2013 Probate and Trust Legislation Affecting

Estate Planning

Glenn M. Karisch

The Karisch Law Firm, PLLC

Austin, Texas

The big pictureHitting the high points, with an emphasis on

changes affecting estate planners and their tools

Bill Pargaman’s paper

Glenn’s paper

www.texasprobate.com

The Texas Probate Mailing List

The new Estates CodeBecomes effective January 1, 2014

The Probate Code is repealed Estate and guardianship administrations

pending on January 1, 2014, become subject to the new code

References in various statutes to Probate Code sections are considered to be references to the appropriate Estates Code sections But what about references in documents?

The new Estates CodeA “non-substantive” codification, but:

There will be confusion over section numbers There is some new terminology Other legislation makes substantive changes to

the new Estates Code

The new Estates CodeNew structure – like other codes

Chapters 31 – 551: decedents’ estates Chapters 751 – 752: powers of attorney Chapters 1001 – 1253: guardianships Chapters 1301 – 1302: management

trusts, pooled trust subaccounts

The new Estates CodeNew terminology

“Appertaining or incident to estate” vs. “probate proceeding” and “matter related to probate proceeding”

“Dependent administration” vs. “personal representative subject to court supervision”

“867 trusts” now “1301 trusts” (or just “management trusts”)?

“128A notices” now “308.002 notices”? “294(d) notices” now “308.054 notices”?

Decanting (later)

New statutory durable power of attorney form

Disclosure statements to principal and agent

Initialing, not crossing out (N) – all of the above Not a general power of appointment

New form becomes effective January 1, 2014

Form is not mandatory and may be modified

Two suggested modifications: If (N) is selected, it is a general POA Construe it as a statutory durable POA

New forms available at texasprobate.com

New medical POA form and disclosure statement

Incorporates prior change permitting medical POAs to be notarized, not witnessed The form changes The disclosure statement changes

Disclosure statement must be substantially in the statutory form

New forms become effective January 1, 2014

New forms available at texasprobate.com

Will and trust forfeiture provisionsThe party seeking to avoid forfeiture has the

burden to prove just cause and good faith by a preponderance of the evidence

Legislative history: The bill does not repeal Texas law recognizing that forfeiture clauses generally will not be construed to prevent a beneficiary from seeking to compel a fiduciary to perform his duties, seek redress from breach of fiduciary duties or to seek a judicial construction of a will or trust

Non-testamentary transfersThe McKeehan case

Texas residents Michigan financial institution Michigan choice of law provision in the account

agreement Account agreement does not meet Texas

requirements for right of survivorship Held: Michigan law applies, so account passes

by right of survivorship

Non-testamentary transfersNew statute

If more than 50% of the property in the account belongs to Texas residents, Texas law applies notwithstanding a choice of law provision inserted by the financial institution

The new statute also applies to IRA benefits and similar arrangements

The choice of law provision still applies to issues between the customer and the financial institution

Disclaimers: trap for the unwaryDisclaimer is not effective if the beneficiary owes

certain child support arrearages

Every disclaimer must include a statement regarding whether the beneficiary is a child support obligor as defined by the statute Include this language in every disclaimer (assuming it is

true): “Disclaimant is not a child support obligor described by Tex. Est. Code § 122.107.”

Failure to do so may keep the disclaimer from being a qualified disclaimer

Becomes effective January 1, 2014

Decedents’ estates changesAffidavit in Lieu of Inventory

Affidavit available even if will “requires” inventory

No “rock-and-a-hard-place” decision Remedies for incorrect affidavit Suggested will language:

“return of any required inventory” “return of an inventory or an affidavit in lieu of the

inventory”

Decedents’ estates changesHeirship Changes

No statute of limitations Any creditor can initiate proceeding Ad litems

Required for heirs whose names or whereabouts are unknown

Permitted for incapacitated heir if “necessary to protect the interest of the heir”

Parent may waive citation for child under 12 No final order until affidavit or certificate of notice filed Testimony reduced to writing

Decedents’ estates changesAddresses not required in application for

administration/letters testamentary

No unsworn declarations for self-proving affidavits, but they are permitted in other cases, such as for the report of a guardian of the person

Foreign self-proving affidavits

$1,000 fine for failure to timely file inventory and continued failure after notice and hearing

Inventory of Successor Representative

If DOD inventory has been filed, successor’s inventory is as of qualification

Decedents’ estates changesExempt Property

If the Decedent is survived by a spouse or minor child, the homestead is exempt from all creditors other than mortgage debt and taxes – adult unmarried children are out Occupancy does not matter Query: does this work if the homestead is in a trust?

Insurance proceeds paid to an estate as any kind of beneficiary (not just contingent beneficiary) is exempt

Roth IRAs and inherited Roth IRAs are exempt Increased allowances in lieu of homestead ($15,000 to

$45,000) and other exempt property ($5,000 to $30,000)

Trust Code changesSpendthrift protection is not lost if a settlor

becomes a beneficiary by the exercise of a power of appointment Example:

Husband creates inter vivos QTIP for wife and gives wife special power of appointment

Wife exercises the power of appointment in trust for husband after her death

Husband enjoys spendthrift protection after wife’s death

Trust Code changesTTC §112.035(d)(2): Spendthrift protection is

not lost solely because the settlor’s interest was created by the exercise of a POA

TTC §112.035(g): Safe harbor – property will not be considered to have been contributed by the settlor in the specific laundry-list of cases

The TBA Trust Code changesA corporate trustee may purchase insurance

underwritten or distributed by an affiliate, subject to its fiduciary duties, unless the trust instrument prohibits it

Instead of paying trustee compensation one-half from principal and one-half from income, the trustee may, consistent with its fiduciary duties, allocate compensation differently

DecantingWhat is decanting?

Who thinks up these names?

Restatement (3rd) Third of Property: Wills and Donative Transfers, §17.1 distinguishes decanting and powers of appointment A power of appointment may be exercised in non-

fiduciary capacity, is personal to the powerholder and lapses when the holder dies

A “fiduciary distributive power” must be exercised in a fiduciary capacity, succeeds to a successor trustee (trust protector?) and survives the death of the trustee

DecantingThe new Texas statute calls it “Distribution of

Trust Principal in Further Trust”

New Sections 112.071 – 112.088 of the Trust Code

Shannon Guthrie’s paper: Decanting with Benefits

DecantingPrior law

No “default” statutory provision, but the settlor could provide for decanting in the trust instrument

New law: Settlor still may expressly provide for decanting Settlor may expressly prohibit decanting If the trust instrument is silent, the new

decanting statute applies

DecantingWhy decant? Shannon Guthrie’s list:

Correct a drafting mistake Clarify ambiguities in the trust agreement Correct trust provisions due to mistake of law or

fact to conform to the grantor’s intent Update trust provisions to include changes in

the law, including new trustee powers Change situs of trust administration for

administrative provisions or tax savings Combine trusts for efficiency

DecantingWhy decant? Shannon Guthrie’s list:

Allow for appointment or removal of trustee without court approval

Allow appointment of special trustee for limited time or limited purpose

Change trustee powers, such as investment options

Transfer assets to a special needs trust Add a spendthrift provision Divide pot trust into separate share trusts

DecantingWhy decant? Shannon Guthrie’s list:

Adapt to changed circumstances of beneficiary, such as substance abuse, creditor or marital issues, including modifying distribution provisions to delay distribution of trust assets

Partition for marital deduction or GST planning Avoid the rule against perpetuities?

Express vs. statutory decanting power – the rest of the discussion will focus on the statutory decanting power

Decanting“Full discretion” trusts – the trustee’s power to

distribute is not limited in any manner Trustee may distribute principal to another trust

for the benefit of one or more of the current beneficiaries of the first trust

Trustee may give a wholly discretionary beneficiary a broad power of appointment

If there are multiple trustees and fewer than all have full discretion, the “full discretion” trustees may exercise this power without the participation of any “limited” trustees

Decanting“Limited discretion” trusts – the power to

distribute is limited (HEMS trusts are limited) Trustee may distribute principal to another trust

so long as: the current beneficiaries of both trusts are the

same; the successor and remainder beneficiaries of both

trusts are the same; and The distribution language of both trusts is the

same Thus, it is useful only for administrative changes

DecantingTrustee must act in good faith, in accordance

with the terms and purposes of the trust and in the interests of the beneficiaries

In no case is the trustee deemed to have a duty to decant

The power to decant is reduced to the extent it would cause any intended tax benefits to be lost

DecantingThe trustee may not:

Take away a beneficiary’s mandatory distribution right

Materially impair the rights of any beneficiary Materially lessen the trustee’s fiduciary duty Decrease the trustee’s liability or exonerate the

trustee Eliminate another person’s power to remove the

trustee Modify the perpetuities period, “unless

expressly permitted by the terms of the first trust”

DecantingThe trustee must give at least 30 days’ notice to

current beneficiaries and presumptive remainder beneficiaries (including the AG, if a charity is a beneficiary)

If no one objects, the trustee may decant without judicial approval, although the trustee may seek judicial approval if desired

If a beneficiary other than the AG objects, the trustee may seek judicial approval but is not required to do so

If the AG objects, the trustee must seek judicial approval

DecantingThe trustee may not decant without judicial approval

solely to change the trustee compensation provisions

The trustee may change compensation provisions if the change is in conjunction with other changes for which there are valid reasons, so long as the change does not provide for unreasonable compensation under Texas law

Decanting“The legislature intends [the decanting provisions] to

be a codification of the common law of this state in effect before the effective date of this Act”

Except as otherwise provided by the trust instrument, the decanting provisions apply to trusts existing or created on or after September 1, 2013

DecantingDecanting drafting suggestions

Include an express decanting power where appropriate Have a plan for having an independent trustee or trust

protector do or direct the decanting Specifically authorize decanting to a trust:

Subject to the laws of another state With one, some or all of the same beneficiaries –

beneficiaries need not be identical – and excluding one or more beneficiaries

Expressly permit modification of the perpetuities period Permits the addition of more remote descendants and

persons appointed by a beneficiary holding a power of appointment as beneficiaries

DecantingSuggestions about implementing decanting

If you decant to a trust subject to another state’s laws, make sure there is a reasonable nexus to the state

Query: Would a Texas two-step work with a HEMS trust? Step one: Decant a Texas HEMS trust “Trust 1”) to a trust

(“Trust 2”) subject to the laws of a state which permits broader decanting Trust 2 must meet Texas standard for limited discretion trusts

Step two: The trustee of Trust 2 later decants to a trust (Trust 3) with different beneficiaries, or with one or some but not all of the same beneficiaries, etc. The trustee of Trust 1 may breach his duties if it is a pre-

arranged plan