Table of Contents

1. Significant Changes

a. The Two UPIAs

i. The Uniform Prudent Investor Act
ii. The Uniform Principal and Income Act

b. New Rules for Guardians of the Estate

c. Medicaid Estate Recovery - Don't Mess With Texas. Er, Never Mind.

d. Exculpatory Clauses in Trusts

e. Statutory Probate Court Jurisdiction Gets Even More Complicated

f. "Voluntary" In-Patient Psychiatric Care for Wards

2. Other Changes

a. Decedents' Estates

i. Effect of Filing a Contested Pleading
ii. Contracts Concerning Succession
iii. Satisfaction of Bequest
iv. Allowance for Defending Will is an Administrative Expense

b. Guardianships

i. Temporary Guardianships
ii. Limited Immunity of Guardians Ad Litem
iii. Payment of Applicant's Attorney's Fees
iv. MHMR Report for Mentally Retarded Proposed Ward
v. Miller Trusts
vi. Discharge of Guardian When 867 Trust is Created
vii. Incapacitated Spouse Management Rules And Marital Property Rights
viii. Application and Citation

c. Trusts

i. Trust Accountings
ii. Trustee Removal
iii. Income/Principal Adjustments in Charitable Trusts

d. Other

i. Creditor Protection for Section 529 Plans
ii. Powers of Appointment
iii.  Notice Required in Recorded Real Estate Transactions
iv.  Partners Owe Duties to Transferees of Deceased Partners
v. Gestational Agreements
vi. Marital Property
vii. Accounts at Financial Institutions
viii.  "Probate Masters" are Now "Associate Judges"
ix. Directives to Physicians and Family or Surrogates

3. Things That Could Have Been, But Weren't

2003 Legislative Update

By Glenn M. Karisch

The Legislature has come and gone, and the damage is done. The Legislators may come back for a special session, but it is unlikely that the special session will affect probate and trust law. Here's the butcher's bill from the regular session of the 78^th Texas Legislature:

• 58 - count 'em, 58 - sections of the Probate Code added, amended or repealed.
• Enactment of two major uniform acts affecting trusts.
• Several other changes, some big and some small.
• No changes on franchise tax, state inheritance tax, durable powers of attorney or the rule against perpetuities.

This paper summarizes the changes made by the 78^th Texas Legislature in 2003, first by focusing on the significant changes and then on the other changes affecting probate, guardianship and trust law in Texas.  It also offers "practice pointers" -- tips for lawyers for adapting to these changes.

Here are some useful links to other materials on the 2003 legislation:

Probate Code Changes -- the 58 sections of the Texas Probate Code amended in 2003
The Uniform Prudent Investor Act with comments (WordPerfect version)
The Uniform Principal and Income Act with comments (WordPerfect version)
UPIA Derivation Tables (WordPerfect version)
Sam Hildebrand's Comparison of Old and New Trust Principal and Income Allocation Statutes (WordPerfect version)

1. Significant Changes

These legislative developments are worthy of special attention:

a. The Two UPIAs

The Texas Legislature has enacted two uniform trust acts in 2003 - the Uniform Prudent Investor Act of 1994 (HB 2240 - new Chapter 117 of the Texas Trust Code) and the Uniform Principal and Income Act of 1997 (HB 2241 - new Chapter 116 of the Texas Trust Code). Texas lagged behind the majority of states in enacting these acts. Roughly 40 states have already adopted the Uniform Prudent Investor Act, while roughly 30 have enacted part or all of the Uniform Principal and Income Act. These bills will bring significant changes to the default rules governing how trusts are administered and accounted for in Texas.

i. The Uniform Prudent Investor Act

The Uniform Prudent Investor Act (HB 2240 - new Chapter 117 of the Texas Trust Code) changes the default rules regarding investment of trusts. It replaces Texas's modified "prudent man" investment standard found in Texas Trust Code §113.056(a) ⁽¹⁾ with the "prudent investor" rule based on the American Law Institute's Restatement (Third) of Trusts: Prudent Investor Rule (1992). The new rule requires the trustee to give greater attention to all of the circumstances surrounding the trust. In many cases it will encourage, if not mandate, investing the trust for the best total return regardless of whether the return is in the form of principal or income.

Under the new Uniform Prudent Investor Act, trustees will have an affirmative duty to diversify investments (new Texas Trust Code Section 117.005) and an affirmative duty to review the trust assets and to make and implement decisions concerning the retention and disposition of assets in order to bring them in compliance with the prudent investor rule (new Texas Trust Code Section 117.006). Gone is the old Texas provision permitting retention of trust assets held at the inception of the trust without liability for diversification (old Texas Trust Code §113.003).

The fiduciary duties of loyalty and impartiality, which previously were common law duties in Texas, now are codified in new Texas Trust Code Sections 117.007 and 117.008.

The Texas version of the Uniform Prudent Investor Act follows the uniform act very closely. There is one major departure. The Texas provision permitting trustees to delegate the investment function and avoid liability for the actions of the agent (new Texas Trust Code §117.011) is stricter than the uniform act. In addition to the requirements imposed by the uniform act, under the Texas provision a trustee does not avoid liability for the actions of its agent if (1) the agent is an affiliate of the trustee, (2) the delegation agreement requires arbitration or (3) the delegation agreement shortens the statute of limitation. Still, the new Texas delegation standard should be easier for trustees to meet than the former Texas delegation statute (Texas Trust Code §113.060), which was repealed.

The Uniform Prudent Investor Act imposes default rules. Its provisions may be overriden by provisions in the trust instrument.

The Uniform Prudent Investor Act takes effect January 1, 2004, and applies to new and existing trusts. With respect to existing trusts, actions taken by the trustee on or after January 1, 2004, will be judged by the new standard.

ii. The Uniform Principal and Income Act

The Uniform Principal and Income Act (HB 2241 - new Chapter 116 of the Texas Trust Code) changes the default rules a trustee uses to allocate receipts and disbursements between principal and income. The most significant change is in new Texas Trust Code §116.005, which permits the trustee to make adjustments between principal and income in certain cases. This power to adjust is necessary in income-only trusts if the trustee invests for total return under the prudent investor rule. For example, if the trustee invests for total return by investing in growth stocks, thereby achieving a 20% return but with virtually no "traditional" trust income, the trustee may use Section 116.005 to make an adjustment so that the income beneficiary receives a reasonable rate of return (say 3% to 5%). The power to adjust cannot be used in some cases, including cases in which the trustee also is a beneficiary of the trust.

This adjustment power caused corporate trustees to flinch at the potential liability to beneficiaries for making these adjustments. New Texas Trust Code §116.006 permits the trustee to go to court in some cases and obtain an advisory opinion that the proposed adjustment will not be a breach of trust. There are conditions placed on the trustee's right to bring this action, however. Also, while the section requires the trustee to advance attorney's fees to beneficiaries in connection with the action, it permits the court to charge these fees to the trustee, to one or more beneficiaries (or their trust interests), or to the trust at the conclusion of the proceeding as circumstances warrant.

Several states have adopted statutes permitting existing trusts to be converted to unitrusts. Texas did not adopt a unitrust conversion statute. However, new Texas Trust Code §116.007 permits a settlor to define trust income in terms of a unitrust percentage, which will be helpful if Proposed Treasury Regulation 1.643(b)-1, 66 Fed. Reg. 10396 (February 15, 2001), becomes final. Then a marital deduction trust could be set up as a unitrust and meet the all-income-to-spouse requirement.

In most cases, the Texas version of the Uniform Principal and Income Act follows the uniform act, which has a stated bias toward principal (Section 116.004(a)(4) provides, in essence, when in doubt, a receipt is principal). However, in a few key places the Texas statute differs. These include:

Deferred Compensation Plans - Section 116.172. Rather than adopting the uniform act rule, which would have made 90% of any required payment from a qualified plan or IRA principal and only 10% income, the Texas statute provides that distributions of up to 4% of the value of the plan or IRA in any one year is income and any excess is principal. ⁽²⁾  The Real Estate, Probate and Trust Law Section of the State Bar of Texas, which pushed for this legislation, thought this was fairer to the income beneficiary and more in keeping with one's expectations. The new provision replaces former Texas Trust Code §113.109, which was repealed.

Oil, Gas and Minerals - Section 116.174. Under old Texas Trust Code §113.107, 72 ˝ % of royalties were income and 27 ˝ % were principal. Under the uniform act, only 10% would have been income while 90% would have been principal. The Real Estate, Probate and Trust Law Section of the State Bar of Texas thought that this was unfair to the income beneficiary and not in keeping with one's expectations, so the Texas version varies from the uniform act. Under it, the trustee is required to allocate these receipts "equitably," and allocating in accordance with the available federal tax depletion deduction is presumed to be equitable. Also, for existing trusts, trustees may continue to apply the old 72 ˝ % income rule.

The Uniform Principal and Income Act also impacts the allocation of receipts and disbursements in estates. Some of the subsections of Section 378B of the Probate Code have been repealed or substantially changed.

The Uniform Principal and Income Act provides default rules for allocating income. The settlor may override these provisions by placing contrary provisions in the trust instrument.

This act takes effect January 1, 2004, and applies to existing as well as new trusts. Thus, the trust accounting rules for existing trusts will change January 1, 2004.

HB 1470 imposes new, and tougher, rules on guardians of the estate. These changes have a particularly tough bite at the inception of guardianships. Attorneys representing guardians need to study these changes and advise clients appropriately.

Previously, guardians had 90 days (or such longer period that may be granted by the court) to file an inventory. Under the new law (Probate Code § 729), that deadline is shortened to 30 days. Section 765 also was amended to require a successor guardian to file an inventory within 30 days.

The reason for the deadline is a new requirement that the guardian apply for approval of a monthly allowance within 30 days of the granting of letters of guardianship (Probate Code § 776). The judges wanted the inventory filed before the monthly allowance application was heard. In some parts of the state, monthly allowances are common. Now they will be required.

One bright spot is that the $5,000 limit on after-the-fact approval of unauthorized (but justified) principal distributions in Section 776 is removed. However, to be approved, the guardian must show that (1) the expenditures were made when it was not convenient or possible for the guardian to first secure court approval, (2) the proof is clear and convincing that the expenditures were reasonable and proper, (3) the court would have granted authority in advance to make the expenditures, and (4) the ward received the benefits of the expenditures.

Another new requirement is the filing of an application for approval of an investment plan for the guardianship within 180 days of the granting of letters (new Texas Probate Code § 855B). The new scheme anticipates that the guardian will spend the first six months deciding which assets to keep and which ones to sell. The investment plan provides the guardian and the court with a road map of how to invest and manage the ward's assets.

HB 1470 makes a general overhaul of the investment rules for guardians (see changes to Sections 768, 814, 854, 855, 855A, 855B, 857, 858, 860 and 863). In general, the new rules adopt a "prudent man" standard for investment, rather than a "prudent investor" standard (see Section 855). There are changes to the rules governing loans of the ward's funds, including a presumption that a reasonable rate of interest is 120% of the applicable federal rate (Section 858), and real estate investments (Section 860).

HB 1470 provides that most of these new investment rules apply to new guardianships and to existing guardianships which are "modified to conform to the changes in law." At least one statutory probate court plans to issue a blanket order modifying all existing guardianships to conform to the changes wrought by HB 1470.

c. Medicaid Estate Recovery - Don't Mess With Texas. Er, Never Mind.

Texas has avoided implementing a Medicaid estate recovery program for 10 years (since it was required by the Omnibus Budget Reconciliation Act (OBRA) of 1993) with no ill effects. This meant that a Texan owning a home going into a nursing home could receive Medicaid benefits without the family losing the home to pay back Medicaid. Unfortunately, due to greed, timidity, stupidity, mean-spiritedness or fiscal responsibility (take your pick), a provision was added to HB 2292 late in the session which requires the appropriate state agency to implement an estate recovery system. This means that the successor to the Department of Human Services will be working up the terms of Texas's very own estate recovery plan in the near future.

It is not clear exactly how the estate recovery program will be implemented. It may be limited to probate estates, meaning that living trust planning may be an effective workaround. What is clear, though, is that a Medicaid recipient's family can no longer count on the patient's house being protected from seizure by the state after the patient's death.

d. Exculpatory Clauses in Trusts

On December 31, 2002, the Texas Supreme Court issued its opinion in Texas Commerce Bank, N. A. v. Grizzle, 96 S. W. 3d 240 (Tex. 2002). The Grizzle case took a very broad view of Section 113.059 of the Texas Trust Code which, if taken to its logical conclusion, could mean that the settlor of a trust could override all statutory and common law trustee duties, so long as he or she did not attempt to relieve a corporate trustee from the prohibited actions in Section 113.052 and 113.053. For example, the Grizzle opinion leaves open the door to a trustee being exculpated for actions taken in bad faith or with reckless indifference and to flatly refusing to give any kind of accounting, if the trust instrument backs him or her up. Reasonable minds differ about whether Grizzle can be read to reach this far, but the Legislature chose to respond to Grizzle by amending Trust Code §113.059 to incorporate the provisions of the Restatement (2^nd) of Trusts, §222, which prohibit the enforcement of an exculpation clause that would relieve a trustee of liability for a breach of trust committed in bad faith, intentionally or with reckless indifference to the interest of the beneficiary. It also may not relieve the trustee for liability for any profit derived by the trustee from a breach of trust (HB 3503).

Another reaction to Grizzle were amendments to the statutes governing 142 Trusts (Texas Property Code §142.005) and 867 Trusts (Texas Probate Code §867). These amendments make any provision in one of these court-created trusts unenforceable to the extent that it limits the liability of a trustee beyond that imposed by the Texas Trust Code, unless there is a specific finding by clear and convincing evidence that the specific property of that trust justifies the exculpation provision (HB 3503).

e. Statutory Probate Court Jurisdiction Gets Even More Complicated

Three bills passed affecting the power of statutory probate courts to hear cases. HB 1470 and HB 1473, which had the support of most, if not all, of the statutory probate judges, takes away the power of district courts to hear any case in which the personal representative of an estate (or guardian) is a party unless (1) it is a wrongful death, survival or personal injury action or (2) "in all actions involving a personal representative of an estate in which each other party aligned with the personal representative is not an interested person in that estate." ⁽³⁾ In these cases, the jurisdiction of the statutory probate court and the district court is concurrent. Thus, except for these few cases, virtually every case in which the personal representative or guardian is a party must be brought in the statutory probate court even if the case has nothing to do with probate.

HB 1470 and HB 1473 also rewrite and reorganize Sections 5, 5A, 606 and 607. In general, the reorganization moves some of the "jurisdictional" provisions from Section 5A to Section 5 and from Section 607 to Section 606, leaving the "appertaining and incident to estate" language in Sections 5A and Section 607. (HB 4, discussed below, amends Sections 5A and 607, which makes things interesting [in other words, confusing], since HB 4 amended the former statute, not the amended statute.)

The proponents of HB 1470 and HB 1473 get an "E" for effort, but the reorganized statutes do not eliminate all of the potential construction issues. One issue which jumps out is the jurisdiction of the district courts and the statutory probate courts over testamentary trusts. Based upon the changes made by HB 1473, there are at least these five possibilities for the proper jurisdiction of a proceeding concerning a testamentary trust (but not an inter vivos or charitable trust). The case either:

What a mess, huh? To understand jurisdiction over testamentary trusts after HB 1473, one must look to four subsections:

Texas Trust Code §115.001(d) may be read as always vesting in the district court jurisdiction over testamentary trusts, but allowing statutory probate courts also to have jurisdiction if conferred by law. In this case, filing a proceeding concerning a testamentary trust always is proper in the district court. On the other hand, Section 115.001(d) may be read as permitting a statute granting jurisdiction over testamentary trusts to the statutory probate court to completely strip the district court of jurisdiction. In this case, one may be required to file a proceeding concerning a testamentary trust in statutory probate court in some cases and in district court in other cases, depending on where venue lies and/or where the original probate occurred.

The only basis for saying a statutory probate court has jurisdiction over a testamentary trust is Section 5A(b) – "the interpretation and administration of testamentary trusts and the applying of constructive trusts" is "incident to an estate." Does this mean that a proceeding concerning the interpretation and administration of a testamentary trust always is "incident to an estate?" What about the case where the probate proceeding ended 20 years ago and the testamentary trust has been administered ever since? To what "estate" is that proceeding "incident?" If the 20-year-old trust is "incident to an estate," does that mean the statutory probate court which heard the original probate proceeding has jurisdiction, or does it mean that the statutory probate court in the county where trust venue lies (see Texas Trust Code §115.002) has jurisdiction? If it means that latter, how can the trust action be considered "incident to an estate" when there never was and never will be an "estate" in that court?

Here’s another one: Trust modification or termination suits are "proceedings concerning trusts" for purposes of Trust Code §115.001(d), but are they proceedings concerning "the interpretation and administration of a testamentary trust" under Probate Code §5A(b)?

Unless an appellate court gives direction, no one will know where an action concerning a testamentary trust may, or must, be filed until the Legislature fixes this mess in 2005, which it no doubt will be asked to do. In the meantime, if "either end" of a case involving a testamentary trust – the original probate or Trust Code venue – is in a county with a statutory probate court, the litigants could be in trouble for filing in the wrong court. If the original probate was in a statutory probate court, if the independent executor is still alive, and if no "closing affidavit" or other estate closing procedure was utilized, one possible safe course of action appears to be to bring the proceeding in the statutory probate court where the original probate proceeding was held and make the independent executor a party, since Section 5 always gives the statutory probate court jurisdiction when the personal representative is a party.

HB 1470 amends Section 608 to permit statutory probate courts to exercise their transfer power in cases where there is a guardian of the person only.

While the judges were pushing through HB 1470 and HB 1473, Senator Robert Duncan of Lubbock was tacking on amendments to the main tort reform bill (HB 4) attempting to restrict the authority of statutory probate courts to hear personal injury, death and property damage cases. HB 4 amends Sections 5A, 5B and 607 to provide:

As an apparent oversight, this same provision was not added to Section 608 – the guardianship equivalent of Section 5B.

Section 15.007 of the Civil Practice and Remedies Code was enacted in 1995 in an attempt to put a stop to the transfer of personal injury and wrongful death cases by statutory probate courts from counties of proper venue to counties where the probate or guardianship was pending. One line of cases in the courts of appeal (see, e.g., In Re Houston Northwest Partners, 98 S. W. 3d 777 (Tex. App. – Austin 2003)) holds that Section 15.007 has no practical affect on the authority of the statutory probate courts to transfer cases under Sections 5B or 608 because those sections are jurisdiction statutes, not venue statutes. Another case (Reliant Energy v. Gonzales, ___ S. W. 3d ___, 01-02-00679-CV (Tex. App. – Houston [1^st Dist.] 2003)) holds that Section 15.007 trumps the authority of a statutory probate court to transfer a case from the county of proper venue.

Despite the clear intention of its proponent, HB 4's amendments to Sections 5A, 5B and 607 leave the door open to the courts to interpret them as inapplicable to Section 5B and Section 608 transfers, since the amendments speak in terms of "venue" rather than "jurisdiction." No doubt there will be litigation on this point shortly after HB 4 becomes effective. In the meantime, the Texas Supreme Court may give us a pre-HB 4 answer to question of whether TCPRC §15.007 trumps Sections 5B and 608, or vice versa.

Note that the HB 4 amendments to Sections 5A, 5B and 607 speak in terms of suits for "personal injury, death or property damages," while the HB 1470 and HB 1473 amendments to Sections 5 and 606 speak in terms of "personal injury, survival, or wrongful death actions." This could lead to confusion and litigation. The most obvious potential problem is the meaning of "property damages." HB 4 appears to be addressing tort cases, such as an automobile accident case where there are personal injuries as well as damage to a car or other property. However, "property damages" could be read to have a broader meaning. For example, a surcharge action against an independent executor for malfeasance is a fiduciary case, not a tort case, but the remedy sought could be characterized as "property damages." Wouldn’t it be ironic if this language is interpreted broadly, meaning that a person living in Williamson County who is independent executor of an estate pending in the statutory probate court of Travis County could insist on being sued in a surcharge action in a Williamson County district court rather than in the Travis County probate court?

HB 2679 makes it possible for a guardian of the person to "voluntarily" admit the ward in an in-patient psychiatric facility and to consent to the administration of medications in some cases. There are limits on this authority, but this should close a huge gap in Texas jurisprudence that resulted in many unnecessary civil commitment proceedings. (Probate Code §§ 743(b), 767, 770(b) and 770A; Heath and Safety Code Chapter 573).

2. Other Changes

a. Decedents' Estates

i. Effect of Filing a Contested Pleading

HB 1473 added Section 10C to the Probate Code, which provides that the filing or contesting in probate court of any pleading relating to a decedent's estate does not constitute tortious interference with inheritance of the estate. The section says that this does not abrogate the rights of a person under Rule 13, Texas Rules of Civil Procedure, or Chapter 10, Civil Practice and Remedies Code.

The Texas Supreme Court has not recognized a cause of action for tortious interference with the inheritance of an estate, although it has been recognized at the court of appeals level. See, e.g., King v. Acker, 725 S. W. 2d 750 (Tex. App. - Houston [1^st Dist.] 1987, no writ). We don't have a Texas statute saying what tortious interference is, but we now have a statute saying what it isn't.

ii. Contracts Concerning Succession

HB 1473 amends Texas Probate Code § 59A to permit a contract to make a will or devise, or not to revoke a will or devise, to be enforced if it is contained in the provisions of a written agreement that is binding and enforceable.

In 1979, the Texas Legislature added Section 59A to the Probate Code. This legislation was intended to deal with two problems: First, and foremost, was the problem of joint wills. The practice of having a husband and wife sign a joint will has mostly died out, but it used to be quite common. These wills led to litigation over whether the joint will was contractual -- whether the surviving spouse was free to adopt a different dispositive plan or was stuck with the one in the joint will. Section 59A requires a joint will to say that it is contractual, and its enactment in 1979 has effectively eliminated litigation in this area. Second was the problem of caregiver arrangements: an alleged oral agreement that "if you move in and take care of me until I die, I promise to leave you my house." See Johanson's Texas Probate Code Annotated (2002), Commentary to Section 59A.  Section 59A dealt effectively with the problem as well.

While the 1979 enactment of Section 59A solved these two problems, it inadvertently created another problem -- the one that HB 1473 fixes.  Section 59A was modeled after Section 2-514 of the Uniform Probate Code (UPC).  The UPC was drafted by the National Conference of Commissioner on Uniform State Laws and has been enacted in at least 18 states.  The UPC version includes a significant provision which was left out of Section 59A: that a contract to make a will or not to revoke a will could be included in a writing signed by the decedent and evidencing a contract but not contained in the will itself. The widespread use of marital property agreements which has sprung up in Texas since 1979 has illustrated the need for this provision to be added to Section 59A. It is common for a testamentary conveyance to be a material part of a pre-marital or post-marital agreement. Other types of agreements which contain these types of provisions and are affected by Texas's failure to follow the UPC approach are divorce property settlements and buy-sell agreements.  Many practitioners and commentators believe that these provisions are enforceable even with Section 59A reading the way it read before the HB 1473 change, but the absence of a clear provision in Section 59A resulted in confusion and unnecessary litigation.

The change made by HB 1473 makes it clear that such a provision in a marital property agreement or buy-sell agreement is permitted.

iii. Satisfaction of Bequest

Section 44 of the Texas Probate Code deals with the issue of an intestate donor giving property to an heir in advance of his or her death by providing that these gifts are treated as advancements and deducted from the heir's share only if the decedent declared in a contemporaneous writing or the heir acknowledged in writing that the gift was an advancement or otherwise was to be taken into account in determining intestate shares. Section 44 does not deal with the same issue as it relates to a donor with a will. HB 1473 adds Section 37C to the Probate Code, which provides that a lifetime gift is treated as a satisfaction of a devise only if the will provides for deduction of the lifetime gift, or the testator declares in a contemporaneous writing that the gift is to be deducted from the devise or is in satisfaction of the devise, or the devisee acknowledges in writing that the gift is in satisfaction of the devise.

iv. Allowance for Defending Will is an Administrative Expense

Section 243 permits a person who, in good faith and just cause, seeks to have a will admitted to probate to be awarded his or her attorney's fees and costs from the estate in some cases. HB 1473 amends Section 322 of the Probate Code to make these fees and costs administrative expenses for priority purposes rather than general unsecured claims. This means that they are more likely to be paid in an insolvent estate situation.

b. Guardianships

i. Temporary Guardianships

HB 2189 makes significant changes to Section 875 - the procedure for obtaining a temporary guardianship. The most significant change is that no temporary guardianship can be granted before an application is filed, and immediately upon filing of an application an attorney ad litem must be appointed for the proposed ward. This is intended to eliminate the practice of ex parte temporary guardianships, where the court creates the temporary guardianship before the proposed ward or an attorney ad litem is aware of what is going on.

HB 2189 mistakenly deleted the following sentence from Section 875(b): "A person for whom a temporary guardian has been appointed may not be presumed to be incapacitated." This sentence was important because it made clear that the granting of a temporary guardianship did not affect the presumption of capacity in the permanent guardianship proceeding to follow. The proponents of the bill had agreed to keep this sentence in the statute, but it was inadvertently deleted in the Senate Jurisprudence Committee late in the session. The proponents agreed that the granting of a temporary guardianship should not be evidence of incapacity in a subsequent proceeding to appoint a permanent guardian (i.e., "He must be crazy. Otherwise the court wouldn't have appointed a temporary guardian.")

ii. Limited Immunity of Guardians Ad Litem

Occasionally a guardian ad litem is appointed in a proceeding to create, terminate or modify a guardianship and is asked to express opinions to the court regarding what is in the best interests of the ward. HB 1470 adds Section 645A to the Probate Code to provide judicial immunity to guardians ad litem expressing such opinions, so long as they do not act wilfully wrongful, with conscious indifference or reckless disregard, in bad faith, with malice or in a manner which is grossly negligent. This immunity does not apply in other situations in which a guardian ad litem may be appointed.

iii. Payment of Applicant's Attorney's Fees

Previously, Probate Code §665B permitted the court to order that the attorney's fees of an applicant for guardianship who asked the court to name himself or herself as guardian to be paid from the ward's estate. HB 1470 amends the section to permit the award of attorney's fees even if the applicant asks for someone other than himself or herself to be appointed guardian.

iv. MHMR Report for Mentally Retarded Proposed Ward

Previously Section 687 permitted a guardianship based on an examination report of the Department of Mental Health and Mental Retardation that was no more than six months old. HB 1470 amends this section to change six months to 24 months. Apparently MHMR routinely re-examines persons in its system every 24 months, so this change is consistent with that practice. This does not affect the currency requirement for physician's certificates for proposed wards who are not mentally retarded. Those certificates still must be dated within 120 days of filing the application.

v. Miller Trusts

HB 1470 amends Section 767 to permit a guardian of the person to apply for creation of a "Miller trust" under 42 U.S.C. Section 1396p(d)(4)(B). HB 1470 also amends Section 774 to permit guardians of the estate to apply for creation of Miller trusts. These types of trusts help persons qualified for governmental assistance programs such as Medicaid.

vi. Discharge of Guardian When 867 Trust is Created

HB 1470 amends Section 868A to eliminate the requirement that either a guardian of the person or guardian of the estate must remain after the creation of a guardianship management trust under Section 867 of the Probate Code.

vii. Incapacitated Spouse Management Rules And Marital Property Rights

In 2001 the procedure for managing the community property of an incapacitated spouse was revamped. Section 883 of the Probate Code was amended and Sections 883A, 883B, 883C and 883D were added. As a result, it is possible that management of a married couple's community property could be divided between the competent spouse and a guardian of the estate of the incapacitated spouse. HB 1470 amends Section 883 to make it clear that this division of management does not partition community property into separate property, that the property given to the competent spouse to manage is that spouse's sole management community property, that the property given to the guardian to manage is the incapacitated spouse's sole management community property, and that the order dividing the property for management purposes does not affect a creditor's claim existing on the date of the order.

viii. Application and Citation

HB 1470 amends Section 682 regarding the contents of the application for guardian. Previously Section 682 (10) and (12) required the names and addresses of certain persons (for example, a minor ward's parents) to be listed, but it did not state what should happen if this information was not known. Thus, in a case of a child who was abandoned by one of his or her parents, some courts found the failure of the applicant for a guardianship to list that parent's address in the application (even though the address was not known) as an impediment to getting a guardianship. HB 1470 provides that the information must be stated "if known by the applicant." It also expands the list of persons whose names and addresses must be listed.

HB 1470 also amends Section 633 of the Probate Code to eliminate the service of citation by the county clerk on various persons when an application for a guardianship is filed. Rather, the applicant is required to send the notice to the listed persons by certified mail and file proof of delivery with the court. Any next of kin required to be listed on the application by Section 682 (10) or (12) also must receive this notice. This does not change the requirement of personal service on the proposed ward.

c. Trusts

i. Trust Accountings

HB 1471 amends Section 113.151(a) of the Trust Code to impose a 90-day deadline for trust accountings. Previously the accounting was due in a "reasonable time." Under the change, the trustee can ask a court to extend the deadline in appropriate cases. The amendments to this section also permit a beneficiary who is forced to bring a lawsuit to enforce the accounting demand to recover attorney's fees and costs from the trust or the trustee, in the discretion of the court.

ii. Trustee Removal

HB 1471 amends Section 113.082 of the Trust Code to make it clear that, upon the occurrence of one of the specific grounds for removal of a trustee listed in the statute, the court may in its discretion remove the trustee. Yes, "may" should be sufficient to make it clear that the court's authority is discretionary without the addition of "in its discretion," but two cases (Akin v. Dahl, 661 S. W. 2d 911, 913 (Tex. 1983), and Lee v. Lee, 47 S. W. 3d 767, 785-6 (Tex. App. -- Houston [14^th Dist.] 2001)) called this into question. The amendment also adds the failure to make an accounting required by law or the trust instrument to the list of specific, discretionary grounds for removal.

iii. Income/Principal Adjustments in Charitable Trusts

HB 1471 adds Section 113.0211 to the Trust Code. This provision applies only to charitable trusts, and it gives the trustee of a charitable trust the power to adjust receipts between principal and income. This power is similar to the power given to trustees of all types of trusts in new Section 116.005. It is unclear if trustees of charitable trusts must use the Section 113.0211 power to adjust or may avail themselves of the Section 116.005 power to adjust. A potential advantage of using the Section 116.005 adjustment power is the ability to use the advisory opinion procedure of Section 116.006.

d. Other

i. Creditor Protection for Section 529 Plans

SB 1588 adds Section 42. 0022 to the Texas Property Code, making it clear that Texans' investments in both types of college savings plans (prepaid tuition plans and Section 529 college savings plans) are exempt from creditors regardless of which state sponsors the plan. Under prior law, creditor protection was assured only if Texans invested in one of the Texas-sponsored plans. However, 529 plans of other states are marketed to Texans, and this bill closes the creditor protection gap for these plans.

ii. Powers of Appointment

Two bills passed (HB 1472 and HB 1473) affecting powers of appointment. HB 1473 added Section 58c to the Probate Code, providing that a residuary clause in a will, or a will making general disposition of all of the testator's property, does not exercise a power of appointment held by a testator unless specific reference is made to the power or there is some other indication of intention to include the property subject to the power. HB 1472 adds Sections 181.081 - 181.083 to the Texas Property Code, providing that, unless contrary intent is evidenced by the instrument, a donee who holds a power of appointment may (1) make appointments of present or future interests or both; (2) make appointments with conditions and limitations; (3) make appointments with restraints on alienation upon the appointed interests; (4) make appointments of interests to a trustee for the benefit of one or more objects of the power; (5) make appointments that create in the object of the power additional powers of appointment to permissible objects of the power of appointment pursuant to which such powers are created; (6) if the donee could appoint outright to the object of a power, make appointments that create in the object of the power additional powers of appointment and such powers of appointment may be exercisable in favor of such persons or entities as the person creating such power may direct, even thought the objects of such powers of appointment may not have been permissible objects of the power of appointment pursuant to which such powers are created; and (7) make appointments that create any right existing under common law. Most or all of these points are covered in well-drafted instruments, and to a large extent this may just be a restatement of the common law. In fact, the effective date provisions state that these are merely clarifications of existing law.

iii.  Notice Required in Recorded Real Estate Documents

HB 2930 requires any instrument executed on or after January 1, 2004, transferring an interest in real property to or from an individual to include the following notice in 12-point boldfaced or upper-case type:

Instrument not containing the notice are still effective as between the parties to the instrument but may not be recorded. HB 2930 provides that the county clerk may not reject an instrument presented for recording because the instrument contains or fails to contain a social security number or driver's license number, but apparently it can (and must) reject it if it does not contain the notice. If the county clerk accepts an instrument for recording, the recording of the instrument creates a conclusive presumption that the requirements of this section have been met.

iv.  Partners Owe Duties to Transferees of Deceased Partners

HB 1637 amends the Texas Revised Partnership Act to provide that a partner owes a duty of loyalty and a duty of care not only to the partnership and to the other partners but also to the transferee of a deceased partner's interest.

v. Gestational Agreements

HB 729 adopts a portion of the Uniform Parentage Act that deals with gestational agreements. It recognizes and authorizes gestational agreements -- agreements between a birth mother and the "intended parents" regarding the birth of a child. These agreements may be adjudicated under the procedure in the statute, thereby fixing the rights of the parties to the agreement. HB 729 amends Chapter 160 of the Family Code. The rights of the child, the birth mother and the "intended parents" to take under the intestacy statutes may be affected by HB 729.

vi. Marital Property

HB 885 tinkers with the formula for determining a claim for economic contribution (Family Code § 3.403), creates a presumption that the partition and exchange of community property into separate property makes the income from that property separate property, too (Family Code § 4.102), and tinkers with the division of quasi-community property (or perhaps it should be called quasi-separate property) on divorce (Family Code § 7.002).

vii. Accounts at Financial Institutions

Two bills affect multi-party accounts. HB 2238 loosens up the requirements for convenience accounts to permit multiple account owners and convenience signers (Probate Code Sections 438A and 439A). Under prior law, some thought that a husband and wife could not establish an account on which both of them were parties and owners but which had a child as a non-survivorship convenience signer. This bill is intended to permit that to occur. Also, under prior law, some thought that a convenience account could not have more than one convenience signer. This bill is intended to permit grandpa to have two of his grandchildren as convenience signers, not just one.

HB 1590 permits persons "on" a multi-party account who are not "owners" of the account (e.g., joint tenants, tenants in common, etc.) to pledge the account to secure a debt. Notice of the pledge must be given to all parties to the account, unless the account is at a non-FDIC institution (i.e., a credit union). "Convenience signers" cannot pledge the account (Probate Code Section 442).

A third bill does not deal with multi-party accounts, but it deals with trust accounts. HB 1307 is a big bill dealing with many issues affecting credit unions. This bill has one troubling provision (Finance Code §125.309) permitting credit unions to establish accounts for trustees based on a "certificate of trust" rather than a written trust agreement. A lot of the ills of this section can be avoided if the settlor, trustee, beneficiary or attorney gives the credit union a copy of the trust instrument and "certifies" to its "authenticity." A similar provision applies to trust accounts at banks.

viii.  "Probate Masters" Are Now "Associate Judges"

HB 1539 renames "probate masters" in statutory probate courts to "associate judges." It also permits associate judges to hear jury trials unless one of the parties timely objects. (Subchapter G, Chapter 54, Government Code.)

ix. Directives to Physicians and Family or Surrogates

The good news is that there were no changes to the statutory directive to physicians form. SB 1320 focuses on what happens when a physician or health care facility refuses to honor the directions given, and it may be useful in moving the patient to a facility that will comply with the family member's wishes.

3. Things That Could Have Been, But Weren't

The Texas Bankers Association Trust Services Division tried to pass a bill and constitutional amendment extending the rule against perpetuities for trusts to 1,000 years. These measures failed to make it out of committee.

The Texas Bankers Association Trust Services Division also tried to pass SB 1668, which would have permitted a corporate trustee to buy insurance for a trust from an affiliated company.  This bill failed to pass.

Several bills would have closed the so-called "Delaware sub loophole," making some or all limited partnerships subject to the franchise tax. However, none of these bills passed, so limited partnerships are not subject to the franchise tax for now.

Several bills would have tinkered with the state inheritance tax, either resurrecting it from its impending death when the state death tax credit phases out or repealing it before it dies a natural death. None of these bills passed.

HB 710 would have made substantial changes to the durable power of attorney act, including changing the statutory durable power of attorney form and imposing the duties of a trustee on an agent under a power of attorney. The bill failed to get out of committee.

1. ". . . [A] trustee shall exercise the judgment and care under the circumstances then prevailing that persons of ordinary prudence, discretion, and intelligence exercise in the management of their own affairs, not in regard to speculation but in regard to the permanent disposition of their funds, considering the probable income from as well as the probable increase in value and the safety of their capital.  In determining whether a trustee has exercised prudence with respect to an investment decision, such determination shall be made taking into consideration the investment of all of the assets of the trust . . . over which the trustee had management and control, rather than a consideration as to the prudence of the single investment of the trust. . . ."

2.  Section 116.172 was garbled in the legislative process and is somewhat confusing.  See the Official Comments of the Real Estate, Probate and Trust Law Section of the State Bar of Texas for explanation and examples, and a look for a clarifying amendment in 2005.

3. This loophole is intended to permit cases in which the personal representative of an estate is one of many parties on the same side and which have nothing to do with probate to be heard in the district court. For example, a lawsuit by all royalty owners against the operator of an oil and gas well could be heard in the district court if one of the royalty owners is the personal representative of an estate, but only if no person interested in the estate (such as the decedent's wife, etc.) is one of the plaintiff royalty owners. This last condition was viewed as necessary to catch estate-related cases (thus forcing them into the statutory probate courts) but it is written so broadly as to make the exception unusable in many cases.

Revised June 24, 2003.