmuckler's Estate, 296 N.Y. 2d 202, 58 Misc. 2d 418 (1968). 146. 60United States v. Kimbell Foods, Inc., 440 U.S. 715, 99 S.Ct. 1448, 59 L. Ed. 2d 711 (1979). 148. 62Kleine v. United States, 539 F.2d 427, 431-433 (5th Cir. 1976). 155. 64Miller v. Menke, 56 Tex. 539 (1882); Ford v. Aetna Insurance Co., 424 S.W.2d 612 (Tex. 1968), rehearing denied; O'Neil v. Mack Trucks, Inc., 542 S.W.2d 112, 114 (Tex. 1976). 156. 92Davis v. Lund, 41 S.W.2d 57 (Tex. Comm. App. 1931, holding approved. Sullivan v. Barnett, 471 S.W.2d 39 (Tex. 1971). 157. 93Davis v. Lund, 41 S.W.2d 57 (Tex. Comm. App. 1931, holding approved. Sullivan v. Barnett, 471 S.W.2d 39 (Tex. 1971). 159. 94Prob. Code §284. Tex. Const. Art. 16, §52. 160. 95Shambaugh v. Scofield, 132 F.2d 345 (5th Cir. 1942); Ellis v Patrick, 93 S.W. 1201 (Tex. Civ. App.- 1936, no writ); Williams v. Jones, 106 S.W. 755 (Tex. Civ. App.- 1908); Garrison v. Ferguson's Estate, 54 S.W. 247 (Tex. Civ. App.- 1899, writ ref'd); Salmons v. Thomas, 62 S.W. 102 (Tex. Civ. App. 1901, no writ). 161. 96Thompson v. Kay, 124 Tex. 252, 77 S.W. 2d 201 (1934) at pages 209 & 214; Quintana v. Giraud, 209 W.W.770 (Tex. Civ App. -1919, no writ). Hayworth v. Williams, 102 Tex. 308, 313, 116 S.W. 43, 45, cited in Thompson v. Kay, id. at p. 209. 162. 97Ward v. Hinkle, 117 Tex. 566, 8 S.W.2d 641 (1928); First Coleman National Bank v. Vaughan, 139 S.W.2d 870 (Tex. Civ. App. - 1940, writ dism'd). 163. 66Trimble v. Farmer, 157 Tex. 533, 305 S.W.2d 157 (1957) and Sargeant v. Sargeant, 118 Tex. 343, 15 S.W.2d 589 (1929). 164. 67Murphy v. Slaton, 154 Tex. 35, 273 S.W.2d 588 (1954). 165. 68Roberts v. Roberts, 136 Tex. 255, 150 S.W.2d 236 (1941); Trimble v. Farmer 157 Tex. 533, 305 S.W.2d 157 (1957). 166. 69Richardson v. McCloskey, 276 S.W. 820 (1925 Tex. Comm. Ap.); Hill v. Hill, 623 S.W.2d 779 (Tex. App.-Amarillo 1981, writ ref'd n.r.e.). 167. 70Wright v. Wright, 154 Tex. 138, 274 S.W.2d 670 (1955). 168. 98Little v. Birdwell, 27 Tex 688 (1864); Lindsley v. Lindsley, 139 Tex. 512, 163 S.W.2d 633 (1942); Miller v. Miller, 149 Tex. 543, 235 S.W.2d 624 (1951). 169. 99Land v. Marshall, 426 S.W.2d 841 (Tex. 1968). 170. 100Smith v. Smith, 657 S.W.2d 457 (Tex. App.-San Antonio 1984, writ ref'd, n.r.e.). Noble v. Noble, 636 S.W.2d 551 (Tex. App.--San Antonio 1982, no writ). Churchill v. Churchill, 780 S.W.2d 913 (Tex. App.--Fort Worth 1989, no writ). 171. 101Noble v. Noble, 636 S.W.2d 551 (Tex. App.--San Antonio 1982, no writ). 172. 102Lieber v. Mercantile Nat'l Bank, 331 S.W.2d 463, 465 (Tex. Civ. App.--Dallas 1960, writ ref'd n.r.e.). 173. 103Noble v. Noble, 636 S.W.2d 551, 552 (Tex. App.--San Antonio 1982, no writ). 174. 71Woodward and Smith, Probate and Decedents' Estates, Vol. 18, §862, TEXAS PRACTICE (1971). Zwernemann v. Von Rosenburg, 13 S.W. 285 (Tex. 1890). 175. 72Copplin v. Ewald, 70 S.W.2d 608 (Tex. Civ. App.-San Antonio 1934, no writ) and George v. First National Bank, 67 S.W.2d 324 (Tex. Civ. App.-Amarillo 1933, writ ref'd). Ward v. Braun, 417 S.W.2d 888 (Tex. Civ. App.-Corpus Christi 1967, no writ). 177. 104Tex. Prob. Code §275(c). 178. 105Shambaugh v. Scofield, 132 F.2d 345 (5th Cir. 1942); Ellis v Patrick, 93 S.W. 1201 (Tex. Civ. App.- 1936, no writ); Williams v. Jones, 106 S.W. 755 (Tex. Civ. App.- 1908); Garrison v. Ferguson's Estate, 54 S.W. 247 (Tex. Civ. App.- 1899, writ ref'd); Salmons v. Thomas, 62 S.W. 102 (Tex. Civ. App. 1901, no writ). 179. 74Zwernemann v. Von Rosenburg, 13 S.W. 285 (Tex. 1890); Hoefling v. Hoefling, 167 S.W. 210 (Tex. 1914);Chisholm v. Mills, 250 S.W.2d 268 (Tex. Civ. App.-Waco 1952, writ ref'd); Kay v. Thompson, 40 S.W.2d 884 (Tex. App.-Waco 1931, affd, Thompson v. Kay, 124 Tex. 252, 77 S.W.2d 201). 180. 75Woodward and Smith, Probate and Decedents' Estates, Vol. 18, §859, TEXAS PRACTICE (1971). 181. 76Chisholm v. Mills, 250 S.W.2d 268 (Tex. Civ. App.-Waco 1952, writ ref'd);Galloway v. Galloway, 236 S.W.2d 832 (Tex. Civ. App.-Dallas 1951, no writ); Woodward and Smith, Probate and Decedents' Estates, Vol. 18, §856 & 857, p. 188-190, TEXAS PRACTICE (1971). Dorman v. Grace, 122 S.W. 401 (Tex. Civ. App.- 1909, writ ref'd); §52 of the Texas Constitution. 182. 106Thompson v. Kay, 124 Tex. 252, 77 S.W. 2d 201 (1934) at pages 209 & 214; Quintana v. Giraud, 209 W.W.770 (Tex. Civ App. -1919, no writ). Hayworth v. Williams, 102 Tex. 308, 313, 116 S.W. 43, 45, cited in Thompson v. Kay, id. at p. 209. 183. 107Ward v. Hinkle, 117 Tex. 566, 8 S.W.2d 641 (1928); First Coleman National Bank v. Vaughan, 139 S.W.2d 870 (Tex. Civ. App. - 1940, writ dism'd). 187. 79Woodward and Smith, Probate and Decedents' Estates, 18 TEXAS PRACTICE (1971), §874. Mabry v. Ward, 50 Tex. 404 (1878). First National Bank v. MacFarlane, 160 S.W.2d 969 (Tex. Civ. App.-- xxx 1942, writ ref'd w.o.m.). In Re Mays Estate, 43 S.W.2d 306 (Tex. Civ. App.-- Beaumont 1931, writ ref'd). Hickman v. Hickman, 149 Tex. 439, 234 S.W.2d 410 (1950). 188. 109Cooper v. Cooper, 168 S.W.2d 686 (Tex. Civ. App.-Galveston 1943, no writ). 189. 110For example, if the estate were missing a breeding age bull or a few guineas. 192. 113Woodward and Smith, Probate and Decedents' Estates, 18 TEXAS PRACTICE (1971), §869-882. 194. 114Tex. Prob. Code §275(c). 195. 81Tex. Prob. Code §§286-287. 197. 83Tex. Prob. Code §291(a). 198. 115Tex. Prob. Code §291(b). 199. 84Ward v. Braun, 417 S.W.2d 888, at 894, (Tex. Civ. App.-Corpus Christi 1967, no writ). Pace v. Eoff, 48 S.W.2d 956 (Tex. Comm'n App. 1932, jdgmt adopted). 200. 116Cf. Hutchings v. Bates, 393 S.W.2d 338 (Tex. Civ. App. --xxx 1965, aff'd 406 S.W.2d 410 (Tex. 1966). 201. 117 Miller v. Miller, 235 S.W.2d 624 (Tex. 1951). See also Miller v. Miller, 230 S.W.2d 237 (Tex. Civ. App.--Beaumont 1950, rev'd on other grounds, 235 S.W.2d 624). 202. 118Pace v. Eoff, 48 S.W.2d 956, at 959-960 (Tex. Comm'n App. 1932, jdgmt adopted). Ward v. Braun, 417 S.W.2d 888 (Tex. Civ. App.-Corpus Christi 1967, no writ). Miller v. Miller, 235 S.W.2d 624, 628-29 (Tex. 1951). 203. 119Ward v. Braun, 417 S.W.2d 888, at 894 (Tex. Civ. App.-Corpus Christi 1967, no writ). 205. 120Pace v. Eoff, 48 S.W.2d 956 (Tex. Comm'n App. 1932, jdgmt adopted) and Ward v. Braun, 417 S.W.2d 888 (Tex. Civ. App.-Corpus Christi 1967, no writ). 206. 121Gonzalez v. Gonzalez, 541 S.W.2d 865 (Tex. Civ. App.-Waco 1976, no writ). 207. 122Kennedy. v. Draper, 575 S.W.2d 627 (Tex. Civ. App.-Waco 1978, no writ). 208. 123Cooper v. Pierce, 74 Tex. 526, 12 S.W. 211 (1889). Tex. Prob. Code §291(a). 209. 86Tex. Prob. Code §286(a). 210. 124Tex. Prob. Code §286(b). 211. 87Tex. Prob. Code §286(a). 212. 125Woodward and Smith, Probate and Decedents' Estates, 17 TEXAS PRACTICE (1971), §504. Runnels v. Runnels, 27 Tex. 515 (1864). 213. 126Tex. Prob. Code §146. Cf. Runnels v. Runnels, 27 Tex. 515 (1864). 214. 127Kopplin v. Ewald, 70 S.W.2d 608 (Tex. Civ. App.-- San Antonio 1934, no writ). 215. 88Little v. Birdwell, 27 Tex 688 (1864); Lindsley v. Lindsley, 139 Tex. 512, 163 S.W.2d 633 (1942); Miller v. Miller, 149 Tex. 543, 235 S.W.2d 624 (1951). 216. 128Noble v. Noble, 636 S.W.2d 551 (Tex. App.-San Antonio 1982, no writ). 219. 130Schwartz v. Commissioner, 560 F.2d 311 (8th Cir. 1977). 220. 131Federal Reserve Bank of Dallas v. Smylie, 134 S.W.2d 838 (Tex. Civ. App.-Amarillo 1939, no writ). 221. 90Parker Square State Bank v. Huttash, 484 S.W.2d 429 (Tex. Civ. App.-Ft. Worth 1972, writ ref'd); Pope Photo Records, Inc. v. Malone, 539 S.W.2d 224 (Tex. Civ. App.-Amarillo 1976, no writ); Oden v. McAdams, 108 S.W.2d 920 (Tex. Civ. App-Waco 1937, no writ); San Jacinto Building, Inc. v. Brown, 79 S.W.2d 164 (Tex. Civ. App.-Beaumont 1935, writ ref'd); and Lane v. Kuehn, 141 S.W.2d 363 (Tex. Civ. App.- Texarkana 1911 aff'd, 167 S.W. 804). See also Art. 21.22 of the Texas Insurance Code. 222. 91In re Brothers, Bkrtcy. N.D. Tex., 1988, 94 B.R. 82. 223. 132In Re Bowes, Case No. 293-20135, Bkrtcy. N.D. Tex. (10/29/93). 225. 93Tex. Prop. Code §42.0021. 226. 94Tenneco, Inc. v. First Virginia Bank (Tidewater), 698 F.2d 688 (4th Cir. 1983); Ellis National Bank v. Irving Trust Co., 786 F.2d 466 (2d Cir. 1986). 227. 133McLean v. Central States, Southeast and Southwest Areas Pension Fund, 762 F.2d 1204 (4th Cir. 1985); Goff v. Taylor, 706 F.2d 574 (5th Cir. 1983); Samore v. Graham, 726 F.2d 1268 (8th Cir. 1984); In re Lichstrahl, 750 F.2d 1488 (11th Cir. 1985); and In re Daniel, 771 F.2d 1352 (9th Cir. 1985). In the matter of Brooks, 844 F.2d 258 (5th Cir. 1988). 228. 134Patterson v. Shumate is 112 S. Ct. 2242 (S. Ct. 1992); CCH PPG ¶23,853W. 229. 135Tex. Prop. Code §42.0021. 230. 136In re Volpe, ---- F.2d ---- (5th Cir. 1991); In Re Dyke, ---- F.2d ---- (5th Cir. 1991). 232. 95Tex. Const. Art. 16 §15; Tex. Fam. C. §5.01. 233. 138However, certain proceeds, such as the proceeds of mineral interests, are not usually considered income for this purpose. Likewise, the income of a trust is not necessarily community property. 236. 141Cameron v. Cameron, 641 S.W.2d 210 (Tex. 1982). 237. 142Hanau v. Hanau, 730 S.W.2d 663 (Tex. 1987). 238. 143Tex. Fam. Code §5.22(a). 239. 144Marshall v. Marshall, 735 S.W.2d 587 (Tex. App.-Dallas 1987, no writ history to date); Horlock v. Horlock, 533 S.W.2d 52, 55 (Tex. Civ. App.-Houston [14th Dist.] 1975 writ ref'd n.r.e.); Carnes v. Meador, 533 S.W.2d 365 (Tex. Civ. App.-Dallas 1975, writ ref'd n.r.e.); and Tabassi v. NBC Bank-San Antonio, 737 S.W.2d 612 (Tex. App.-Austin 1987, no writ history to date). See also 29 Baylor Law Review 608. 240. 145Treas. Reg. §25.2511-1(h)(9). Cox v. U.S., 286 F. Supp. 761 (W.D. La, 1968). Cf. Goodman v. Comm'r, 156 F.2d 218 (2nd Cir. 1946), and Rev. Rul. 79-303, 1979-2 C.B. 332. 241. 146Tex. Const. Art. 16 §15; Tex. Fam. C. §5.53. 242. 96Texas Prob. Code §177(b), last sentence. 243. 97Tex. Fam. Code §5.22(a). 244. 147Tex. Fam. Code §5.22(b). 245. 148Tex. Fam. Code §5.22(c). 246. 149LeBlanc v. Waller, 603 S.W.2d 265 (Tex. Civ. App.-- Houston 1980, no writ), Owen v. Porter, 796 S.W.2d 265 (Tex. App.-- San Antonio 1990, no writ) and Muller v. Evans, 516 S.W.2d 923 (Tex. 1974). 247. 150Vallone v. Miller, 663 S.W.2d 97 (Tex. Civ. App.-Houston [14th Dist.] 1983, writ ref'd n.r.e.). Cumming v. Johnson, 616 F.2d 1069 (5th Cir.?? 1979). 248. 151Tex. Fam. Code §5.22(b) & (c). 249. 152See LeBlanc v. Waller, 603 S.W.2d 265, 267 (Tex. Civ. App.-Houston [14th Dist.] 1980, no writ.) 250. 153Tex. Fam. Code §5.24(a). 251. 154Tex. Fam. Code §5.24(b). 252. 98Tex. Fam. Code §4.031(a). 253. 155Tex. Fam. Code §4.031(b). 254. 156Tex. Fam. Code §4.031(c). 255. 157Tex. Fam. Code §5.61(a). 256. 158For an example of a case illustrating that the law is not always what it seems to say, see Cockerham v. Cockerham, 527 S.W.2d 162 (Tex. 1975). It is believed that the rule now found in Fam. Code §4.031 to the effect that a person is liable for the acts of the person's spouse only if acting as agent for the spouse, and that a spouse does not act as agent for the other spouse solely because of the marriage relationship, was passed, in part, in response to Cockerham. If the Cockerham fact pattern were to arise today, the application of this rule might very well alter the outcome. 258. 160Tex. Fam. Code §5.61(b). 259. 161Tex. Fam. Code §5.61(c). 260. 162Tex. Fam. Code §5.61(d). 261. 163Tex. Fam. Code §5.22(b) & (c). 262. 164See LeBlanc v. Waller, 603 S.W.2d 265, 267 (Tex. Civ. App.-Houston [14th Dist.] 1980, no writ.) 263. 165Tex. Fam. Code §5.24(a). 264. 166Tex. Fam. Code §5.24(b). 265. 99I am indebted to Prof. Thomas M. Featherston of Waco for suggesting this elegant solution to the dilemma 266. 167Family Code §4.02 and 4.031; Daggett v. Neiman Marcus, 348 S.W.2d 796 (Tex. Civ. App.-Houston 1961, n.w.h.); Cooper v. Cooper, 120 S.W.2d 269 (Tex. Civ. App.-Amarillo 1938, n.w.h.); Wall v. Irick, 83 S.W.2d 394 (Tex. Civ. App.-Amarillo 1935, no writ); Stewart Title Co. v. Huddleston, 598 S.W.2d 321 (Tex. Civ. App.-San Antonio 1980, writ ref'd n.r.e. in 608 S.W.2d 611); In Re Marriage of Lang, 542 S.W.2d 712 (Tex. Civ. App.- Texarkana 1976, no writ); Inwood National Bank v. Hoppe, 596 S.W.2d 183 (Tex. Civ. App.-Texarkana, writ ref'd n.r.e); and Miller v. City National Bank, 594 S.W.2d 823 (Tex. Civ. App.-Waco 1980, no writ). 267. 168See Albiar v. Arguello, 612 S.W.2d 219 (Tex. Civ. App.-Eastland 1980, no writ). 268. 100See Baylor Law Review, Vol. 39:861, page 890. 269. 169Williams v. Portland State Bank, 514 S.W.2d 124 (Tex. Civ. App.-Beaumont 1974, writ dism'd); Vallone v. Miller, 663 S.W.2d 97 (Tex. App.-Houston [14th Dist.] 1983, writ ref'd n.r.e.); Dalton v. Jackson, 691 S.W.2d 765 (Tex. App.-Austin 1985, writ ref'd n.r.e.). 271. 102Tex. Prob. Code §74, first clause. 272. 170Tex. Prob. Code §74, last clause. 273. 103Tex. Prob. Code §89, second paragraph. 274. 104Tex. Prob. Code §137(a)-(d). 275. 171Tex. Prob. Code §137(e). 279. 106Tex. Prob. Code §43(a). 280. 107"For purposes of §§20.2041-1 to 20.2041-3, the term "power of appointment" does not include powers reserved by the decedent to himself within the concept of sections 2036 to 2038." Treas. Reg. §20.2041-1(b)(2). 281. 108It is predicted that a great deal of litigation is going to result over just whether or not in any particular instance, a will does in fact contain a contrary direction. 282. 174See Sinnott v. Gidney, 322 S.W.2d 507 (1959). 283. 109Hurt v. Smith, 741 S.W.2d 1 (Tex. 1987). 284. 110Hurt v. Smith, 741 S.W.2d 1 (Tex. 1987). 285. 111Page on Wills, Revised Treatise, by William Bowe and Douglas Parker, 1962, published by the W. H. Anderson Company, Vol. 6, §48.4, page 15. 286. 175Hurt v. Smith, 741 S.W.2d 1, 5 [top of page, left hand column] (Tex. 1987). 287. 176Brady v. Nichols, 308 S.W.2d 100 (Tex. Civ. App.-San Antonio 1957), modified per curiam 158 Tex. 382, 312 S.W.2d 381 (1958). 288. 112Hurt v. Smith, 741 S.W.2d 1, 4 (Tex. 1987), citing Houston Land & Trust Co. v. Campbell, 105 S.W.2d 430, 433 (Tex. Civ. App.-El Paso 1937, writ ref'd) and Atkinson, Law of Wills §132, at 732 (1953). 289. 177Pinkston v. Pinkston, 81 S.W.2d 196, 198 (Tex. Civ. App.-Eastland 1935, no writ). See also Houston Land & Trust Co. v. Campbell, 105 S.W.2d 430 (Tex. Civ. App.-El Paso 1937, writ ref'd). 290. 178The Law of Wills, by George W. Thompson, Third Edition, §481, p. 698, Indianapolis, The Bobbs-Merrill Company, 1947. 291. 179The Law of Wills, by George W. Thompson, Third Edition, §481, p. 698, Indianapolis, The Bobbs-Merrill Company, 1947. 292. 180Pinkston v. Pinkston, 81 S.W.2d 196, 197 (Tex. Civ. App.-Eastland 1935, no writ). Cf., "The doctrine of facts of independent significance." Wilson v. Phillips, 459 S.W.2d 212 (Tex. Civ. App.-Fort Worth 1970, no writ); Welch v. Trustees of Robert A. Welch Foundation, 465 S.W.2d 195 (Tex. Civ. App.-Houston [1st Dist.] 1971, writ ref'd n.r.e.). 293. 181Hurt v. Smith, 741 S.W.2d 1, 4-5 (Tex. 1987). 294. 182Hurt v. Smith, 741 S.W.2d 1, 5 (Tex. 1987). 295. 183Houston Land & Trust v. Campbell, 105 S.W.2d 430, 434 (Tex. Civ. App.-El Paso 1937, err ref'd). 296. 113Hurt v. Smith, 741 S.W.2d 1, 4 (Tex. 1987), citing Houston Land & Trust Co. v. Campbell, 105 S.W.2d 430, 433 (Tex. Civ. App.-El Paso 1937, writ ref'd) and Bailey, Wills §574, Vol. 10, TEXAS PRACTICE (1968), at 367-68 (Texas Practice 1968). 297. 184Page on Wills, Revised Treatise, by William Bowe and Douglas Parker, 1962, published by the W. H. Anderson Company, Vol. 6, §48.7, page 26. Bailey, Wills, Vol. 10 TEXAS PRACTICE (1968), §574, page 367. 298. 114Hurt v. Smith, 741 S.W.2d 1, 6 (Tex. 1987). 299. 185Texas Tex. Prob. Code §322B. 300. 186Bailey, Wills, Vol. 10 TEXAS PRACTICE (1968), §574, page 369. 301. 187Page on Wills, Revised Treatise, by William Bowe and Douglas Parker, 1962, published by the W. H. Anderson Company, Vol. 6, §48.2, page 8. 302. 188Hurt v. Smith, 741 S.W.2d 1, 4 (Tex. 1987), citing Houston Land & Trust Co. v. Campbell, 105 S.W.2d 430, 433 (Tex. Civ. App.-El Paso 1937, writ ref'd) and Bailey, Wills, Vol. 10 TEXAS PRACTICE (1968), §574, at 367-68. 303. 189Houston Land & Trust v. Campbell, 105 S.W.2d 430, 433 (Tex. Civ. App.-El Paso 1937, err ref'd). 304. 190Page on Wills, Revised Treatise, by William Bowe and Douglas Parker, 1962, published by the W. H. Anderson Company, Vol. 6, §48.2, page 8. 305. 191Page on Wills, Revised Treatise, by William Bowe and Douglas Parker, 1962, published by the W. H. Anderson Company, Vol. 6, §48.2, page 9. 306. 192The Law of Wills, by George W. Thompson, Third Edition, §482, p. 700, Indianapolis, The Bobbs-Merrill Company, 1947. 307. 193Page on Wills, Revised Treatise, by William Bowe and Douglas Parker, 1962, published by the W. H. Anderson Company, Vol. 6, §48.6, page 21. 308. 194Hurt v. Smith, 741 S.W.2d 1 (Tex. 1987); Houston Land & Trust Co. v. Campbell, 105 S.W.2d 430, 433 (Tex. Civ. App.-El Paso 1937, writ ref'd). 309. 195Houston Land & Trust v. Campbell, 105 S.W.2d 430, 434 (Tex. Civ. App.-El Paso 1937, err ref'd). 310. 196Pinkston v. Pinkston, 81 S.W.2d 196, 198 (Tex. Civ. App.-Eastland 1935, no writ). 311. 197Page on Wills, Revised Treatise, by William Bowe and Douglas Parker, 1962, published by the W. H. Anderson Company, Vol. 6, §48.2, page 8, ft. note 5. The Law of Wills, by George W. Thompson, Third Edition, §482, p. 700, Indianapolis, The Bobbs-Merrill Company, 1947. 312. 198Currie v. Scott, 187 S.W.2d 551, 554 (Tex. 1945). 313. 115Hurt v. Smith, 741 S.W.2d 1, 4 (Tex. 1987). 314. 116Hurt v. Smith, 741 S.W.2d 1, 4 (Tex. 1987). Lake v. Copeland, 82 Tex. 464, 17 S.W. 786, 787 (1891). 315. 199Hurt v. Smith, 741 S.W.2d 1, 4 (Tex. 1987). 316. 200Hurt v. Smith, 741 S.W.2d 1 (Tex. 1987). 317. 201Hurt v. Smith, 741 S.W.2d 1, 5-6 (Tex. 1987). 318. 117Texas Practice, Texas Law of Wills, Vol. 9, §26.3 p. 732, by Leopold and Beyer, West Publishing Co., St. Paul, Minn., 1992. 319. 202Currie v. Scott, 187 S.W.2d 551, 554 (Tex. 1945). 320. 203Currie v. Scott, 187 S.W.2d 551, 554 (Tex. 1945). 321. 204Brady v. Nichols, 158 Tex. 382, 312 S.W.2d 381 (1958). 322. 205Currie v. Scott, 187 S.W.2d 551 (Tex. 1945); Brady v. Nichols, 158 Tex. 382, 312 S.W.2d 381 (1958). 323. 206Currie v. Scott, 187 S.W.2d 551, 554-555 (Tex. 1945). 324. 207Hurt v. Smith, 741 S.W.2d 1, 5-6 (Tex. 1987). 325. 118ERISA §206(d); Code §401(a)(13). 326. 119Allard v. Frech, 754 S.W.2d 111 (Tex. 1988). 327. 120It is clear from the Senate Committee Report to the 1986 Tax Reform Act that it was both assumed and intended that the marital deduction is to be available for a transfer of a qualified plan interest by a nonemployee spouse to an employee spouse in a community property state, but this may show a lack of appreciation on the part of the Committee for the subtleties of the terminable interest doctrine, as well as a lack of appreciation as to just how this transfer is to be accomplished. 329. 209Treas. Reg. §1.411(d)-4. 330. 121See, for example, Texas Trust Code §113.103. 332. 123Chapter 24, Texas Business and Commerce Code, §§ 24.005. 333. 124Texas Business and Commerce Code, §§ 24.001-24.013. 334. 210Chapter 24, Texas Business and Commerce Code, §§ 24.005. 335. 211Cf., Townsend v. State Bar of California, 197 P.2d 326 (Calf. 1948). See Estate Planning and Creditor Claims-Should We (and Can We) Help the Financially 'Distressed' Client, by Santo (Sandy) Bisignano, Jr., 1987 Advanced Estate Planning and Probate Course, State Bar of Texas Professional Development Program, at pages R-6 and R-7. 336. 212It is submitted that in this context the word "hinder" is literally correct, in one of its meanings, but that the statutory meaning of the word requires a fact situation that is somewhat more egregious and offensive than the one posed. 337. 125Roth v. Schroeter, 129 S.W. 203 (Tex. Civ. App., 1910 writ ref'd); Vratis v. Wilbanks, 287 S.W. 666 (Tex. Civ. App.- Austin 1926); John Hancock Mutual Life Ins. Co. v. Morse, 132 Tex. 534, 124 S.W. 330 (1939); Chandler v. Welborn, 294 S.W.2d 801, 156 Tex. 312 (1955). 338. 126Dyer v. Eckols, 808 S.W.2d 531 (Tex. App.-Houston [14th Dist.] 1991, Dism. Agr.). 339. 127Property Code §42.004(b). 340. 128Caples v. Buell, 243 S.W. 1066 (Tex. Comm'n. App. 1922, opinion adopted); Adams v. Williams, 112 Tex. 469, 248 673 (Tex. 1923); Hines v. Sands, 312 S.W. 2d 275 (Tex. Civ. App.-Fort Worth 1958, no writ); First Bank & Trust v. Goss, 533 S.W.2d 93 (Tex. App.-Houston [1st Dist.] 1976, no writ); Highlands State Bank v. Gonzales, 340 S.W.2d 828 (Tex. Civ. App.-Waco 19xx, no writ). 341. 213§112.035(a) the Texas Trust Code 342. 129Estate of Cal. Dept. of Mental Hygiene v. Bank of S.W. Nat. Ass'n, 354 S.W.2d 576 (Tex. 1962), affirming California Dept. of Mental Hygiene v. Bank of S.W. Nat. Ass'n, 348 S.W.2d 731 (Tex. Civ. App.-Waco 1961). 343. 130First City National Bank of Beaumont, Trustee v. Phelan, 718 S.W.2d 402 (Tex. App.-Beaumont 1986, writ ref'd n.r.e.). See also Myrick v. Moody National Bank, 590 S.W.2d 766, at 768 (Tex. Civ. App.- Houston [14th Dist.] 1979, writ ref'd n.r.e.). Restatement (Second) of Trusts §157(a). 344. 131Glass v. Carpenter, 330 S.W.2d 530 (Tex. Civ. App.-San Antonio 1959, writ ref'd n.r.e.). Cf., Becknal v. Atwood, 518 S.W.2d 593 (Tex. Civ. App.-Amarillo 1975, no writ); Fewell v. Republic National Bank of Dallas, 513 S.W.2d 506 (Tex. Civ. App.-Eastland 1974, writ ref'd n.r.e.); Bank of Dallas v. Republic Bank of Dallas, 540 S.W.2d 499 (Tex. Civ. App.-Waco 1976, writ ref'd n.r.e.); McFaddin v. C.I.R. 148 F.2d 570 (5th Cir. 19xx). 345. 214Cf., Becknal v. Atwood, 518 S.W.2d 593 (Tex. Civ. App.-Amarillo 1975, no writ); Fewell v. Republic National Bank of Dallas, 513 S.W.2d 506 (Tex. Civ. App.-Eastland 1974, writ ref'd n.r.e.). 346. 215Glass v. Carpenter, 330 S.W.2d 530 (Tex. Civ. App.-San Antonio 1959, writ ref'd n.r.e.). 347. 216See Note-Trusts-Spendthrift Provisions-Validity of Restraint on Alienation Where Settlor is Beneficiary, 14 SW. L.J. 552 (1960). 348. 217Bank of Dallas v. Republic Bank of Dallas, 540 S.W.2d 499 (Tex. Civ. App.-Waco 1976, writ ref'd n.r.e.). 349. 132Cf., First Bank & Trust v. Goss, 533 S.W.2d 93 (Tex. App.-Houston [1st Dist.] 1976, no writ). 350. 133Marshall v. Marshall, 735 S.W.2d 587 (Tex. App.-Dallas 1987, no writ history to date); Horlock v. Horlock, 533 S.W.2d 52, 55 (Tex. Civ. App.-Houston [14th Dist.] 1975 writ ref'd n.r.e.); Carnes v. Meador, 533 S.W.2d 365 (Tex. Civ. App.-Dallas 1975, writ ref'd n.r.e.); and Tabassi v. NBC Bank-San Antonio, 737 S.W.2d 612 (Tex. App.-Austin 1987 no writ history to date). See also 29 Baylor Law Review 608. 351. 134Givens v. Girard Life Insurance Company, 480 S.W.2d 421 (Tex. Civ. App.-Dallas 1972 writ ref'd n.r.e.); Jackson v. Smith, 703 S.W.2d 791 (Tex. App.-Dallas 1985, no writ history to date). 352. 218Jackson v. Smith, 703 S.W.2d 791 (Tex. Civ. App.-Dallas 1985, no writ) pp. 795-796. 353. 219Cf., Parker Square State Bank v. Huttash, 484 S.W.2d 429 (Tex. Civ. App.-Ft. Worth 1972, writ ref'd). 354. 135Treas. Reg. §25.2511-1(h)(9). Cox v. U.S. 286 F. Supp. 761 (W.D. La, 1968). Cf. Goodman v. Comm'r, 156 F.2d 218 (2nd Cir. 1946), and Rev. Rul. 79-303, 1979-2 C.B. 332. |
