Some Time Off and Some Problems Revisited

I am taking a much needed vacation beginning July 30th and heading to what I hope are the much cooler climates of Colorado for a week. I will not be posting anything in the meantime; however, before I took off, I wanted to share a couple of problems which came across my desk this past week which serve as warning signs to people who are doing their Wills. Both of these were prepared and executed by people on their own without legal counsel.

The first was a Will that by and large was correct in the body of the Will. However, when it came to the signatures, I found a problem. In Texas, a typewritten Will (which this was), has to signed by the Testator and witnessed by two individuals above the age of 14. Texas also has a provision where the Testator and the witnesses can sign what is known as a "self-proving affidavit," which allows the Will to be probated without the necessity of the witnesses having to come to court and give testimony that they were present when the Testator signed the Will, that the Testator was above the age of 18 and of sound mind, etc.

Unfortunately in this situation, the Testator signed the Will and the self-proving affidavit, but the witnesses only signed the affidavit--there were not even any signature lines for the witnesses on the Will (I will add here that the Testator who prepared the Will was a patent attorney, which only goes to prove that lawyers are there own worst clients). Prior to 1991, this would have rendered the Will completely invalid. Fortunately, Section 59 of the Texas Probate Code was changed in 1991 to provide that in this type of situation, the witnesses' signature to the affidavit will be considered a signature to the Will if necessary to prove that the Will was signed by the Testator, but the Will can no longer be considered self-proven, meaning that either one or both of the witnesses to the affidavit will have to give testimony in court as to the execution of the Will, or two witnesses will be needed to prove up the Testator's handwriting. Moral: Make sure that you have the Testator and the witnesses sign not only the Will, but also the self-proving affidavit. Added notes: make sure the witnesses are over the age of 14, and not related to the Testator or a beneficiary under the Will.

Second problem I encountered:

A gentlemen died with an estate of approximately $2 million. His son brought me the Will, which had been prepared by his father, using forms he had cobbled together from form books and other people's Wills, apparently. Dad's first wife had died and he subsequently remarried, so he wanted to make some provisions for the second wife, who did not get along at all with Dad's children. Dad started out by making some specific bequests worth about $250,000 to his children. In the following Article, he leaves "all my remaining property in trust for my wife for her lifetime." The rest of the Article provides the terms of the trust, which on termination was to be paid to her estate (note: doing this would certainly cut his children off from this share of his estate, since it is very unlikely she would leave any of this property to Dad's children).

The next Article is where things get unusual. He provides that he leaves "all the rest and remainder of my property to my children in equal shares." He now has created, in effect, two residuary clauses leaving all his property in very different ways. It is painfully obvious that he had no idea what he had written and the amount of conflict and confusion that would cause. It is now unclear who receives the residuary estate, so we are going to have to file what is known in Texas as a Petition for Declaratory Judgment with the probate court to have the court determine who the proper recipient of the residuary estate will be. Sometimes, in a case like this, you could go back to the attorney who drafted it and ask: What happened here? What did you mean? What do your notes say? Such extrinsic evidence would normally be admissable if the intent cannot be gleaned from the plain reading of the Will. However, in this case, the drafter of the Will was the Testator, and his intent died with him, so we will have to resort to other means to determine the ultimate beneficiaries. Moral: Don't be penny wise and pound foolish when it comes to drafting such an important document such as your Will. Get competent legal counsel to help in drafting your documents--and don't forget to read what they have drafted! Ask questions--what does this mean? Show me where the Articles where the property gets distributed. What happens is this person does not survive me? You've worked hard to acquire your assets. Don't inhibit your plans for these assets with second-rate software where you can draft your own Wills or with attorneys whose speciality is not in the estate planning area.

Executor and Trustee Compensation in Texas

I have often been asked: Do I have to pay my executor? If I create a trust for my children, does the trustee have to be paid?

In Texas, the answer is both simple and complicated, as most things usually are. In Texas, there is no requirement that an executor or trustee has to be paid a commission or be compensated for their work, but if you are not going to pay them, you have to say so in the instrument that appoints them (i.e., the Will or the trust agreement). If you do not make any reference to compensation, the Texas Probate Code (for executors) or Texas Property Code (for trustees) provides for compensation.

Section 241 of the Texas Probate Code provides that Executors are entitled to a commission of five per cent (5%) on all sums that actually receive in cash, and five per cent (5%) on all sums they pay out in cash. This seems simple enough, but on further examination of Section 241, you will find that “sums received” does not include cash received that was on deposit in a financial institution, life insurance proceeds, certificates of deposit and similar items. In addition, “sums paid out” does not include distributions to beneficiaries of the estate.

If the executor conducts a sale of property of the estate, the five per cent (5%) will apply unless a broker was used who is also being paid a commission. Thus, on the sale of a home where a broker was used and was paid a commission, the executor is not entitled to a commission as well. Where publicly-traded stock is sold in a brokerage account, and the broker receives a commission on the transaction, the executor receives no compensation.

The general rule of thumb is that the compensation will equal 5% of the income and 5% of the expenses of the estate. Sometimes this is adequate compensation, and sometimes it is not. If the executor feels the compensation is too low, he can always petition the probate court to consider additional compensation to be paid under Section 241.

For trustees, compensation is provided under Section 114.061 of the Texas Property Code (also known as the Texas Trust Code); however, the compensation provided there is very nebulous. It provides that the trustee is entitled to “reasonable compensation” from the trust for acting as a trustee. “Reasonable” can have all sorts of meanings, depending on the circumstances surrounding the trust and its assets, but typically it is taken to mean the amount that would normally be charged for like services by a corporate trustee in the area where the trust is administered. This can be anywhere from 1 to 1 ½ per cent (1% to 1.5%) of the market value of the assets on an annualized basis. Depending on the size of the trust, this could be a significant (or insignificant amount).

Of course, you can state very clearly that you want the executor or trustee to be paid and the terms of compensation, whether it is a percentage of the overall estate (for estate administration), a lump sum, or an annualized percentage of the market value of the assets (for trustees), or a set amount each year. Consider the size of your assets, the amount of income and expenses you might be expecting for your estate, and whether there are any unusual assets that the executor might be dealing with. Then consider whether the resulting compensation would be adequately compensating the person handling these matters.

In some cases, it is not necessary to compensate the executor or trustee. For example, it does not make much sense to compensate a spouse or child who is serving as the executor and who is receiving all the assets of the estate. Where there are multiple beneficiaries, however, and a difficult administration of the estate or trust is faced, it is perfectly fine to pay the compensation.

Finally, those persons serving as executors or trustees should remember that any compensation actually received is income that is taxable to them. Accordingly, the person serving may consider declining compensation. However, they should not do so without first consulting with their accountant or attorney to determine the resulting tax ramifications of accepting or declining the compensation.