Creditor's Claims in an Independent Administration

I know the topic alone gets your blood pumping. Can't contain your excitement? Read on.

In an independent administration, (IE, someone dies without a will, everybody agrees on how things will get split up, and the court appoints an independent administrator to settle things up) the independent administrator has to deal with creditors.

Example: Mother died without a will. She had $5k of credit card debt, $3k of debt at Sears, owed on her car and still had not paid off her mortgage on the condo she bought in Corpus. You were appointed independent administrator. What to do?

As an independent administrator, within 30 days after you have qualified (taken the oath and given any required bond), you must publish a notice to creditors in a local newspaper advising all creditors of your appointment. Within two months after your qualification, you must mail a registered or certified letter, return receipt requested, to each secured creditor of the estate. A secured creditor is one who holds a claim secured by a deed of trust, a mortgage, or some other lien upon property. You must file proof of the above two notices with the clerk’s office.

So what happens when the creditor's call you back?

Turns out, the creditors have options. If they are secured, then they can either proceed under the probate code, or not. If you go the probate code route, Sec. 306 provides that you can elect to take the collateral and forego any other claim against the estate, OR be treated as a matured secured debt, to be paid within due course of administration. Easy right? Not so fast.

Sec 146(b) of the Texas Probate Code provides another wrinkle: (b) Secured Claims for Money.  Within six months after the date letters are granted or within four months after the date notice is received under Section 295, whichever is later, a creditor with a claim for money secured by real or personal property of the estate must give notice to the independent executor of the creditor's election to have the creditor's claim approved as a matured secured claim to be paid in due course of administration.  If the election is not made, the claim is a preferred debt and lien against the specific property securing the indebtedness and shall be paid according to the terms of the contract that secured the lien, and the claim may not be asserted against other assets of the estate. 

So, if you don't comply with the time limit, you are stuck with the preferred debt and lien option. This means you cannot get a deficiency judgment. Further, the Independent Administrator can just say "No" or do nothing, rejecting your claim. If this happens, you have to file suit. What a pain.

Option B turns out to be good ole' fashioned foreclosure. If your secured asset included a power of sale, you can still use nonjudicial foreclosure, assuming you properly notice the independent administrator and conduct it appropriately, and still retain the ability to file suit for any remaining deficiency.

Complicated enough? Rep. Will Hartnett attempted to get a bill pushed through last legislative session to simplify things a little, but it didn't quite make it. A good analysis of the changes can be found here.

What does any of this mean?

For Independent Administrators:

1. You don't have a choice in not paying your creditors. If you want them to maybe go away, you have to use a dependent administration, or just hope they never call you back.


2. If creditors do call you back, sometimes they will settle on a lesser amount to save the headache of pursuing other remedies.


3. If you want to reject a creditor's timely claim, know that they can, and often will sue you.

 

For Creditors:

1. Are you secured? If so, you have options. Make sure you preserve your right to a deficiency by either foreclosing, or timely becoming a secured, approved claim under the probate code.


2. Don't forget to send notice, if you foreclose or pursue the probate code remedies.

 

At the end of the day, creditor's claims can be a headache, for both the estate and the creditor, but they do not have to be.

A Win for Trust Fund Babies

Oh, to be Matt, Tagg, Craig, Ben and Josh...Romney. A couple days ago, likely spurred by the releasing of his tax returns, we now know that Massachusetts Governor and GOP presidential hopeful Mitt Romney is not only really wealthy, but he has set aside near $100 million for his kids.

That is not the part I care about, but I do care about how he got it there.

As the CNN article accurately states, under current law you can transfer some $5 million to other during your lifetime, or at death. Double that for a married couple. That does not add up to $100 million. Yet a Romney spokesperson claims they have not paid any gift tax.

How does this happen? Let me count the ways. Without completely plagiarising the CNN analysis, there are a variety of valuation discounts, fancy trusts, and other estate and tax planning mechanisms that you can use to give money to someone else. Valuation discounts means that you can claim a $100 asset is only worth $50 because of how it is owned, controlled, or other really good excuses. The fancy trusts accomplish a similar goal by isolating an asset, usually a stock, oil/gas resource, even a small business, and having any increase in value pass tax free onto someone else. However, the key to all these is an underlying asset or class of assets that experiences growth. You don't accomplish much of anything if what you put in the trust starts worth $100 and ends worth $100.

There is good, and then there is Romney-good. Assuming that all the gifting was not done in the last couple years, in reality the underlying assets had to be valued at a maximum of a couple million (as the current $10 million limit/couple  was $7 million/couple in 2009, and as little as $2 million/couple as recently as 2003). This means that, roughly, he turned $2 million in tax valued assets into $100 million. In less than a decade or so. This is incredible.

We can't all be Mitt Romney. Politics aside, we can hope to use the strategies he has used to grow and transfer wealth to our loved ones. You do not have to have millions to take advantages of the same tools Romney has used, you just need a competent estate planning attorney. Or marry a Romney. Both work.

The State of the Union is...

The President just finished his speech. What did we learn? Not much, sadly.

More of the same calls for tax reform: the middle class is getting punished, everyone should pay their "fair share, " and even a cameo for Warren Buffet's secretary.

The Positives: The President did comment on the continued discrepancy in out nation's taxation of corporations verses others, and the losses of American jobs and tax revenue to foreign nations based solely on corporate tax rates. This has to change, and I think it will, regardless of who is in the White House for the next term.

The Negatives: Of course Warren Buffet's secretary pays a higher effective tax rate than her boss. See my previous post.  To fix this, you would have to call every type of income: earned wages, investments, rents, etc.,  the same. This would punish the middle class even more, as their potential retirement savings would be hit with an additional penalty. That won't work.

Of course Mitt Romney is only going to have an effective tax rate of 14% or so.  He is a millionaire, and he makes his money through investments. The super rich are not the problem per se, they are just doing what is legal, and what everyone else wishes they could do: not work, and just watch their money grow.

The President has come out and said publicly that millionaires such as Romney should send at least 30% of their income to Washington, and GOP hopefully Gingrich has taken the other route, saying that investment income should not be taxed at all.

Without running the numbers, it is difficult to endorse either of those programs. However, with the current state of affairs, it is difficult to endorse the status quo. It will be interesting to see what policy ends up in effect.

Breaking, News, First

I know I don't post all that often, but when I do, I hope you know that you are getting original thought and analysis.

If I am going to use someone else's thoughts, I give them credit. So yesterday, when I talked about Mitt Romney, I didn't expect CNN to copy and paste my thoughts onto their website.

Call me crazy, but my thoughts yesterday seem oddly similar to this article written by a Charles Riley for CNNMoney.com, published today. From the Herman Cain references to the Grover Norquist bit, I'm wondering if he consulted yourtexasestateplan.com before submitting his piece.

Either that, or maybe I should get a syndicated column. Thanks for nothing, CNN. 

8 votes...

The Iowa Caucuses are over. What does it mean? Not much, really, unless you are Michelle (o) Bachman, or maybe Rick Perry, who didn't do so hot. Newt is apparently mad, which is a shame, because I like Newt. He even posed for a picture with me, (see below).


But I digress. The winner, and the leader for now in the GOP carousel of candidates is Mitt Romney. Unlike our previous post's subject, who sadly is no longer with us in the race, Romney's website is not emblazoned with a three-digit tax plan and analysis. So, we have to go elsewhere to see what President Romney would have our tax system look like.


No thanks to http://www.mittromney.com/, lots of thanks to http://irs-hitman.blogspot.com/2011/11/mitt-romney-tax-plan.html for outlining what he thinks.


The Basics:


Romney, like every Republican held by the shorts of THIS GUY>>>
(if you don't know who the man to the right is, see his bio here)
can't really say he will raise taxes, else face political doom. So, he sticks to the general basics of eliminating capital gains tax and estate tax, lowering the corporate tax rate to 25%, and eliminating capital gains for earners of less than $200k. (assuming my source is accurate). Another source claims most of the same, and that he opposes the flat tax, and is neutral on the alternative minimum tax (which, if you don't know what it is, it probably deserves its own post.)


Real World Analysis:


I know I was harsh on Herman Cain, but at least the guy thought about taxes, and had enough gumption to make his own plan, however flawed it was. Maybe I'll retroactively bump his grade up for effort. Romney hasn't really said anything, except the basic Republican party line jargon of "hey let's cut taxes."


For a guy who panders to the middle class, and was recently quoted as saying on a visit to Florida this summer "I'm also unemployed" to a group of jobless workers. This, from a governor and guy who is allegedly worth around $200 million, and also has recently been called out for not releasing his own tax returns, is tough to swallow.


The Verdict:


Does he have a plan? Maybe, but I don't know what it is. He wants to cut taxes and balance the budget. Can you do that? At the same time? Not unless you cut the defense budget, health care, or a lot of pork from somewhere else. I love tax cuts, who doesn't? But I also enjoy paved roads. And school. And going to sleep at night with a decent confidence that our boys/girls in uniform have my back. Mitt Romney receives an INCOMPLETE, pending further assessment of unsubmitted work.







Disclaimer: YourTexasEstatePlan, or its author, does not endorse any political candidate, party, or ideal. Publicly.


Newt Gingrich did take the time to take a picture with me, which does get him somewhere.