First, Happy Valentine’s Day! Second, the rest of this post has absolutely nothing to do with Valentine’s Day.
“Living trusts” designed to avoid probate have not found as widespread acceptance in Texas as in some other states. This is likely due to our independent administration procedures that allow most estates to be settled with a minimum of court involvement, reducing the advantages of “probate avoidance.” However, there is one aspect of living trusts that many clients might still find appealing, even in Texas – privacy.
Assets passing under a will generally must be listed on an inventory prepared by the executor and filed in the public probate records. The inventory includes not only a description of the assets, but also an estimate of their value. On the other hand, assets placed in a living trust prior to the decedent’s death need not be listed on a publicly-filed inventory. This privacy advantage may be the sole reason for using a living trust as the client’s primary estate planning vehicle.
There have been several attempts to extend the benefits of this privacy to probate administrations. For example, in 2009, S.B. 559 would have “sealed” inventories in independent administrations. That bill got nowhere, fast.
The 2011 Change
The desire for privacy did not go unnoticed by the Real Estate, Probate, and Trust Law Section of the State Bar. REPTL included a provision in its 2011 legislative package (S.B. 1198, to be specific) that allows an independent executor to avoid filing the inventory in the public probate records if certain requirements are satisfied. Those requirements are:
- All debts (other than those secured by liens on real estate) must be paid by the time the inventory is due (including any extensions of the filing deadline).
- The executor must prepare, swear to, and provide a copy of, the inventory to all beneficiaries.
- And the executor must file an affidavit in the public probate records that both of these requirements have been met.
This change can be found in new Section 250(c) of the Probate Code and is effective for the estates of persons dying on or after September 1, 2011. I have found it much more popular among my clients than I had anticipated.
Questions About the Effectiveness of this Change
I have received a number of questions from attorneys around the state about the availability of an affidavit in lieu of inventory in independent administrations. One common question is whether independent administrators may use the affidavit alternative. Yes. Section 3 of the Probate Code defines the term “independent executor” to include independent administrators.
However, another question arises from the language most wills contain providing for independent administrations. Section 145(b) of the Probate Code provides that any person “may provide in his [one sic] will that no other action shall be had in the county court in relation to the settlement of his [two sics] estate other than the probating and recording of his [three sics] will, and the return of an inventory, appraisement, and list of claims of his [four sics!] estate.” Therefore, most well-drafted Texas wills provide exactly that, e.g., “I direct that no action be had in any court relating to the settlement of my estate other than the probating and recording of my will and the return of an inventory, appraisement, and list of claims of my estate.”
[By the way, did you know that “sic” is abbreviated from the Latin sic erat scriptum, meaning "thus was it written?"]
At least one well-respected probate judge has taken the position that this language in the will requires the filing of an inventory, despite the fact that the Probate Code has now been amended to provide the use of the affidavit in lieu of an inventory. The argument goes something like this:
- The language of Section 145(b), if incorporated into the will as described above, imposes a mandatory statutory duty on an executor to file an inventory.
- Filing an affidavit in lieu of the inventory under Section 250(c) conflicts with this statutory duty.
- Therefore, the executor may be subject to removal without notice under Section 222(b) of the Probate Code.
I believe that there are a number of problems with this analysis.
Section 145(b) itself imposes no duty at all on an executor. It merely outlines language that a person may include in his or her will.
- To the extent the executor has a duty to file an inventory under Section 250, subsection (c) of that statute expressly provides for the waiver of that duty where the requirements for the affidavit have been met.
- To the extent the executor has a duty to file an inventory under the language of the will itself, it’s not a statutory duty. At most, failure to file the inventory is a breach of a duty imposed by the will, not any statute. (We’ll come back to this potential breach a little later on.)
- Section 145(h) provides that once an inventory has been filed and approved or an affidavit in lieu of inventory has been filed, there may be no further action in the court regarding the supervision of the executor except where the Probate Code “specifically and explicitly” provides for that action.
- There is no statutory procedure for compelling the filing of an inventory once the affidavit in lieu of the inventory has been filed. In Estate of Bateman, 528 S.W.2d 86 (Tex. Civ. App – Tyler 1975, writ ref’d n.r.e.), the appellate court held that the probate court had no jurisdiction to compel an independent executor to file an amended inventory under Probate Code Section 258 after the originally inventory was filed (and presumably approved). Section 258 did not “specifically and explicitly” apply to independent administrations. The same rationale would apply once an independent executor has met the threshold of Section 145(h) by filing an affidavit in lieu of the inventory.
- While Section 222(a) of the Probate Code allows a court to remove an executor for failure to file an inventory, cases like Bateman and Baker v. Hammett, 789 S.W.2d 682 (Tex. Civ. App – Texarkana 1990, no writ), make clear that Section 222, like Section 258, does not apply to independent executors. Section 222 was not amended to refer to the affidavit alternative because it only applies to dependent executors, and the affidavit alternative is not available in dependent administrations.
- Section 149C of the Probate Code lists the grounds for removal of independent executors. Section 149C(a)(1) only allows removal if the independent executor fails to file either the inventory or the affidavit in lieu of the inventory. Where the independent executor files one or the other, this ground for removal is inapplicable. The recent Texas Supreme Court case of Kappus v. Kappus, 284 S.W.3d 831 (Tex. 2009), makes clear that the list of removal grounds in Section 149C is a pretty exclusive list.
- As noted above, there may be an argument that the failure of an independent executor to file an inventory may be a breach of a duty imposed by the will. However, after the Kappus case, there is no room left for an argument that a breach of this potential duty, without more, is grounds for removal.
What is the Executor to Do?
An executor faced with a “demand” by a probate judge to file an inventory after an affidavit in lieu of the inventory faces a choice. The executor can stand on his or her rights and refuse to file the inventory. Of course, this may make the judge unhappy. But I doubt there’s much the judge could do about it.
Or, the executor can file the inventory that’s already been prepared and distributed to the beneficiaries. I don't think the judge has jurisdiction to approve the inventory once the affidavit has been filed, but this will keep the judge happy. But then what if one of the beneficiaries complains about the unnecessary waiver of privacy interests?
What is the Attorney to Do?
I do not think the attorney should just decide what’s best and make this decision for the executor. If the executor has a statutory right to file the affidavit in lieu of the inventory in order to further the estate’s privacy interests, the attorney has no right to unilaterally waive that interest just to maintain good relations with the judge in future matters (especially when those matters may have nothing to do with the current client). This is, after all, the executor’s decision, not the attorney’s decision.
What the Heck is the Affidavit Supposed to Look Like?
If you’re wondering what the new affidavit in lieu of inventory should look like, you’ll find a suggested form as one of the attachments to my 2011 Texas legislative update.
Again, Happy Valentine’s Day!