Very little attention has been given in the past to a species of property which I have termed "probate assets not subject to administration."[1] The primary example of such a species of property would be the special community estate of a surviving spouse, and a graphic example of that would be the surviving spouse's rollover IRA. Another graphic instance is the community property interest of a deceased spouse in the survivor’s retirement plan.
Unfortunately, this is an area in which there are more questions than answers. With this in mind, recognizing the issues should be the first order of priority. It is submitted that with the proliferation of rollover IRAs, sooner or later we will all face these problems.
The surviving spouse will retain control and management over that portion of the community over which he had sole control and management during the marriage, even if a personal representative has been appointed.[2] It is only if the surviving spouse files a written instrument with the clerk, waiving the right to exercise powers as community survivor, that the personal representative of the deceased spouse may administer the entire community.[3]
The fact that the special community property of the survivor is not subject to administration in the absence of a waiver does not for a moment mean that the property is not subject to testamentary disposition or that it is not liable for the decedent's debts (at least tort debts). This is the anomaly.
During the lifetime of the decedent, creditors of the deceased spouse cannot ordinarily reach community assets subject to the sole control and management of the other spouse to satisfy claims against the decedent arising prior to marriage or any nontortious (contract) liabilities that the decedent may have incurred.[4] Tex. Prob. Code §156, however, appears 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. Therefore, at death, the rules may change, and these creditors can possibly reach the decedent's entire community estate. However, is the probate estate which is under administration primarily responsible for payment? If the probate estate which is under administration pays these debts, is it entitled to reimbursement? See below.
Does the community property which is not being administered by the executor have a special priority over other assets subject to administration? For example if the decedent's residuary estate subject to administration is exhausted in the payment of debts, taxes and expenses, such that abatement of general or specific devises is called for, does the estate or the legatees have a claim against the survivor for reimbursement? Is the decedent's interest in the survivor's special community a part of the residuary estate for purposes of the order of abatement, even though such property is not subject to administration? If the survivor files a waiver with the clerk in order to allow his special community to be administered, could or should this affect the size and allocation of beneficial interests under the will?
Even if the decision in Allard v. Frech, 754 S.W.2d (Tex. 1988), is not upheld by the Federal courts, the nonparticipant spouse will have a power of testamentary disposition over the nonparticipant's community property interest in the participant's IRA, because an IRA is not subject to the same limitations and considerations as are present in the case of a qualified plan. If Allard is upheld, this power will extend to the nonparticipant's interest in the survivor's qualified plan as well. In the case of an IRA in particular, we may have a striking example of what could be a very substantial species of community property subject to the sole control and management of the surviving spouse. Under Tex. Prob. Code §177(b), the executor has no power to administer this property, although under Allard it would pass pursuant to the decedent's will.
Marital deduction and bypass trust planning often result in large pecuniary gifts passing under the will. If a large part of the decedent's estate consists of the decedent's interest in the special community of the survivor (which is likely to be the case if the survivor has a large rollover IRA), does the executor have the authority to allocate this asset, over which the executor has no administrative control, in satisfaction of a pecuniary legacy? In the case of an IRA, does an attempted allocation, not accompanied by an actual distribution, constitute a taxable distribution from the IRA, such that the IRA or a part of it would thereafter cease to be qualified under IRC §408?