2003 Key Legislation

Following are summaries and analysis by Glenn M. Karisch of selected legislation.  This material is copyright 2003 by Glenn M. Karisch and all rights are reserved.  The views expressed are those of Glenn M. Karisch and not of any firm or group.

Contents

Guardianship
In-Patient Psychiatric Care
Inventory/Monthly Allowance/Investment Plan Changes
Temporary Guardianships
Other Guardianship Legislation
Jurisdiction
Jurisdiction and Powers of Statutory Probate Courts
Other Probate Jurisdiction Bills
Powers of Attorney
Probate
Contracts Concerning Succession (Section 59A)
Inter Vivos Satisfaction of Bequests
Other Probate Legislation
Taxes
Trusts
Exculpation Provisions/142 and 867 Trusts (Grizzle Problems)
Rule Against Perpetuities
Trustee Accountings and Removal
Uniform Principal and Income Act
Uniform Prudent Investor Act
Other/Miscellaneous
Creditor Protection for 529 Plans
Filing Fees
Powers of Appointment

Guardianship

In-Patient Psychiatric Care

Inventory/Monthly Allowance/Investment Plan Changes

Temporary Guardianships

Other Guardianship Legislation

Jurisdiction

What a long, strange trip it's been.

Probate jurisdiction has been in a constant state of confusion and change since at least the early 1980s.  This session there are still more bills tinkering with the system. 

Jurisdiction and Powers of Statutory Probate Courts

It all started with Seay v. Hall, 677 S. W. 2d 19 (Tex. 1984).  Actually, it started long before that, but Seay v. Hall is a watershed case that summarized much of what happened before and set the stage for all of what was to happen after.  Justice Kilgarlin, writing for the majority in Seay, concluded that, based on the statutes at the time, the phrase "appertaining to or incident to an estate" meant (1) one or more of the specifically enumerated actions (such as the probate of will, claims, etc.) and (2) "matters in which the controlling issue was the settlement, partition, or distribution of an estate."  Accordingly, in the issue at hand in Seay, the Supreme Court found that neither wrongful death nor survival actions are, or were intended to be, matters appertaining to or incident to estates. 677 S. W. 2d at 23.

Seay v. Hall  was well-reasoned, rightly decided and in many respects is still good law.  However, the Legislature reacted to Seay to make it clear that they wanted statutory probate courts -- those specialty probate courts in most urban counties -- to have the jurisdiction to hear cases which did not fit the strict definition of "appertaining or incident to" laid down in Seay.  So, in 1985 and 1989, the Legislature amended Section 5A(b) of the Probate Code to give statutory probate courts jurisdiction over claims "by or against a personal representative ... whether or not the matter is appertaining to or incident to an estate."  In Palmer v. Coble Wall Trust Co, Inc., 851 S. W. 2d 178 (Tex. 1992), the Supreme Court (with Justice Gonzales writing) said that the intent of these amendments was obvious -- to extend the jurisdiction of statutory probate courts beyond "appertaining to" cases to cases by or against a personal representative.  While acknowledging this expansion, however, the Palmer opinion also acknowledged the continued viability of the "controlling issue" test in Seay v. Hall for determining what is "appertaining to" an estate.  In other words, after Palmer there were two bases for statutory probate court jurisdiction -- the old-fashioned "appertaining or incident to" cases and the post-Seay v. Hall expanded jurisdiction, most notably the "by or against personal representative" cases.

After Palmer, the Legislature continued to tinker with these statutes and the appellate courts continued to hear probate jurisdiction cases, but the main battleground was over the power of statutory probate courts to transfer cases to itself under Sections 5B and 608 of the Probate Code.  Section 5B was added in 1983 and originally permitted the court to transfer cases that were appertaining or incident to an estate pending in the court.  The limits of this statute were illustrated by the famous (infamous?) "Baby Dolls" case -- DB Entertainment, Inc. v. Windle, 927 S. W. 2d 283 (Ct. App. -- Fort Worth 1996).  In the Baby Dolls case, the statutory probate judge attempted to transfer a wrongful death case to his court, where there was pending guardianship.  Citing Seay v. Hall, the court of appeals held that a wrongful death case was not appertaining or incident to an estate, and under the wording of Section 608 (almost identical to Section 5B but applicable to guardianships instead of decedents' estates), only "appertaining to" cases could be transferred.

It is at approximately this point where, in the author's opinion, the statutes started getting messed up.  The mess-up happened in two places -- in Section 5A(b) in 1997 and in Section 15.007, which was added to the Civil Practices and Remedies Code in 1995.  It is easier to explain the 1997 mess-up first, so here goes:

Section 5A(b) -- Leaving the Seay v. Hall Path

The proponents of expanded statutory probate court jurisdiction responded to the Baby Dolls case in the 1997 legislative session with HB 1157.  That bill would have amended Sections 5B and Section 608 to include "by or against personal representative" along with "appertaining or incident to" cases as cases which statutory probate courts could transfer.  Thus, if HB 1157 passed, a judge could transfer a wrongful death case brought by a guardian on behalf of a ward to his or her court not because it was appertaining or incident to, but because it was "by or against a guardian."

But HB 1157 did not pass.  One or two key transfer cases preceding the 1997 session had focused attention on the Section 5B/608 transfer power, and opposition arose to any change in those sections which would expand the ability of statutory probate courts to make transfers.

Undaunted, the proponents stuck a change to Section 5A (not the transfer statute, but the "appertaining to" statute) into SB 506 -- the State Bar REPTL's general probate bill -- late in the session.  This change amended Section 5A(b) to read as follows (the italicized and underlined text is the amendment):

(b)  In proceedings in the statutory probate courts and districts courts, the phrases "appertaining to estates" and "incident to an estate" in this Code include the probate of wills, the issuance of letters testamentary and of administration, and the determination of heirship, and also include, but are not limited to, all claims by or against an estate, all actions for trial of title to land and for the enforcement of liens thereon, all actions for trial of the right of property, all actions to construe wills, the interpretation and administration of testamentary trusts and the applying of constructive trusts, and generally all matters relating to the settlement, partition, and distribution of estates of deceased persons. All statutory probate courts may, in the exercise of their jurisdiction, notwithstanding any other provisions of this Code, hear all suits, actions, and applications filed against or on behalf of any heirship proceeding or decedent's estate, including estates administered by an independent executor; all such suits, actions, and applications are appertaining to and incident to an estate for the purposes of this section. This subsection shall be construed in conjunction with and in harmony with Section 145 and all other sections of this Code dealing with independent executors, but shall not be construed so as to increase permissible judicial control over independent executors. All statutory probate courts shall have the same powers over independent executors that are exercisable by the district courts. In situations where the jurisdiction of a statutory probate court is concurrent with that of a 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.

The only reason to make this change was to expand a statutory probate court's transfer authority under Section 5B to cover "by or against" cases.  The statutory probate courts already had the authority to hear all of the cases covered by the amendment, so the only effect it could have would be to expand the transfer authority under Section 5B.  Note, however, that it was very shabbily done.  First, it wasn't tied to the part of Section 5A that gives the statutory probate courts jurisdiction over cases "by or against a person in the person's capacity as personal representative."  Rather, the tenuous 5B transfer argument hinged on (1) reading the phrase "all suits, actions and applications filed against or on behalf of any heirship proceeding or decedent's estate" as covering "by or against the personal representative" cases, (2) overcoming the unfortunate phrase "for the purposes of this section" (which could mean that it didn't apply for Section 5B purposes at all), and (3) straining past the breaking point the Seay v. Hall definition of "appertaining or incident to" that had served so well and stood the test of time.  Under the reading of this section given to it by SB 506's proponents, cases having absolutely nothing to do (forget "controlling issue") with the settlement, partition, or distribution of an estate were now appertaining and incident to the estate merely because the personal representative of the estate was a party.

This 1997 amendment also planted the seeds for a huge problem which some of this session's legislation is attempting to address.  In making this slipshod change to Section 5A, the effects of the last sentence of Section 5A(b) were not considered.  Taken literally, this sentence can be read to mean that all of these cases which under any sensible reasoning have nothing to do with the administration of an estate now have to be brought in probate court because they meet this new, inappropriate "appertaining to and incident to" test.  That cannot be what was intended by the 1997 change, and it obviously is not what any reasonable person organizing these matters from scratch would come up with, but that is the mess we find ourselves with.  This argument was raised in In Re Azle Manor, 83 S. W. 3d 410 (Tex. App. -- Fort Worth 2002), but it was not central to the case and did not figure in the court's decision.  This could have the horrible effect of tying up our expensive, specialty probate courts in hearing cases unrelated to their expertise and making them unavailable the hear the types of cases they were created to hear in the first place.

SB 506 slipped under the opposition's radar screen in 1997 and passed.  Because SB 506 was a decedents' estates bill and not a probate bill, the proponents were unable to make the same change to Section 607 in 1997.  However, in 1999, when opposition to expansion of statutory probate court jurisdiction was lighter, a similar change to Section 607(b) was made.  Also in 1999 the confusing phrase "for the purposes of this section" was eliminated and both Section 5B and 608 were changed to expressly permit a statutory probate court to transfer cases in which the personal representative or guardian is a party, whether or not they are appertaining or incident to.

CPRC Section 15.007

In 1995,  the Legislature added Section 15.007 to the Civil  Practices and Remedies Code.  This section reads:

Notwithstanding Sections 15.004, 15.005, and 15.031, to the extent that venue under this chapter for a suit by or against an executor, administrator, or guardian as such, for personal injury, death, or property damage conflicts with venue provisions under the Texas Probate Code, this chapter controls.

This was part of then-Governor Bush's first big tort reform push, and the intent of this statute seems pretty clear -- follow the CPRC venue rules in personal injury, death and property damage cases, not the Probate Code "by or against personal representative" rules.  However, this is not how this statute has been interpreted in the statutory probate courts.  The problem hinges on the language Section 15.007 uses.  It refers to venue.  Statutory probate judges are fond of saying that Section 5A, 5B, 607 and 608 are jurisdictional statutes, not venue statutes, so Section 15.007 does not apply.  They have found some support in the appellate courts, see, e. g., In re Houston Northwest Partners, Ltd., ___ S. W. 3d ___ (Tex. App. -- Austin, February 21, 2003); and In re Ramsey, 28 S. W. 3d 58, 61 (Tex. App. -- Texarkana 2000).  In Reliant Energy v. Gonzales, ___ S. W. 2d ___ (Tex. App. -- Houston [1st. Dist] 2002), however, the court held that the venue provisions of Section 15.007 precluded the transfer of a wrongful death case to the probate court.

The problem with the reasoning of the courts holding that Section 15.007 doesn't preclude Section 5B or 608 transfers is that they render Section 15.007 meaningless.  The legislature must have intended this statute to apply to prohibit these transfers because nowhere in the Probate Code is the issue of "venue" of personal injury cases addressed.  This statute has no meaning and application if not to prevent the transfer of personal injury, death or property damage cases by statutory probate courts unless they have the required venue.

The Simple Solution

While there have been other changes affecting statutory probate court jurisdiction not detailed here, the foregoing discussion is sufficient to show how we got to where we are.  Here is the author's simple solution to the current problems:

1. Eliminate the the language added to Section 5A(b) in 1997 (and the similar language added to Section 607(b) in  1999) and go back to a Seay v. Hall-based test of what is appertaining to and incident to an estate.  Most of our problems have stemmed from messing up this definition.  The statutory probate courts should be given the jurisdiction to hear whatever additional cases the Legislature wishes to give them -- by or against personal representative cases, trust cases, etc. -- but, please, please, please don't call these appertaining and incident to estates.

2. Leave the last sentence of Sections 5A(b) and 607(b) alone.  That sentence reads the way it should.  If a case is truly appertaining or incident to an estate, then it should be brought in the probate court and not in district court.  With the Seay v. Hall test determining what is appertaining and what is not, this works just fine.  The problem comes when cases having nothing to do with an estate are called "appertaining" merely because the personal  representative is a party.

3. Have the legislature expressly say whether CPRC 15.007 trumps Sections 5B and 608, or vice versa.  Let's eliminate the confusion.  Either the legislature wants statutory probate courts to be able to transfer personal injury, death and property damage cases even  if venue is improper, or it doesn't.  CPRC Section 15.007 should be amended to read in either of the following ways:

If  venue trumps the transfer power:

Notwithstanding Sections 15.004, 15.005, and 15.031:

(a) To the extent that venue under this chapter for a suit by or against an executor, administrator, or guardian as such, for personal injury, death, or property damage conflicts with venue provisions under the Texas Probate Code, this chapter controls.

(b) A statutory probate court shall not have the power and authority to transfer a personal injury, death or property damage case to itself under Section 5B or Section 608 of the Texas Probate Code unless venue of the personal injury, death or property damage case is proper under this chapter in the county where the statutory probate court is located.

Or, if the transfer power trumps the venue:

(a) Notwithstanding Sections 15.004, 15.005, and 15.031, to the extent that venue under this chapter for a suit by or against an executor, administrator, or guardian as such, for personal injury, death, or property damage conflicts with venue provisions under the Texas Probate Code, this chapter controls.

(b) The power and authority of a statutory probate court to transfer a personal injury, death or property damage case to itself under Section 5B or Section 608 of the Texas Probate Code is not limited by the venue provisions of this chapter, and the court may transfer such a case even if venue of the personal injury, death or property damage case otherwise is not proper under this chapter in the county where the statutory probate court is located.

It might also be a good idea to stick a similar provision in Section 5B and Section 608, saying expressly that the section either does, or does not, supersede the venue rules of Chapter 15 of the Civil Practices and Remedies Code.

That's it.  No muss, no fuss, and everyone knows where they stand.

The 2003 Legislation

That's not the approach that the legislation this session is taking.

The Real Estate, Probate and Trust Law Section of the State Bar had fixes to this problem in their legislative package (HB 1470, HB 1473,  SB 577 and SB 1178).  The Legislative Council, which must process bills before they are filed, mangled REPTL's jurisdictional proposals, so the bills as filed bear little or no resemblance to what was proposed.  However, since they were proposed, REPTL has decided to ask the sponsors to drop the jurisdictional provisions from the bill because they seemed likely to cause problems with the passage of the remaining provisions of the bills, which have nothing to do with probate jurisdiction.

The bills which seem likely to be considered for passage are HB 2431, covering jurisdiction in guardianship cases, and HB 2432, covering jurisdiction in decedents' estates.  Both bills were filed by Rep. Will Hartnett, R-Dallas. 

One aspect of these bills is noble -- they attempt  to reorganize Sections 5 and 5A (with respect to decedents' estates) and Sections 606 and 607 (with respect to guardianships) so that the jurisdictional provisions are in Sections 5 and 606, while the appertaining to  provisions are in Sections 5A and 607.  When Section 5A was first carved out of Section 5 back in 1979, this was how things stood, but over the years the legislature stuck jurisdictional provisions in Section 5A to the point where it is all mixed up.

The problem with these bills is that they do not attempt to resolve the "shall be brought" problem raised in the Azle Manor case by returning to a logical definition of "appertaining to and incident to" an estate.  The two bills approach the problem differently, so they are addressed separately.

HB 2432 -- Decedent's Estates

In the decedents' estates bill (HB 2432), Section 5(e) would be amended to read as follows (the amended language is underlined):

(e)  A statutory probate court has concurrent jurisdiction with the district court in all personal injury, survival, or wrongful death actions by or against a person in the person's capacity as a personal representative, in all actions involving an inter vivos trust, in all actions involving a charitable trust, and in all actions involving a testamentary trust.

Then a new subsection (h) to Section 5 would  provide:

(h)  A statutory probate court has jurisdiction over any matter appertaining to an estate or incident to an estate and has jurisdiction over any cause of action in which a personal representative of an estate pending in the statutory probate court is a party.

The knot, then, is tied by making the last sentence of Section 5A(b) read as follows (additions underlined, deletions struck through):  "Except for [All statutory probate courts shall have the same powers over independent executors that are exercisable by the district courts. In] situations in which [where] the jurisdiction of a statutory probate court is concurrent with that of a district court as provided by Section 5(e) of this code or any other 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].

I believe that the proponents of HB 2432 want this to be read so that:  (1) all "by or against" cases are appertaining or incident to an estate; (2) the district court has "concurrent jurisdiction" of a small subclass of these cases (personal injury, survival and wrongful death actions); (3) in those limited cases, a litigant may choose to file in either the district court or the probate court; and (4) in all other cases in which the personal representative is a party, the case must be brought in the probate court.  Other readings are possible (largely because they strain the definition of "appertaining or incident to" so much), but assuming for the moment that this reading is correct, the result is less than perfect for two reasons:

First, a whole bunch of cases which have no business clogging our probate courts are going to have to be filed in the probate court.  Rather than using a flexible, logical standard to decide which cases should be in the "either-district-or-probate-court" category, the bill opts for the "it's-probate-unless-it's-on-our-short-list" approach.  This is a misguided approach in estate planning (can you imagine using this approach drafting a trust which might last for 90 years?), and it is a misguided approach in legislation.  It takes about 30 seconds to think of several types of cases that should be on the list but aren't -- partnership cases and mineral rights cases where the decedent's estate owned a tiny interest, business disputes, class actions over any number of issues, to name a few.  So, HB 2432's solution to the "shall be brought" problem is no solution at all.

Second, nothing has been done to address the venue issue.  CPRC Section 15.007 is still out there, clouding the landscape.  In a personal injury case (where district court and probate court jurisdiction is concurrent) do you have to follow the venue rules and file in the proper county, or can you file in probate court regardless of the venue?  Is Reliant Energy right, and venue trumps the Section 5B transfer power, or is In re Houston Northwest right, and it does not?  HB 2432 leaves this unclear.

HB 2431 -- Guardianships

In the guardianship bill (HB 2431), there is no "short list" of types of cases in which the district court has concurrent jurisdiction.  The rationale is that any case  in which a guardian of the estate is a party affects the ward's estate -- even personal injury, survival or wrongful death claims -- so there's no reason to have a list of things to carve out. 

The guardianship jurisdiction issue is made more complicated by the fact that there were conflicting amendments to Sections 606(e) and (f) in 2001.  Johanson's Texas Probate Code Annotated and the Texas Legislature Online web site list both (e)s and (f)s.  HB 2431 does not attempt to clarify which (e) and (f) apply or if both apply.  (There may be a technical corrections bill elsewhere in this session that deals with this problem.)

At any rate, I believe the proponents of HB 2431 would have it read to mean that any case in which the guardian is a party must be brought in the probate court, including personal injury and wrongful death cases.  Other readings are possible, but assuming for the moment that this reading is correct, the same two problems noted above with respect to HB 2432 apply with even greater force to HB 2431.

Other Probate Jurisdiction Bills

In addition to tinkering with statutory probate court jurisdiction, HB 2431, covering jurisdiction in guardianship cases, and HB 2432, covering jurisdiction in decedents' estates, would clean up Sections 5(b) and 606(b) of the Probate Code regarding  what happens when a contested probate or guardianship matter gets filed in a constitutional county court.  The bill addresses what happens when the contested portion of the case gets resolved in the district court or statutory probate court and how it gets transferred back to the control of the constitutional county court.  It also addresses what happens to the uncontested portion of the probate or guardianship while the district or probate court is hearing the contested portion.

HB 2552, filed by Rep. Barry Telford, D-DeKalb, would amend Section 5 to permit a constitutional county court to transfer a contested probate case to the district court or ask for a statutory probate judge to be assigned to the case on his or her own motion only if the judge is not a licensed attorney.  It appears that the bill still would require the transfer or assignment if a party asked for it.  In other words, even if the judge was a lawyer, he or she would have to transfer the case if a party requested it, but would not be able to transfer the case on his or her own motion if no party asked for it.  This may not  be the case, however, as the language inserted into Section 5 could be read to prohibit all transfers in cases where the constitutional county judge is a lawyer.

Two bills filed by Rep. Robert Talton, R-Pasadena, would affect proceedings for recusal of statutory probate judges.  HB 680 would require that a recusal motion be heard within 14 days.  It would permit the recusal motion to be heard by the presiding judge of the administrative judicial region if no statutory probate judge is available to hear the motion within 14 days.  HB 445 would amend Section 875 of the Probate Code to "toll" the requirement that a hearing occur within 10 days and "toll" the requirement that temporary guardianships must last no longer than 60 days if a motion to recuse the judge is filed.  In those cases, the time periods would be "tolled" until the hearing on the recusal motion.  This could have the effect of extended an ex parte temporary guardianship indefinitely if a recusal motion is filed.

HB 1539, filed by Rep. Elliott Naishtat, D-Austin, bill would change the name of "probate masters" to "associate judges" and do away with the requirement that all litigants in certain cases must consent in writing to having an associate judge hear a contested trial on the merits.

SB 1724, filed by Sen. Robert Duncan, R-Lubbock, does not  appear to be directed at probate cases, but it may have unintended consequences in the probate area.  This bill would add subsection (g) to Section 25.003 [this probably should be 25.0003] of the Government Code, to read as follows:

(g)  In any suit filed in a statutory county court in which all plaintiffs do not affirmatively plead that they seek monetary relief aggregating $100,000 or less, excluding costs, pre-judgment interest, and attorneys' fees, any defendant may, within 30 days after being served, remove the case to a district court in the same county by filing a notice of removal in the statutory county court.

The provision clearly is intended to apply only to cases where the jurisdiction of the county court at law is based on the amount in controversy, but it does not say this, so a litigant in a probate case (a will contest, for example) who did not like the county court at law judge could try to use this to remove the case to district court, since it is unlikely that the pleading would include an affirmative pleading that they seek monetary relief of less than $100,000.

Powers of Attorney

HB 710, sponsored by Rep. Senfronia Thompson, would make significant changes to the statutory durable power of attorney form and to the laws governing powers of attorney.

In 2001, Rep. Thompson authored HB 1883. The version that passed the House that year would have made dramatic changes to power of attorney practice. Due largely to opposition from probate lawyers and banks, HB 1883 was trimmed back to address agent accounting issues, but no form changes were made. Rep. Thompson, former chair of the House Judicial Affairs Committee, has been conducting hearings during the period between sessions on the power of attorney issue, and HB 710 apparently is the result.

There are some problems with HB 710, but not as many as were in the House version of HB 1883 last session. The good news is that there is time this session to work with the proponents of HB 710 to come up with a bill that meets most of their objectives without ruining powers of attorney as an estate planning option for the vast majority of people.  Last session the bill appeared out of nowhere as a floor amendment in the House late in the session, and there was little time to do anything.

Probate

Contracts Concerning Succession (Section 59A)

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 was modeled after Section 2-514 of the Uniform Probate Code, but it left out a significant provision:  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 addition to Section 59A.  It is common for a testamentary conveyance to be a material part of a pre-marital or post-marital agreement.  Many practitioners and commentators believe that these provisions are enforceable even with Section 59A reading the way it reads, but the absence of a clear provision in Section 59A results in confusion and unnecessary litigation.

SB 577, filed by Sen. Chris Harris, R-Arlington, and HB 1473, filed by Rep. Will Hartnett, R-Dallas, each propose amending Section 59A to provide that a contract to make a will or not to revoke a will can be established by "provisions of a written agreement that is binding and enforceable."  Hopefully this will pick up marital agreement, business succession agreements, etc.

REPTL tried to make a similar change in 2001, but there was some confusion and opposition that time.  Hopefully this session's attempt will be successful.

Inter Vivos Satisfaction of Bequests

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.  This section does not deal with the same issue as it relates to a donor with a will.

SB 577, filed by Sen. Chris Harris, R-Arlington, and HB 1473, filed by Rep. Will Hartnett, R-Dallas, each propose adoption of Section 37C, which would provide that a lifetime gift is treated as a satisfaction of a devise 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.

This change was suggested by Prof. Stanley Johanson of the University of Texas School of Law.

Other Probate Legislation

Taxes

This site doesn't attempt to follow tax legislation closely.  Tax legislation goes through committees which are different from the committees which routinely consider probate, guardianship and trust legislation.  Also, the stakes in tax legislation are much higher, since all the bills have fiscal notes attached, since "special interests" follow these bills and since many Texans are polarized on the issue of taxes.

Nevertheless, it is worth noting possible developments on two fronts -- the state inheritance/estate tax and the franchise tax.

Inheritance/Estate Tax

President Bush's 2001 tax bill changed how the Texas state inheritance/estate tax worked.  Texas, like many states, has a "soak-up" tax, which simply soaks up the amount of the state death tax credit permitted by federal law and makes the Texas tax equal to that amount.  This worked great prior to 2002 -- the state return was a one-pager which simply reflected the relevant information from the federal return.  No muss, no fuss.

The 2001 tax bill changed all that.  To help pay for the federal estate tax reductions, Congress phased out the state death tax credit.  With its current soak-up tax, Texas will receive ever-shrinking amounts of state inheritance tax money until 2005, when there will be no "soak-up" -- the state death tax credit goes away.  This results in a significant revenue loss for Texas (and many other states), but it enabled Congress and President Bush to take credit for reducing federal taxes without taking as big of a bite out of federal coffers as would otherwise have occurred.

This is the first session the Legislature has had a chance to do something about this problem.  One approach, sponsored by Rep. Tommy Merritt, R-Longview, would repeal the state inheritance tax effective September 1, 2003, and place a constitutional prohibition against it ever coming back (see HB 313 and HJR 47).  The repeal seems rather silly, since it will go away on its own in 2005.

Two bills would go the other way.  SB 1149, filed by Senator Eliot Shapleigh, D-El Paso, and HB 2532, filed by Rep. Sylvester Turner, D-Houston, would leave the Texas tax as a "soak up" tax, but would turn back the clock on the federal tax statutes to December 31, 2000 -- the soak-up would be applied based on the way the tax laws read on that date.  Presumably this means $650,000 exemption equivalent and a full state death tax credit.  These bills anticipate that some estates will not be required to file federal estate tax returns but would still be subject to the Texas tax.  Therefore, it contains provisions directing the comptroller to come up with the necessary forms and procedures to collect this tax.  This is an approach other states have used to deal with the problem caused by the 2001 tax bill, and it enables the Legislature to say that they didn't increase taxes.

Stay tuned.

Franchise Tax

The desire to create new sources of revenue without causing legislators to violate "no new taxes" pledges causes legislators to look to tweaking existing taxes.  Under current law, the Texas franchise tax (which for most entities really is a state income tax) applies to corporations and limited liability companies (LLCs), but not to limited partnerships.  Partly for this reason, limited partnerships often are used to achieve various estate planning objectives.  (In other states, where this tax issue isn't applicable, LLCs creep into the practice more often.)  Unfortunately, also for this reason, and because of the liberal "check the box" rules for entity tax selection at the federal tax level, some big companies based in Texas have opted for the limited partnership form of organization to avoid the state franchise tax.

This strikes many legislators as unfair.  The trick, from the estate planning attorney's perspective, at least, is how to catch the Dells and the SBCs of the world, making their LPs subject to franchise tax, without making our garden-variety family limited partnerships subject to the same tax.  (Of course, there are legislators who would like to tax FLPs, too.)

SB 1030, filed by Sen. Eliot Shapleigh, D-El Paso, would make limited partnerships with non-natural persons as partners subject to the franchise tax.  There's a provision in there to offset the income attributable to natural persons who are partners, so, assuming the offset works correctly, an FLP with a 1% LLC general partner and 99% in limited partnership interests held by natural persons may not make the franchise tax problem much worse than it is now.  (However, it would appear necessary to file a franchise tax return for the partnership in this situation, which could be a pain.)  On the other hand, if the plan calls for tiered limited partnerships or limited partnership interests held by trusts, this could create a big enough problem to make reorganization a good idea.

Other franchise tax changes are possible.  For example, HB 450, filed by Rep. Anna Mowery, R-Fort Worth, would impose a minimum $100 franchise tax.  Recall that there used to be a minimum $100 franchise tax, back in the days when it wasn't an income tax and when it only applied to corporations.  Also, HB 694, filed by Rep. Yvonne Davis, D-Dallas, apparently would apply the franchise tax to any entity taxed as a corporation for federal tax purposes (although this isn't entirely clear).

Whether or not either of these bills become law, there are likely to be franchise tax changes, so this will be something to check at the end of the session.

Trusts

Exculpation Provisions/142 and 867 Trusts (Grizzle Problems)

On December 31, 2002, the Texas Supreme Court issued its opinion in Texas Commerce Bank, N. A. v. Grizzle, ___ S. W. 3d ____ (Tex. 2002 [Docket No. 01-0211]). The Grizzle case takes 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. For example, Professor Gerry Beyer, in his case update on Grizzle, doesn’t see this as a likely result. Click here to see Professor Beyer's case summary.  To see the text of the Grizzle opinion, click here.

The Grizzle case also raises questions about the propriety of including exculpation clauses in trusts created by courts under Section 142.005 of the Property Code and Section 867 of the Probate Code.

In fairly direct terms, the Supreme Court invites the Legislature to fix Section 113.059 if its interpretation does not reflect Legislative intent:

[Footnotes omitted.]

HB 3503, filed by Rep. Will Hartnett, R-Dallas, responds to Grizzle in two ways:

1. It revises Section 113.059 of the Trust Code to make it clear that an exculpation provision which purports to protect a trustee from gross negligence or willful misconduct is unenforceable. It also attempts to clarify what duties a settlor can and cannot relieve the trustee from.  For example, it provides that a settlor cannot take away a court's right to remove the trustee for breach of trust.

2. It attempts to end the practice of routinely sticking in exculpation clauses in trusts created under Section 142.005 of the Texas Property Code of Section 867 of the Texas Probate Code. These types of court-created trusts are for the protection of minors and incapacitated persons and there is no public policy reason why the courts should routinely stick exculpation provisions in them.

Rule Against Perpetuities

SJR 26, filed by Sen. John Carona, R-Dallas, and HJR 77, filed by Rep. Ken Paxton, R-Frisco, would eliminate the constitutional prohibition against perpetual trusts in Texas.  SB 534 and HB 2239, also filed by Sen. Carona and Rep. Paxton, respectively, would make related statutory changes enabling trusts in Texas to last 1,000 years.  As a practical matter, these two pieces of legislation are intended to abolish the rule against perpetuities in Texas as it applies to trusts.

These bills are the same as SJR 26  (coincidentally the same bill number in 2001 and 2003) and SB 698 Senator Carona filed in the 77th Texas Legislature in 2001.  Those bills passed the Senate (SB 698 was amended to fix some of the language and to shorten the maximum duration of trusts to 360 years) but failed to clear the Calendars Committee in the House and, thus, did not become law.  It is interesting that Sen. Carona and Rep. Paxton chose to start with the original, 1,000-year version of the statute rather than the 360-year version which passed the Senate last time.

In 2001 these bills had the backing of the Trust Division of the Texas Bankers Association (TBA), and that this is the case in 2003 as well.  The TBA's arguments last session centered on two propositions:  (1) Texans ought to be able to do with their property what they want, and if they want to create a trust that lasts for 1,000 years, they ought to be able to do so; and (2) other states have repealed the rule against perpetuities and if Texas does not, its banks and trust companies will be at a competitive disadvantage and property which should be managed here in Texas will go to be managed in other states.

Steve Saunders, an Austin attorney, led the opposition to the TBA legislation last session.  He is doing the same this session.  Click here to see Steve's latest position paper opposing these legislative changes.

If these bills pass, the Legislature should take a look at some of the changes that were made in the Senate before it passed of SB 698 last session.  The obvious change is shortening the time period from 1,000 years to 360 years.  Regardless of the time period used, the 2001 bill was improved after it was filed, and the Legislature should include those improvements in the final version of SB 534/HB 2239.  To see the version of SB 698 that passed the Senate last session, click here.

Trustee Accountings and Removal

SB 574, filed by Senator Chris Harris, R-Arlington, and HB 1471, filed by Rep. Will Hartnett, R-Dallas, are identical bills which would make two Trust Code changes -- one affecting trustee accountings and one affecting trustee removal.  This is part of the legislative package of the Real Estate, Probate and Trust Law Section of the State Bar of Texas (REPTL).

Texas Trust Code §113.151(a)

The Texas Probate Code imposes a 60-day deadline on independent executors for responding to a beneficiary’s accounting demand. See Tex. Prob. Code § 149A(b). While the accounting demand provision in the Texas Trust Code is similar to the Probate Code provision applicable to independent executors, there currently is no clear deadline for a trustee’s response to an accounting demand. SB 574/HB 1471 would amend Section 113.151(a) of the Texas Trust Code to require the trustee to make the accounting within 60 days after receipt of the demand or such longer period ordered by a court. SB 574/HB 1471 also would amend Section 113.151(a) to make it clear that the court in its discretion may award costs and legal fees against the trustee individually if a beneficiary successfully brings a suit to compel an accounting.

The House Judicial Affairs Committee passed a committee substitute for HB 1471 out of committee.  In the substitute, the 60-day requirement for accountings was changed to 90 days and the attorneys' fees provision was revised to make clear that the court in its discretion could award attorneys fees against the trustee personally or out of the trust property.  The House passed the committee substitute for HB 1471 on April 2, 2003.  Click here to see the version as passed by the House.

Texas Trust Code §113.082(a)

There is a problem with the way SB 574/HB 1471 as filed would amend Section 113.082(a) of the Texas Trust Code regarding trustee removal.  REPTL proposed amending this section to make it clear that the court "may in its discretion" remove a trustee for one of the reasons stated in that section. Judicial decisions have called into question whether "may" (without "in its discretion") in the current statute really means "shall."   See 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). REPTL wanted to make it clear that "may" really meant "may," so it proposed sticking in the "in its discretion" language.  Unfortunately, when the Legislative Council got hold of this proposal, it apparently decided that "in its discretion" was superfluous, so it eliminated it in the version given to Senator Harris and Rep. Hartnett to file.  I would agree that it ought to be superfluous, but hopefully these words will be stuck back in the statute to make this point clear, in light of court decisions. 

SB 574/HB 1471 also would amend Section 113.082(a) to make the failure to make an accounting which is required by law or by the terms of the trust an express basis for removal of a trustee. While the court has the discretion to remove a trustee for failing to account under the catch-all "other cause" currently in the Trust Code (Section 113.082(a)(4)), the importance of making required accountings justifies including it among the specific bases for removal. Also, this change mirrors the approach used for independent executors in Section 149C of the Texas Probate Code.

Uniform Principal and Income Act

SB 573, filed  by Sen. Chris Harris, R-Arlington, and HB 2241, filed by Rep. Ken Paxton, R-Frisco, would enact the Uniform Principal and Income Act in Texas.  This is part of the legislative package of the Real Estate, Probate and Trust Law Section of the State Bar of Texas (REPTL).  Together with its sister bill, SB 575/HB 2240, it could change the way trustees manage trust investments and the way trustees allocate receipts and disbursements between principal and income in Texas.

Uniform Prudent Investor Act

SB 575, filed by Senator Chris Harris, R-Arlington, and HB 2240, filed by Rep. Ken Paxton, R-Frisco, would enact the Uniform Prudent Investor Act in Texas.  This bill is part of the legislative package of the Real Estate, Probate and Trust Law Section of the State Bar of Texas (REPTL).  It goes hand-in-hand with SB 573/HB 2241, which would enact the Uniform Principal and Income Act.

A substantial majority of states have adopted versions of the Uniform Prudent Investor Act of 1994.  Based on the Restatement (3rd) of Trusts: Prudent Investor Rule (1992) promulgated by the American Law Institute, this "UPIA" modernizes the investment standard for trusts which do not specify another standard.

Currently, the default investment standard applicable to Texas trusts is found in Texas Trust Code § 113.056(a):

. . . [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. . . .

This is a Texanization of the prudent man rule (or, to be more politically correct, the prudent person rule) first espoused in Harvard College v. Amory, 26 Mass. (9 Pick.) 446, 461 (1830) (trustees should "observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested") and later included in a slightly different form in the Model Prudent Man Rule Statute (1942) and the Restatement (2nd) of Trusts (1959).  Texas added the last sentence quoted above in 1991 to make the standard of prudence applicable to investments as a whole rather than each separate investment.

REPTL recently concluded a multi-year study of the new Uniform Trust Code.  It concluded that the Uniform Trust Code as a whole is not an improvement over the current Texas Trust Code.  However, it concluded that one part of the UTC -- the Uniform Prudent Investor Act -- should be adopted, with a few Texas-oriented changes.  The Uniform Principal and Income Act is a necessary adjunct to the Uniform Prudent Investor Act.  If the Legislature is going to adopt the prudent investor rule, it also needs to adopt accounting rules to assure that the relative rights of the beneficiaries are protected.  REPTL studied these issues for more than two years before including these bills in its legislative package.  The REPTL study included representatives of judges, lawyers, accountants and the banking/trust industry, and the resulting bills are a compromise of the interests of these various groups.

(As initially filed, SB 575 and HB 2240 would have placed the Uniform Prudent Investor Act in Chapter 116 of the Texas Trust Code (Texas Property Code).  However, SB 573 and HB 2241 would have placed the Uniform Principal and Income Act in this same chapter.  The committee substitute for SB 575 and HB 2240 moves the Uniform Prudent Investor Act to Chapter 117 of the Property Code/Trust Code to eliminate any confusion.  References in this analysis are to Chapter 117 and the committee substitute.)

The proposed Texas Uniform Prudent Investor Act replaces the prudent person rule with the prudent investor rule.  The key objectives of the Act are:

• The standard of prudence is applied to any investment as part of the total portfolio, rather than to individual investments.  UPIA § 2(b) [§117.004(b) of SB 575/HB 2240].  (This is similar to the 1991 amendment to Section 113.056.)
• The tradeoff in all investing between risk and return is identified as the fiduciary’s central consideration. UPIA § 2(b) [§117.004(b) of SB 575/HB 2240].
• All categoric restrictions on types of investments have been abrogated; the trustee can invest in anything that plays an appropriate role in achieving the risk/return objectives of the trust and that meets the other requirements of prudent investing. UPIA § 2(e) [§117.004(e) of SB 575/HB 2240].  (Note, however, that several self-dealing prohibitions remain (e.g., Texas Trust Code §§ 113.052, 113.053, 113.054, 113.055 and 113.057).)
• The long familiar requirement that fiduciaries diversify their investments has been integrated into the definition of prudent investing. UPIA § 3 [§117.005 of SB 575/HB 2240].

Other/Miscellaneous

Creditor Protection for 529 Plans

Investments by Texans in either of Texas’s college savings plans have some protection from creditors. The protection of investments by Texans in other states’ college savings plans is uncertain.  HB 3234, filed by Rep. Todd Smith, R-Bedford, and SB 1588, filed by Sen. John Whitmire, D-Houston, would provide protection from creditors for all college savings plans, including those sponsored by other states.

Texans have three options for investing in a state-sponsored college savings plan:

• First, they can invest in the old "Texas Tomorrow Fund," now known as the "Texas Guaranteed Tuition Plan." This fund is governed by Subchapter F of Chapter 54 of the Education Code. Section 54.639 of the Education Code (part of Subchapter F) expressly provides that "money in the fund is exempt from claims of creditors, including claims of creditors of a purchaser, a beneficiary, or a successor in interest of a purchaser or beneficiary." Note that the statute exempts "money" in the fund from claims. This is not as broad as it could be, but since this fund is administered by the State of Texas and presumably only accepts investments of cash, "money" probably is sufficient.
• Second, they can invest in the new "Tomorrow’s College Investment Plan." This plan is governed by Subchapter G of Chapter 54 of the Education Code. This Subchapter was added in 2001 by SB 555. This is what is commonly referred to as Texas’s 529 Plan. Texas has authorized Enterprise Capital Management, Inc., of Atlanta to administer this plan. Section 54.709(e) of the Education Code (part of Subchapter G) provides: " Money in a savings trust account is exempt from attachment, execution, and seizure for the satisfaction of debt or liability of an account owner or beneficiary." The use of the word "money" here is more troubling, since the donor can direct assets in the plan to be invested in various types of investments (2 "static" allocation portfolios – 100% stock allocation and balanced allocation – and 13 single-fund portfolios). Thus, while "money" may go into and come out of the plan, the plan itself may have things other than money in it that can be identified as "belonging" to a particular donor. The creditor exemption provision for this plan is not as extensive as for the Texas Guaranteed Tuition Plan.
• Third, Texans can invest in a college savings plan sponsored by another state. These plans are being aggressively marketed across state lines (see http://www.savingforcollege.com for more information), and the Texas plan only recently became available, so it is safe to assume that there are millions of Texans’ dollars in the college savings plans of other states. These states’ statutes might have provisions similar to Texas regarding creditor protection (they may not), but there is at least some chance that a court will decide that a Texan’s creditor protection is determined under Texas law and not under the law of the jurisdiction where the plan is based. For this reason, there would appear to be some exposure for Texans’ investments in other states’ plans.

It appears to be the policy of the State of Texas that assets in these types of plans should be exempt from creditors’ claims, since the enabling legislation for both Texas-based plans contain provisions to this effect. See Tex. Ed. Code §§54.639, 54.709(e). There appears to be no reason why Texans investing in the plans of other states should be afforded any less protection.

HB 3234 and SB 1588 would add a provision to Chapter 42 of the Property Code making it clear that assets in any such plan is exempt from creditors.  The statute would be similar to Section  42.0021 of the Property Code.  These bills are similar to the actions taken in 1999 to protect the then-new Roth IRAs from creditors.

Filing Fees

HB 3055, filed by Rep. Joe Deshotel, D-Port Arthur, would return to the days when any probate filing after the earlier of approval of the inventory or 120 days after the initial probate filing would cost $3 for the first page and $2 for each additional page.  Recall that this was changed by HB 2822 in 1999.  Prior to that time, any filing after the inventory or 90 days after the original probate filing cost $3 for the first page and $2 for each additional page.  This requirement worked a hardship, especially in dependent administrations and guardianships, which require frequent, and often voluminous, filings.  The 1999 scheme replaced the $3/$2 requirement with a list of scheduled filing fees for certain actions (for example, a $25 fee for filing an annual account).  HB 3055 apparently would keep those scheduled fees and add the $3/$2 fee.

Powers of Appointment

SB 576  and SB 577, filed by Sen. Chris Harris, R-Arlington, and HB 1472 and HB 1473, filed by Rep. Will Hartnett, R-Dallas, would make two changes affecting powers of appointment.

First, SB 577  and HB 1473 propose adding 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.

Second, SB 576  and HB 1472 propose adding Section 181.081 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.

Both of these changes were suggested by Professor Stanley Johanson of the University of Texas School of 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.  In any event, if the proposals pass, these issues will be addressed with statutory certainty.