To Will or Not to Will

You Can’t Take It With You

Death affects people in many ways. It never is timely. Death confronts the family with bereavement, with the need to readjust emotionally and financially, and often with an unknown future. Death is not only a personal issue but a legal one as well. A death certificate must be issued, and the estate of the deceased individual (the decedent) must pass to others.

An estate consists of the property, both real and personal, which the decedent owns at the time of death. Real property includes land and improvements located on the land. Real property also includes oil, gas, and other mineral interests. Personal property is all property other than real property, including cash and bank accounts, clothing and personal effects, household furnishings, motor vehicles, stocks and bonds, life insurance policies, and government, retirement, or employee benefits.

Upon death, title to the decedent’s property passes immediately to the beneficiaries under the decedent’s will or to the heirs-at-law if the decedent died without a will. However, there must be an actual transfer of ownership of the property by proving the will in court or, if there is no will, by having a court determine who are the decedent’s heirs. The purpose of court involvement is to protect the rights of the family, those entitled to receive property, and the creditors of the decedent’s estate.

Therefore, although title to property passes immediately at death, the assets of the estate are subject to the control of the executor or administrator of the estate for the purpose of settling the debts of and claims against the estate. After the payment of debts and claims, the remaining assets are distributed to the decedent’s beneficiaries or heirs-at-law. If the decedent died with a legally valid will, then his or her property is distributed according to his or her wishes as expressed in the will. On the other hand, if the decedent died without a will or if the will is declared invalid, the estate is distributed to the decedent’s heirs as determined under Texas law. The decedent’s heirs may not be the persons to whom the decedent wished for his or her property to pass.

Dying Intestate (Without A Will)

In Texas, property is characterized as separate or community. Separate property is that which is owned before marriage or acquired during marriage by gift or inheritance. Damages awarded during marriage from a personal injury lawsuit, except damages representing the loss of earning capacity, also are separate property. Community property is all property, other than separate property, which is acquired by either spouse during marriage. Thus, there can be separate real property, separate personal property, community real property and community personal property. When a person dies without a will, the law determines who are the heirs, and assets are disposed of according to whether they are community or separate property.

Distribution of Community Property

Community property, whether real or personal, is distributed in this manner:

  1. If the decedent is survived by a spouse and children (or descendants of deceased children):
  • If all surviving children and descendants of the deceased spouse are also children or descendants of the surviving spouse, all of the community property passes to the surviving spouse.
  • If any surviving child or descendant of the deceased spouse is not also a child or descendant of the surviving spouse, the deceased spouse’s one-half of the community property pass-es to his or her children (and the descendants of any deceased child), and the surviving spouse retains the one-half of the community property he or she owned prior to the deceased spouse’s death. However, the surviving spouse has the right under Texas law to use and occupy the homestead during his or her life and may have the right to use or own certain items of personal property that are exempt from creditors’ claims.
  • Example 1: Husband (H) dies with-out a will. H is survived by Wife (W) and by his three children (A, B, and C). A, B, and C also are the children of W. In this case, all of the community property passes to W.
  • Example 2: Same as Example 1, except H is survived by a child (D) who is not also a child of W. Now, A,B,C, and D share equally in H’s one-half of the community property, and W simply keeps the one-half of the community property that she owned prior to H’s death. To illustrate, let’s apply this rule to a community bank account with $1,000 in it. The $1,000 is distributed as follows:
  • $500 (Many people incorrectly think that W gets the entire $1,000.)

A, B, C, and D: Each receives $125 (1/4 of $500)

  • Example 3: Same as Example 1, except W has a child (E) by a prior marriage. E is alive at H’s death. All of the community property still passes to W. It does not matter that W has children who are not also H’s children.
  1. If the decedent is survived by a spouse but not by any children or descendants, all of the community property passes to the surviving spouse.
  1. If the decedent is not survived by a spouse, all property is separate property. The following section discusses the intestate distribution of separate property.

Distribution of Separate Property

The distribution of separate property of a person who dies without a will depends on whether it is real or personal property. Separate property is distributed in this manner:

  1. If the decedent is survived by a spouse and children (or descendants of deceased children), then subject to the surviving spouse’s rights with respect to the homestead and exempt personal property:
  • Separate personal property passes one-third to the spouse and two-thirds to the children (and the descendants of deceased children).
  • Separate real property passes to the children (and the descendants of deceased children) subject to a life estate in one-third of the property in favor of the surviving spouse. This means that the surviving spouse is entitled to use one-third of the real property during his or her lifetime, and upon his or her death, the children (or descendants) will have full title to the separate real property of the decedent.
  1. If the decedent is survived by a spouse but not by any children or descendants, then subject to the surviving spouse’s rights with respect to the homestead and exempt personal property:
  • All separate personal property passes to the spouse.
  • Separate real property passes one-half to the spouse and one-half to the decedent’s parents or collateral relatives, such as brothers and sisters or their descendants. If no parents, brothers, sisters, or their descendants survive, then all separate real property passes to the surviving spouse.
  1. If only children or their descendants survive, all separate personal and real property passes to the children or their descendants.
  1. If both parents survive, but not the spouse or children or children’s descendants, all separate personal and real property passes one-half to each parent.
  1. If only one parent and brothers or sisters survive, separate personal and real property passes one-half to the surviving parent and the remaining one-half is divided equally among the brothers and sisters or their descendants. However, if no brothers or sisters or their descendants survive, then all separate property passes to the surviving parent.
  1. If no spouse, children or children’s descendants, or parents of the decedent survive, all separate property is divided equally among the decedent’s brothers and sisters or their descendants.
  1. If none of the above relatives survive, then all separate property passes generally to the decedent’s grandparents. If no grandparents survive, the law provides for distribution of separate property to more distant relatives.

In Texas, no matter how remotely related one is to a person who dies without a will, potentially he or she is an heir-at-law. Notice that the decedent’s property passes to the State of Texas only if none of his or her heirs, including very remote heirs (such as uncles, aunts, or cousins), are living. Indeed, the State rarely benefits from the estate of an intestate decedent.

Examine the rules above to see how your community and separate property would be distributed if you died without a will. Would the persons you desire to receive your property actually receive it?

Disadvantages Of Dying Without A Will

If a person dies without a will, the law disposes of his or her property. The public policy of statutes governing the intestate distribution of property is to provide for the orderly distribution of property at death. The law does not play favorites, so the distribution is determined by how closely the heir was related to the decedent, not by the nature or quality of any relationship between the heir and the decedent. Dying without a will may trigger undesired results and unexpected costs and delays.

Undesired Results

Because one usually has an idea of how he or she would like his or her property to pass to others, undesired results can arise if he or she dies without a will. Dying without a will risks that the property will not be inherited as the decedent wished.

For example, very often one spouse may prefer to leave everything to the surviving spouse who will provide for and take care of the children, but this may not happen if there is no will. If a person dies without a will survived by a spouse and children, including one or more children who are not also children of the surviving spouse, the surviving spouse receives only his or her one-half share of the community property, perhaps including the family home. Further, under these circumstances, the surviving spouse inherits only one-third of any separate personal property and only a life interest in one-third of any separate real property. If there is any animosity between, for example, the surviving spouse and the deceased spouse’s children by a prior marriage (who are now co-owners of property), conflicts or disputes may arise. Surely this is not what the deceased spouse wanted.

Another example of unintended results of dying without a will relates to the treatment of lifetime gifts to heirs. Texas law presumes that a gift to an heir is not an advancement of his or her inheritance. This may present a problem where a parent with two children makes a lifetime gift of a sizeable part (say, one-half) of the estate to one child (perhaps to help the child start a business or purchase a home) with the understanding that the gift is an advancement of his or her inheritance. If that parent then dies without a will and is not survived by a spouse, the remaining one-half of the estate is divided equally among the two children. The child who received the lifetime gift in effect takes three-fourths of the total estate, and the other receives only one-fourth instead of one-half, unless an advancement of the one child’s inheritance can be proved in court.

If the most special people in a person’s life are not among those who would be his or her heirs-at-law, they will not share in the estate if he or she dies without a will. If an unmarried person dies without a will, friends and roommates will inherit nothing. Thus, a devoted friend, who perhaps cared for the decedent for years, will not inherit property, no matter how unfair it might seem, unless the friend is provided for in the decedent’s will. Also, without a will, property cannot pass to a charitable organization, no matter how committed the decedent was to its purpose.

In Texas, there is no forced heirship. In other words, a parent is not required to leave property to his or her children. However, one cannot disinherit heirs if he or she dies without a will. Under the intestate distribution statutes, property may pass to undesired heirs instead of those the decedent would have chosen.

 

Costs and Delays

Dying without a will can tie up assets for an undetermined period of time. A court proceeding often is required to determine who are the heirs, although in certain limited circumstances it may be possible to clear title to the assets without an heirship proceeding. An administrator, who may be responsible to the court for settling the estate, may have to be appointed. The administrator may be required to post a bond to insure that the duties are performed properly. The administrator’s duties include locating the heirs, inventorying the assets, classifying and paying off debts of and claims against the estate, and distributing the property to the heirs.

Transfer of ownership of some of the assets by legal documents, such as deeds and certificates of title, may be necessary. If the estate cannot be settled amicably, the court will resolve the disputes. Because of congested dockets, court proceedings often are slow. Legal fees and court costs may begin to mount. Depending on how difficult it is to divide the property and whether the heirs agree on the value assigned to it, court proceedings could be so lengthy and costly that the estate is depleted. The bottom line is that dying without a will costs time and money and causes frustration for the family of the decedent.

Children And Intestacy

Adopted Children

The inheritance rights of adopted children are protected when a parent dies without a will. Under the Texas Estates Code, an adopted child is treated the same as a natural born child. Therefore, the adopted child can inherit from his or her adopted parents and vice versa. The adopted child can also inherit from his or her natural parents, but the natural parents cannot inherit from the child if the child dies without a will. This is an important consideration today when often an adopted child seeks and discovers the identity of a natural parent and then establishes a relationship with that parent. It should be noted that a person who is adopted as an adult may not inherit from his or her natural parents and vise versa.

Illegitimate Children

An illegitimate child (one born out of wedlock) can inherit from his or her natural mother and vice versa when either dies without a will. By contrast, the illegitimate child cannot inherit from the natural father or the father’s family members who die without a will, except upon the occurrence of one of certain specified events, including:

  1. The father consents in writing to be named as the child’s father on the child’s birth certificate.
  1. Paternity is established in a paternity suit brought generally before the child’s twentieth birthday.
  1. The father legally adopts the child.
  1. The father voluntarily signs a written notarized statement of paternity acknowledging that the child is his.
  1. After the child’s birth, the father marries the biological mother and either signs a written acknowledgment of paternity, consents to be named and is named as the child’s father on the birth certificate, or is obligated under a written voluntary promise or by court order to support the child.
  1. After the father’s death, the probate court determines that the father was the child’s biological father.

This means that even if a father maintains ties with his illegitimate child, that child will not inherit from him if he dies without a will, except under limited circumstances such as those discussed above.

Stepchildren

The stepchild does not inherit from a stepparent who dies without a will because he or she is not considered to be legally related to that stepparent. This is unfortunate where the stepchild was raised by a natural parent and/or a stepparent. A stepchild can inherit from a stepparent who dies without a will only if the stepparent adopted the stepchild or if the stepchild proves in court the existence of a written or oral agreement to adopt which was not executed. This latter method often is used when foster parents do not adopt a child even though they had an agreement with the natural parent(s) that they would adopt.

Children of the Half-Blood

Half-blood children share the same natural mother or father, but not the same two natural parents. A half-blood child inherits only half as much as a whole blood child. For example, if a decedent’s only heirs are a half-blood brother or sister and a whole blood brother or sister, the half-blood heir takes one-third of the estate and the whole blood heir takes two-thirds. However, if all of the heirs are half-blooded heirs, then each will take a whole share.

After-Born or After-Adopted Children

After-born or after-adopted children are children who are born to or adopted by a person after he or she executed a will in which such children were not provided for or mentioned at all. After-born or after-adopted children in this situation inherit only under limited circumstances, so it is best to execute a new will or an amendment to the existing will to provide for the after-born or after-adopted children.

Executing A Will To Achieve Desired Property Distribution

What A Will Can Do

A testator is a person who leaves a will in force at his or her death. A will is a legal instrument which states how the testator’s property is to be distributed at death. A valid will avoids many of the problems that may arise from dying without a will and allows a person to leave property to the persons he or she desires. In addition to naming the recipients of the testator’s property, the will also designates the individual(s) who will manage the property and care for minor children. In larger estates, the will often contains provisions that minimize estate taxes.

A will can also set up a trust, a method by which property is held by one party (the trustee) for the benefit of another (the beneficiary). To establish a trust, the testator transfers property, with the specific intent to create a trust, to the trustee who manages and administers the property for the benefit of named beneficiaries. A testamentary trust arises under a will and becomes effective when the testator dies. A trust is an effective way of managing property for the benefit of minor or incapacitated persons or persons who are incapable of managing their own financial affairs. A trust also is useful to prevent a spendthrift child from immediately spending his or her inheritance by preserving the funds for the child’s education or other important needs. Further, a trust may be used to protect the child’s inheritance from the claims of his or her creditors because property placed in a trust generally may not be reached by a beneficiary’s creditors until it is distributed to the beneficiary. There also are many other legitimate reasons to create a trust in a will.

Requirements for Execution

For a will to accomplish any or all of these results, it must have been properly signed. Texas recognizes handwritten (holographic); and typewritten wills (formal).

To execute a will, the testator must meet the following requirements:

  1. is at least 18 years of age, is or has been lawfully married, or is serving in the armed forces;
  2. be of sound mind at the time of execution;
  3. not be unduly or fraudulently induced (forced or deceived) to make the will; and
  4. have testamentary intent (present intent to bequeath property at death).

Additional requirements as noted below must be met for each type of will.

Handwritten (Holographic) Will

Under the Texas Estates Code, a valid handwritten will must be wholly in the handwriting of the testator and signed by him or her. It does not need to be witnessed and can be written on anything, including stationery. Typewritten words may not be incorporated into the will. The wording must reflect a present intent to dispose of property at death. The words, “This is my last will and testament,” generally are sufficient to show testamentary intent.

While executing a handwritten will sounds easy enough, problems can arise from its interpretation, especially when written by a lay person. If the instrument does not dispose of all of the decedent’s property, the undisposed property will pass according to the statutes regarding intestate distribution. If the handwritten will disposes of more property than the testator owns, complications may arise.

Remember, a spouse has only one-half of the community property to give to anyone because the other spouse owns the remaining half. If a will attempts to give all the community property to one or more persons, the surviving spouse is placed in the awkward position of having either to accept whatever bequests are made to him or her in the will or to renounce the entire will and instead claim his or her one-half community share.

If the bequests in a handwritten will are not written in clear language, then it may be necessary for the court to construe the meaning of ambiguous terms. As a general rule, the less clear the language and the more property and heirs involved, the more likely the will may be contested in court. Contesting a will is usually a very lengthy and costly process and may result in defeating the testator’s intent.

Further, if the handwritten will does not contain the proper language allowing the executor to serve without court supervision and waiving bond, the executor may be required to obtain court approval of many actions and to post an executor’s bond. This causes unnecessary delays and expenses in administering the estate.

For these reasons the best approach is to have an attorney prepare a typewritten (or formal) will.

Typewritten (Formal) Will

A typewritten will sometimes is referred to as a formal will. A well-drafted typewritten will is more apt to carry out the decedent’s intent. Although a type-written will may be prepared by a lay person, an experienced attorney should draft the will.

For a typewritten will to be valid, it must meet these requirements:

  1. be signed by the testator or another person at his or her direction and in his or her presence;
  2. be attested by two credible witnesses above the age of 14; and
  3. be signed by the witnesses in the presence of the testator.

A beneficiary under a typewritten will should not serve as a witness to the execution of the will because this may preclude the beneficiary from receiving any property under the will.

Will Revisions

Executing a will that stands up in court is only one aspect of “getting your affairs in order.” After execution, the original document should be safeguarded so that it is not lost, destroyed, or mutilated, which might result in complications in probate court as to the proof of its contents. Further, a will should be updated when there are changes in the testator’s heirs, property, or marital status. This can be accomplished by executing a proper amendment (a codicil) to modify the existing will or by canceling (revoking) the existing will and then executing a new one. It is not advisable to update a will by writing or making changes on it because such revisions may be totally ineffective.

Be aware that a will can also be canceled to some extent if the testator is divorced after making the will. In such a case, gifts to the ex-spouse in the will, as well as appointments of the ex-spouse as executor or trustee, are void and will not be recognized. Similarly, an ex-spouse who was designated during marriage as a beneficiary under the decedent’s life insurance policies generally is not entitled to the life insurance proceeds upon the decedent’s death. A temporary order issued by a divorce court prohibiting a party to a pending divorce case from changing his or her will until the divorce is final is unenforceable.

The subsequent marriage of a single testator will not cancel his or her will. If a person who signs a will before marriage wishes to give all or any portion of his or her property to the new spouse, he or she should sign a new will. Otherwise, the property will pass according to the provisions contained in the will that was signed before marriage, and the new spouse will receive no portion of the deceased spouse’s property.

Nonprobate Assets

Only property owned by the decedent at death can be disposed of by a will. A will cannot dispose of “nonprobate assets” – assets which pass at death other than by will or intestacy. The principal types of nonprobate assets include property passing by contract, property passing by survivorship, and property held in trust.

Property passing by contract includes life insurance proceeds, IRAs, and employee benefit plan proceeds, such as the proceeds payable under a pension, profit-sharing, or employee retirement plan. These assets pass outside the will to the persons named by the decedent in the appropriate beneficiary designations. Thus, it is important to periodically review the beneficiary designations with respect to these type of assets and to update them as necessary.

Property held by the decedent and another person as joint tenants with right of survivorship or in a pay on death account passes outside the will directly to the survivor. Survivorship assets typically include certain types of bank accounts, certificates of deposit, stocks and bonds, and certain savings bonds issued by the United States Government, such as Series EE savings bonds.

Another category of property that passes outside of probate is property held in a trust for the benefit of the decedent. The trust may have been created by the decedent during his or her lifetime for property management purposes or by someone else, such as a parent of the decedent. Trust assets pass under the terms of the trust rather than under the terms of the decedent’s will.

It is important to determine the extent of one’s nonprobate assets when planning the disposition of one’s property at death. If a substantial portion of the assets are nonprobate assets that do not pass under the will, even a well-drafted will may be insufficient to carry out the testator’s intent in disposing of his or her property.

Tax Considerations

Depending upon the value of the decedent’s property, a will may be necessary to avoid, minimize, or defer federal estate and state inheritance taxes. These taxes generally are imposed if the value of the decedent’s property exceeds the limitation imposed by the law at the time of the decedent’s death, reduced by the amount of any lifetime taxable gifts. The limits imposed by law are: $2,000,000 from 2006 until 2009; and $3,500,000 in 2009. Current law states that the estate tax will be repealed in the year 2010 but reinstated in the year 2011. The value of the property that can be transferred tax free will be $1,000,000 at that time. For these purposes, the decedent’s property includes his or her separate property and one-half of all community property. Life insurance and other nonprobate assets are considered in determining the value of the decedent’s property unless certain steps were taken during life to prevent such assets from being subject to estate tax at death (e.g., placing life insurance in a trust).

The highest federal estate tax rate was 50% in 2002 and is scheduled to decline by 1% each year until 2007 when it becomes 45%. It is possible that the estate tax rate could become 55% in 2011. Thus, without proper planning a significant portion of the decedent’s property may go toward the payment of death taxes rather than to the decedent’s intended recipients. Estate planning techniques are available to minimize death taxes and, in the case of a married individual, to defer payment of any taxes until after the death of his or her spouse. The ability to take full advantage of such techniques is not possible without a will.

Probate Of Wills

Whether you have a handwritten or typewritten will, its validity must be proved in court. This procedure is known as probate, and it generally must take place within four years after death.  To probate a will, it must be established in court that the will meets the requirements of execution (see earlier discussion) and that the will was not canceled or revoked. Additionally, unless the will is “self-proved,” proof of a handwritten will requires the testimony of two witnesses to the testator’s handwriting and proof of a typewritten will requires the testimony of one of the attesting witnesses.

A self-proved will is one that has attached or incorporated a specific form of affidavit containing certain required statements which is executed before a notary public at the time the will is signed or any-time thereafter but before the testator dies. A standard notary acknowledgment alone is insufficient to make the will “self-proved.” A self-proved will is admitted to probate on the basis of the self-proving affidavit and there is no need to call witnesses.

A will that is not proved in court is denied probate. In this event, the decedent’s property passes to his or her heirs as if he or she died without a will. Again, this further emphasizes how important it is to execute a will which meets all legal requirements so that property will pass as the testator wishes. After proving the validity of a will, the next step in the probate process is the administration of the estate.

Estate Administration

Estate administration is the management and settlement of an estate by a personal representative approved by the court. Estate administration may not be necessary when the decedent’s estate is so small that no action is necessary to distribute the property to the beneficiaries or heirs. However, estate administration is required in most other circumstances.

Estate administration involves the following steps:

  1. collection of the decedent’s assets;
  1. payment of debts and claims against the estate;
  1. payment of estate taxes, if any;
  1. determination of heirs if the decedent died without a will; and
  1. distribution of the remainder of the estate to those entitled to it.

 

If the will names an individual to carry out these duties, he or she is called an executor. If the court appoints such a per-son because the will does not name an executor or the decedent died without a will, that person is called an administrator. Either way, the executor or administrator has to be approved by the court and has legal obligations and duties to the court and those who receive property from the estate. If the executor or administrator acts improperly, he or she may be held liable for any resulting damages and his or her appointment may be terminated by the court.

In Texas, there are several different methods of administering an estate, some of the more common of which are dis-cussed below.

Independent Administration

Texas is one of the states that provides for independent administration – administration free of court supervision. This means that after an independent executor or administrator is approved and an inventory of estate assets or an affidavit in lieu of an inventory, is filed with the court, the executor or administrator can simply take care of the administration of the estate without any further court involvement or supervision. The independent executor or administrator is free to settle with creditors, set aside the homestead and other exempt property, manage the property of the estate, sell assets for payment of debts or taxes, and distribute the remaining estate to those entitled to it. Thus, independent administration avoids the costs and delays associated with a court-supervised estate administration in which the executor or administrator must seek court approval before doing any of these acts.

A testator can provide for independent administration of his or her estate by inserting in the will a clause such as the following:

“I appoint _______________________ as independent executor of my estate to serve without bond, and I direct that no other action shall be had in the probate court in relation to the settlement of my estate other than the probating and recording of this will and the return of the any required, appraisement, and list of claims of my estate.”

If the decedent did not provide for independent administration in the will but all distributees under the will agree to it, independent administration may be created upon court approval. If the decedent died without a will, independent administration may be created when all heirs agree. Although a court usually permits independent administration, it has the power to deny the request. If the court denies independent administration, many of the actions of the executor or administrator will require court approval, resulting in unnecessary costs and delays in administering the estate.

Muniment of Title

If there is no need for the appointment of an executor or administrator and the only reason for probating a will is to clear title to property, a will can be admitted to probate as a muniment of title. Under this procedure, there is no executor or administrator appointed. It is a somewhat more simplified method of administering an estate than the traditional formal administration. It is generally used only when there are no debts of the estate to be paid and no other actions that require the appointment of an executor or administrator.

Small Estate Affidavit

When someone dies without a will, one possible alternative is the Small Estate Affidavit.

If the value of the estate, excluding the homestead, exempt personal property, and non-probate assets, does not exceed $50,000, no formal administration is necessary if the heirs file an affidavit with the court showing that they are entitled to receive the property of the estate. As mentioned, the values of the homestead and exempt personal property are not included in the $50,000 figure. Up to 10 acres of land with improvements qualifies as an urban homestead of a family or single adult person regardless of its value. Up to 200 acres with improvements for a family or up to 100 acres with improvements for a single adult person qualifies as a rural homestead regardless of its value. Exempt personal property includes items of tangible personal property valued at up to $60,000 per family or $30,000 per single person. The law specifies the extent to which certain types of personal property are exempt. For example, there is no limit up to the maximum on household furnishings, tools, or clothing, but only two firearms are exempt.

In sum, the small estate affidavit is not necessarily limited to small estates, and may be a useful alternative to a formal administration in certain estates where, for example, the residence and non-probate assets comprise the majority of the estate and the remaining assets are valued at less than $50,000.

In addition to the $50,000 ceiling, the small estate affidavit procedure is avail-able only if the assets of the estate, excluding the homestead and exempt personal property, exceed the known liabilities of the estate.

One limitation on the small estate affidavit is its general ineffectiveness to transfer title to real property. The small estate affidavit is effective to transfer title to a homestead if the homestead is the only real property in the estate. However, if the estate contains any real property other than just the homestead, the affidavit will not clear title to any of the real property, including the homestead.

Collection of Final Paycheck

The Probate Code provides for a relatively quick and inexpensive procedure for a surviving spouse to collect the final paycheck of the deceased spouse by affidavit of the surviving spouse when there is no administration pending of the deceased spouse’s estate. This procedure is useful where the only asset of the estate is a final paycheck.

Informal Family Settlements

Informal family settlements are permissible where the estate is small and consists only of personal property, such as personal effects and household furnishings, but generally not where the estate includes bank accounts, stocks, and bonds. If a motor vehicle is involved, a new certificate of title may be applied for by filing an affidavit of heirship with the county tax assessor’s office.

Directive To Physicians And Family or Surrogates

(Living Will)

Texas law allows any competent adult, by signing a Directive to Physicians and Family or Surrogates (or “living will,” as it often is called), to instruct his or her physician to withhold or withdraw artificial life-sustaining procedures in the event of a terminal or irreversible condition. The directive takes effect only after the patient’s physician determines that the patient is terminally ill and that death is expected within six months without application of artificial life-sustaining procedures or the patient has a condition that may be treated, but never cured and that leaves the patient unable to care for or make decisions for himself or herself and that without life-sustaining treatment, is fatal.

The form and contents of the directive are prescribed by Texas law. The directive should be in writing, signed by the patient, and witnessed by two competent adults. One of the witnesses cannot be the person designated to make a treatment decision for the patient, related to the patient by blood or marriage, the patient’s heirs, the attending physician or an employee of the physician, a person who would have a claim against the patient’s estate upon his or her death, or an employee of the patient’s health care facility who is providing direct care to the patient or who is involved in the financial affairs of the facility. In lieu of signing in the presence of witnesses, the patient may sign the directive and have the signature acknowledged before a notary public.

The directive may include a designation of another person to make a treatment decision for the patient if the patient is comatose, incompetent, or otherwise mentally or physically incapable of communication.

If you desire that your life not be artificially prolonged in the event of a terminal illness, you should consult with an attorney to have a directive prepared for you. It may also be desirable to inform your physician of your wishes and to provide him or her with a copy of the directive. Failure to sign a directive may result in disagreements among your family in carrying out your wishes with respect to terminating artificial life-sustaining procedures.

Powers Of Attorney

A power of attorney is an instrument by which one person (the principal) grants to another (the agent) the power to perform certain acts on his or her behalf. Two types of powers of attorney are common in the estate planning field, namely the medical power of attorney and the durable power of attorney.

The medical power of attorney grants the agent the power to make health care decisions for the principal if he or she is unable to make them. The agent may exercise his or her authority only if the principal’s attending physician certifies that, in the physician’s opinion, the principal lacks the capacity to make health care decisions. The principal can revoke the power of attorney at any time, orally or in writing, and regardless of the principal’s mental state. The medical power of attorney may be signed by two witnesses, one of which is not:

  1. the person designated as agent;
  1. related to the principal by blood or marriage;
  1. an employee of the principal’s health care facility who is providing direct care to the principal or who is involved in the financial affairs of the facility;
  1. the principal’s attending physician or an employee of the physician;
  1. the principal’s heirs; or
  1. a person who would have a claim against the principal’s estate upon his or her death.

In lieu of signing in the presence of the witnesses, the principal may sign the medical power of attorney and have the signature acknowledged before a notary public.

The second type of power of attorney is the durable power of attorney. This instrument grants authority to a designated agent to manage the principal’s property on his or her behalf. It can be distinguished from the medical power of attorney which relates to health care decisions rather than to decisions concerning the management of property. The principal can either grant the agent one or more specific powers or grant the agent all of the powers listed in the power of attorney form. In addition, the principal can elect to have the power of attorney become effective immediately upon signing it or only upon the principal’s future disability or incapacity. The durable power of attorney must be notarized, but it need not be witnessed.

The forms of both the medical power of attorney and the durable power of attorney are prescribed by statute. You should consult an attorney if you desire to have either of these documents prepared for you.

Conclusion

If you die without leaving a will, you risk that your property will not be distributed as you desire. Even when the heirs at law are the same as you would have selected yourself, there is no advantage to letting the law take its own course. The advantage lies in dying with a will. With a well-drafted will you can avoid legal pit-falls, name an executor of your estate, name a guardian for your minor children, establish trusts, minimize estate tax liability, and minimize probate-related costs by providing for independent administration. Although a will can be challenged in court, the grounds for contest in Texas are few, and the law favors carrying out the decedent’s intent.

Executing a will is not as complicated or as expensive as you might think. You are encouraged to talk with an attorney about wills, trusts, and estate administration and to have a will prepared by the attorney. If you decide not to use an attorney, at least this handbook should give you a general idea of what will happen to your property if you die without a will.

If you desire that your life not be artificially prolonged in the event of a terminal or irreversible condition, you should consider signing a living will. You should consult with an attorney and your physician to understand the full impact of the living will.

Finally, you should consult with an attorney regarding the advantages of signing a medical power of attorney and a durable power of attorney.

 

*This article is provided as a public service by the State Bar of Texas and Texas Young Lawyers Association.

Living Trust Scams and the Senior Community

LIVING TRUST SCAMS AND THE SENIOR CONSUMER

If you are age 50 or older, you should take special care when buying living trusts. Your age group is often a special target of salespersons whose goal is to sell you something without carefully analyzing your needs.

It is easy to become a victim. Living trust sales are a growing area of consumer fraud. Con artists make millions of dollars every year selling unnecessary trusts. Each year thousands of consumers lose from $500 to $5,000 through the purchases of unwarranted living trusts. Often families face potentially greater costs after the consumer’s death, resulting from problems associated with the trusts.

To protect yourself, follow these guidelines:

Take time when making your decision. Do not fall victim to high-pressure, “act immediately” sales tactics. Seek the advice of someone trustworthy and knowledgeable. Contact your accountant, estate planning attorney, banker or financial advisor. If you conclude that a trust may be right for you, deal directly with a licensed Texas attorney who has substantial expertise in estate planning.

FRAUDULENT AND MISLEADING STATEMENTS USED IN LIVING TRUST SCAMS

Con artists promote their business by making false or incomplete statements about the probate process, guardianships and the taxation of estates. Such statements include:

  1. Living trusts reduce your estate tax liability.

 Misleading. Most Texans’ estates will face no death taxation (estate tax) at all. Estate tax is imposed if the decedent’s assets at death exceed the limitation imposed by law currently in effect for that year, i.e. the year of death. If your estate is taxable, a will can accomplish exactly the same tax savings as a trust at a much cheaper cost.

If the value of your assets could exceed the applicable limitation (or if a husband’s and wife’s combined assets could exceed that amount), you should see an estate planning attorney to discuss options to minimize your potential estate tax liability regardless of who receives your property. However, a living trust is not required to take advantage of other techniques to minimize estate tax liability.

  1. Living trusts will help you qualify for public assistance benefits.

 False. A living trust will not help you qualify for public assistance benefits, particularly nursing home Medicaid benefits. 

  1. You can avoid the Medicaid Estate Recovery Program (MERP) by placing your homestead in a revocable trust.

Misleading. MERP is a federally mandated program that attempts to recover from a deceased Medicaid recipient’s estate the value of the Medicaid services provided to that individual. In some instances, a lien may be placed on the home of the Medicaid recipient to help recoup costs when the home is sold. Placing the homestead in a revocable trust during the recipient’s lifetime might preclude MERP from attaching a lien to the property in the future. However, placing the homestead in a revocable trust has negative effects, because the homestead would lose its exempt status for Medicaid purposes which might keep the individual or individuals who placed the homestead in a revocable trust from qualifying for Medicaid benefits.

  1. Living trusts help you avoid contested wills.

 Misleading. Because a “trust” and a “will” are separate legal concepts, a trust is not subject to a will contest. However, trusts just like wills are subject to attack on the basis of lack of capacity, undue influence, and fraud. 

  1. Living trusts help you avoid your creditors.

 False. During your lifetime and even after your death, assets in a living trust are subject to the claims of your creditors. 

  1. Living trusts avoid the expense of a guardianship.

Misleading. A living trust is helpful to avoid the expense of a guardianship in case of your future incapacity. In some circumstances, a durable power of attorney is a simpler and less costly way to achieve the same goal. However, you should choose between a living trust and a power of attorney after you have considered the advantages and disadvantages of each. 

  1. Attorneys charge from 3 percent to 10 per-cent or more to probate your estate.

False. If your family wished to hire the services of an attorney, his or her fee may be based upon an hourly charge or upon a percentage of your estate and rarely do attorneys charge as much as 3 percent. In fact, most attorneys do not charge a percentage of the estate but instead charge an hourly rate for their work.

  1. Probate takes years to complete.

 Misleading and Very Unlikely. Non tax able probate estates in Texas generally only take a year or less to complete. There are rare circumstances where families and/or the IRS fight over the assets in an estate for an extended period after a death. Such disputes can cause delays in the administration of either a probate or a living trust. In most circumstances the administration of a living trust is no more time efficient than the administration of a will in probate. 

  1. Probate requires excessive time and money.

 False. Texas has adopted a simplified probate process under the Texas Probate Code. These independent administrations, which account for more than 80 percent of Texas probates, involve only one court hearing and the creating of an inventory. Independent administrations can be accomplished through a properly drafted will, and are not usually available if there is no will. 

  1. Everyone should have a living trust.

 False. While a living trust is appropriate for some people, the cost of creating, funding and administering a living trust outweighs the benefits for many people. It is important to decide what your needs are before creating a living trust. For example, the living trust can be an important device to enable a person to obtain assistance in managing assets. Many persons lack the capacity to manage their assets, or have lost that ability through ill health. For persons who own out-of-state property, the living trust can help avoid the need to probate their will in that state. If neither of these goals are your objectives, a living trust may not be an appropriate document for you.

  1. The living trust is the only way to avoid probate.

False. If your goal is to avoid probate, with proper planning there are several ways to do so. Assets that are held in joint tenancy with rights of survivorship and multiple party accounts with financial institutions are non-probate assets and therefore do not go through the probate process. However, always consult with an attorney before proceeding with these options, as they may likely conflict with your current estate planning.

 

WHAT YOU CAN DO TO PROTECT YOURSELF

It is very difficult to get your money back if you are cheated in a living trust scam. So before you buy, and better yet, before you allow a salesperson in your home, remember:

  1. Always take sufficient time to make your decision. 
  • Legitimate advisors understand when you want more information about their services or products.
  • Be sure to talk with someone knowledge able whose advice you value when considering a trust.
  • Never respond to an offer you do not thoroughly understand.
  • Avoid buying on impulse or succumbing to sales pressure to “act now.”

 

  1. If you conclude that a trust may be right for you, deal directly with a licensed Texas attorney who has substantial expertise in estate planning.
    • Be sure you are working with someone with the necessary training and education.
  • If a trust is right for you, an attorney with knowledge of Texas law should draft the documents. Avoid using standard forms, kits or computer software programs for any of your estate documents as the laws vary from state to state and may not be tailored for the requirements of Texas law. A licensed Texas attorney with expertise in estate planning should prepare, or at least review, your living trust. Also, a trust prepared by an attorney will often cost less than the prices charged by trust salespersons.

 

HOW PEOPLE BECOME VICTIMS OF LIVING TRUST SCAMS

Con artists make false and misleading statements to more senior members of our community through:

  1. telemarketing and mail solicitations; 
  1. door-to-door sales; 
  1. “free” seminars and workshops, and; 

Often con artists attempt to meet in your home through offers of a free living will, a free power of attorney, or a free estate analysis also know as Directive to Physicians. Many also offer unnecessary partnerships, limited partnerships, family partnerships, and limited liability companies.

If you feel that you have been a victim of a con artist, a living trust salesperson, or an unethical attorney, please contact the State Bar of Texas. While non-attorneys are not subject to State Bar rules, they may be practicing law without a license.

 

*This article is provided as a public service by the State Bar of Texas and Texas Young Lawyers Association.

 

Protecting the Incapacitated

What is Guardianship?

Guardianship is a judicial proceeding in which a person or entity (a guardian) may be granted full or limited authority over an incapacitated person (a ward) to promote and protect the well-being of the ward and/or the ward’s estate. The guardianship should be designed to encourage the development or maintenance of maximum self-reliance and independence of the ward by limiting the power or authority of the guardian to match the ward’s actual physical or mental limitations. Courts do not take the granting of a guardianship lightly; it is the legal method for taking away certain constitutional and state rights from the ward and imposing certain duties removed from the ward to the guardian.

Note: Guardianship is a specialized area of practice; you are highly encouraged to speak with an experienced attorney about the requirements of appointing a guardian. Many counties require legal representation in guardianship proceedings.

There are two types of guardianship – guardian-ship of the person and guardianship of the estate. The guardian of the person is charged with pro-viding care for the ward to the extent the ward’s estate allows. The guardian of the estate is charged with the protection and preservation of the ward’s property and finances. Factors considered in creat-ing a guardianship include determining 1) the extent of the ward’s diminished capacity and the areas in which the ward needs assistance, 2) the necessity and propriety of a guardianship, and 3) the most appropriate person to be appointed guardian. The best interest of the ward is the guiding principle in creating both a guardianship of the person and guardianship of the estate.

Who is an incapacitated person?

An incapacitated person is a person who (1) is a minor; (2) is an adult who, because of a physical or mental condition, is substantially unable to provide food, clothing, or shelter for himself or herself, care for his own physical health, or manage his own financial affairs; or (3) must have a guardian appointed for the person to receive funds due the person from a governmental source.

Who can be appointed as guardian?

Certain individuals have priority to serve as guardian by statute, such as spouses, adult children, parents and adult siblings. The court will usually perform a criminal background check on the pro-posed guardian and will generally investigate the facts and circumstances of the case to ensure that the right person is appointed guardian.

What if I am not a family member, but am concerned for someone’s welfare?

You can make a referral to the court that handles probate matters in your county for follow-up. If you suspect that a child or elderly person is the victim of abuse, neglect or exploitation, you should contact Child Protective Services or Adult Protective Services as the case may be.

What does a guardian do?

Guardians do as much or as little as necessary to protect the ward and/or his estate as determined by the court in the order appointing the guardian. The guardian must not take any action that is not expressly permitted by the order appointing the guardian or any subsequent order of the court, must maintain meticulous records about actions they have taken and any financial transactions, and must make annual reports to the court regarding the ward’s health and welfare and accounting for each of the ward’s assets, income and expenses down to the penny. A guardian may not sell or dispose of the ward’s property, commingle the ward’s funds with his own, make gifts of any property, or use the ward’s assets for himself. A guardian of the person is not liable for bad acts of the ward unless he is otherwise individually liable, and is not financially liable to provide care for the ward.

Can I create a guardianship without filing paperwork with a court?

Only the court can create a guardianship. However, before a person becomes incapacitated, he can sign a legal document known as a Designation of Guardian in which he expresses who he would like to serve as the guardian of his person and/or estate if he later becomes incapacitated. Likewise, a parent can sign a Designation of Guardian in which he expresses who he would like to serve as the guardian for his minor children should he die or become incapacitated.

Note: A Designation of Guardian is a legal document. Be sure to talk to an attorney to make sure your wishes can be carried out.

Which court creates a guardianship, and where should the guardianship be filed?

First, you must determine in which county the guardianship will be filed. For adult guardianships, it will be the county (1) where the ward is located,

(2) where the ward resides when the application is filed, or (3) the county where the principal estate of the ward is located. For guardianships for minors, it will be the county where his parents reside, or in which the parent with whom the child lives most of the time resides.

Then, you must determine which court in that county exercises probate jurisdiction. In small counties, the county court or the county court at law will hear the case. The largest counties in Texas have dedicated probate courts known as Statutory Probate Courts.

In most cases, the court will remain the same from the filing of the application until the guardian-ship is settled and closed. If the ward moves to another county or another state (with court permis-sion), the guardianship can be transferred to the new county or state.

Who participates in the guardianship proceeding?

In addition to the proposed guardian and the proposed ward, an attorney ad litem will be appointed to represent the ward. The attorney ad litem represents and advocates on behalf of a pro-posed ward and has certain statutory duties. The attorney ad litem’s duties include: meeting the ward prior to any hearing to provide legal options, requesting medical history and records from the applicant’s attorney, reviewing the court file for proper service on the ward and third parties, and making sure the application has been sworn to by the applicant. The court may also appoint a guardian ad litem to advocate for what is in the ward’s best interest. In some cases, a court investigator may be appointed to investigate the circumstances alleged in the application and makes an initial determination. A court investigator assesses the ward’s conditions at periodic intervals during the guardianship proceeding.

What happens at the court hearing?

The exact procedure varies from case to case and county to county. Generally speaking, the proposed guardian’s attorney will elicit testimony from the proposed guardian regarding the need for and propriety of the guardianship, the extent of protection the ward requires, and the qualifica-tions of the proposed guardian to serve. He may call other witnesses as necessary, and the attorney ad litem will have an opportunity to ask questions of the proposed guardian as well. If practicable, the attorneys may also ask the ward some questions to ensure he has an opportunity to be heard.

The court will require medical evidence of the nature and extent of the ward’s incapacity, usually in the form of a physician’s letter. Your county may have a specific form for the ward’s physician to complete and submit to the court.

The hearing will end when the judge signs the order appointing the guardian, articulating the guardian’s powers and duties, and imposing the appropriate bond on the guardian.

What happens after the court hearing?

If required by the court, the guardian must secure and file his bond, and must take and file an oath of office to ensure that the guardian faithfully discharges his duties. Once the oath and bond have been approved and filed, the clerk of the court will issue Letters of Guardianship to the guardian. Letters of Guardianship evidence the guardian’s appointment, qualification and authority to act. The letters expire one year and 120 days from the date of issuance, but may be renewed by an annual accounting approved by the court.

What if there is nobody able or willing to serve as a ward’s guardian?

The Texas Guardianship Certification Board, which is administered through the Office of Court Administration, (www.courts.state.tx.us/gcb) develops and administers a guardianship certification program for professional guardians who are not family members, attorneys, or corporate fiduciaries.

What are the alternatives to guardianship?

There are several alternatives to help avoid guardianship. A durable power of attorney allows another to act as your agent in financial matters. A medical power of attorney allows another to act as your agent to make healthcare decisions. Directive to physician or “Living Will” directs your physi-cian(s) how to act regarding “life-sustaining procedures” in the event of a terminal or irreversible condition. Other Texas laws provide methods of making medical decisions in emergency scenarios.

A competent spouse, once appointed by the court as the Community Administrator, has the right to manage, control, and dispose of the community estate.

A ward’s debtor can deposit monies owed to the ward into the registry of the court (if $100,000 or less).

When an individual’s only asset is a federal benefit (Social Security, SSI, and some VA benefits), the person with custody or responsible for the care of the proposed ward can file an application with the appropriate agency to be appointed representative payee or fiduciary.

If the purpose of the guardianship is to sell property worth less than $100,000, the court can order a sale with the proceeds being placed in the court registry.

Conclusion

This pamphlet is published as a public service project of the Texas Young Lawyers Association. It provides you with a brief overview of the legal system as it pertains to Guardianship and is not intended to replace legal advice from an attorney. If you have specific legal questions, you should seek counsel from an attorney in your area.

For more information about guardianships, visit the Texas Guardianship Association’s website at www.texasguardianship.org and the National Guardianship Association’s website at www.guardianship.org.

*This article is provided as a public service by the State Bar of Texas and Texas Young Lawyers Association.

Facing Foreclosure

FACING FORECLOSURE

INTRODUCTION

Purchasing a home may be one of the most significant investments a person or family will make in their lives. Looking for a suitable home and making an offer to purchase the home can be an exciting and nerve racking experience. Fortunately, a real estate agent , mortgage broker, and escrow agent are often present to guide you through the process and ensure that all of the proper paperwork is prepared and executed. However, after the sale is completed, there is often not anyone available to consult with when you experience financial troubles and face foreclosure. In many situations, the homeowner cannot afford to hire an attorney and does not have enough knowledge about the law to feel comfortable communicating with the lender alone.

This pamphlet is designed to provide a basic introduction and description of the foreclosure process,the laws governing foreclosure, and possible options and sources of further guidance for those facing foreclosure. This pamphlet is focused on foreclosures of residential properties by mortgagees and/or mortgage servicers, which are collectively referred to as “lenders” in this pamphlet.

Definitions:

Below are several key terms that you may encounter in the foreclosure process. Several of these are discussed in greater detail later in this pamphlet.

Collateral – Property pledged to the lender in the deed of trust as security for the repayment of the loan.

Deed of Trust – Mortgage instrument that creates a lien on the collateral and allows the trustee to sell it to satisfy the loan debt in the event of a default.

Default – The failure of the borrower to make the loan payments as agreed in the promissory note or workout plan, as declared by the loan servicer.

Delinquency – A loan payment that is not paid on the due date, but within the period allowed before actual default is declared.

Lender – The entity that gave you the mortgage loan. It may not be the same entity to whom you send your payments.

Mortgagee – Lender or holder of the security interest in the property; the lienholder; the mortgage servicer under certain conditions.

Mortgagor – Debtor, borrower and grantor of the security interest in the collateral; owner of the property.

Mortgage Servicer – The entity to whom you send your monthly payments.The lenderor investor has contracted with the servicer to handle your loan after closing. The servicer is your contact for any issues you have with your mortgage loan. The original mortgagee or lender may be the mortgage servicer, if it still receives payments from the debtor.

Nonjudicial Foreclosure – Foreclosure process that involves no judicial intervention and is free of court involvement.

Security Instrument – The Deed of trust creating the lender’s lien on the collateral and giving the trustee the power of sale. In other states, the security instrument is also known as the mortgage.

Substitute Trustee – Person appoint ed by the current mortgagee or mortgage servicer to exercise the power of sale in lieu of the original trustee designated in the deed of trust.

Trustee – Person or persons authorized to exercise the power of sale under the terms of the deed of trust.

 

What are the different types of foreclosures?

In Texas, the type of foreclosure process that is used by a lender depends on the type of debt that is owed. There are two general classes of foreclosure: (1) a non-judicial foreclosure; and (2) a judicial foreclosure. There is also a third type of foreclosure that combines parts of the non-judicial and judicial foreclosures and is used only for specific types of loans.

  • Non-judicial Foreclosure

A non-judicial foreclosure is used when the loan was used to purchase the home or to refinance the original purchase loan. In a non-judicial foreclosure, the foreclosure is performed without involving a court or judge. The non-judicial foreclosure is often performed by attorneys hired by the lender. As discussed in more detail below, the non-judicial foreclosure occurs at the courthouse on the first Tuesday of the month after at least two notices have been sent to the homeowner. Non-judicial foreclosures are the most common type and will most likely be the type of foreclosure that a homeowner will encounter.

  • Judicial Foreclosure

A judicial foreclosure generally occurs when a government entity is seeking to collect taxes owed on the property. The government will file a lawsuit with the court seeking to have your property sold to pay for property taxes that are owed. If the government proves that the taxes are owed and the judge signs an order for foreclosure, the property will be sold by the sheriff or constable at the courthouse on the firs t Tuesday of the month. It is possible that a private lender may choose this method instead of a non-judicial foreclosure, but it is unlikely because it usually takes longer than a non-judicial foreclosure and the lender has less control.

If you are served with a lawsuit seeking foreclosure of your property for failure to pay taxes, it is recommended that you con-tact an attorney in your area to assist you in filing a proper response. If you cannot afford an attorney and cannot locate a legal aid center to assist you, you should contact the government office that has filed the law-suit because they may be willing to work out a payment plan or enter into some form of payment agreement . Obtaining legal advice in these situations is strongly encouraged because there are special rules for senior citizens and the disabled that may stop the foreclosure. Also, it should be known that a homeowner has a limited right of redemption for two (2) years following the foreclosure sale, but a premium will have to be paid in addition to the amount owed for taxes and maintenance.

  • Combination Foreclosure

If a homeowner has received a home equity loan or a loan that was used to pay property taxes, the lender must obtain a court order approving the foreclosure before performing a non-judicial foreclosure. After the lender provides the First Notice (see description below) and the homeowner does not pay the debt owed, the lender must file an application with the court requesting an order of foreclosure. Unlike a typical lawsuit, the application does not have to be serve d on the homeowner by a sheriff or constable, but instead can be delivered by certified mail. The homeowner has 38 day s to file a response to the foreclosure application. If a response is filed, the court will hold a hearing to determine whether the lender is entitled to foreclosure . If a foreclosure order is signed by the court, the lender will then be allowed to continue with a non-judicial foreclosure by providing the Second Notice (Notice of Sale) as discussed below.

What documents do I need to locate if I am facing a non-judicial foreclosure?

Anyone who has purchased a home or refinanced a home loan knows that there were numerous loan documents signed at the closing. These documents are usually prepared by the lender and presented to you by the title company at closing. The homeowner generally does not review the documents in advance or at the closing, but rather signs everywhere the title agent indicates a signature is needed. When the closing is complete, the title company provides the homeowner with a set of copies that are often placed in a drawer or cabinet. If everything goes well, it may not be necessary to look at these documents again, but they become very important if you are unable to make a mortgage payment and the lender begins the foreclosure process. It is important that the homeowner know where their loan documents are kept and become familiar with the primary documents discussed below when foreclosure begins to become a reality.

In Texas, there are three primary documents that serve as the heart of a home purchase: (1) the Warranty Deed; (2) the Promissory Note; and (3) the Deed of Trust. This of course assumes that the purchaser made a down payment and has borrowed the remainder of the purchase price from a bank or mortgage lender.

  • Warranty Deed

The Warranty Deed is the document that transfers ownership of the property from the seller to the buyer. At the closing, the purchaser will provide a certain amount of money as the down payment and to pay the closing costs. Down payments can vary from 5% of the total purchase price to as much as 20%. The larger the amount of the down payment, the smaller the amount that will have to be borrowed from the bank. In addition to the down payment from the purchaser, the lender will arrange for the remaining sales price to be paid to the seller. Because the seller is receiving the total sales price for the home at the closing, the seller will sign the Warranty Deed transferring legal ownership of the property to the buyer. The individual seller no longer has any rights or claims to the property. The Warranty Deed will be recorded in the property records of the county where the home is located giving notice to the world that the buyer is now the legal owner of the home.

  • Promissory Note

The Promissory Note is the document that authorizes the loan from the lender for the purchase of the property. Th e Promissory Note includes information on the lender who made the loan; the payment terms of the loan such as the payment amount, number of payments; and interest rate, and the terms that the lender must follow if the homeowner fails to make the required loan payments, or otherwise defaults under the Promissory Note.

The Promissory Note is important because it will describe when a missed payment actually becomes a default, the notices, if any, that the lender must provide to you before a missed payment becomes default, and whether the lender must provide you an opportunity to cure the default before beginning foreclosure. The exact terms will depend on the language of the Promissory Note making it important for you to review this information to ensure that the lender has complied with the terms of the Promissory Note before initiating a non-judicial foreclosure.

  • Deed of Trust

The Deed of Trust is the document that actually gives the lender the right to per-form a non-judicial foreclosure on your home if you default in making payments under the Promissory Note. This provision is referred to as the power of sale clause. The Deed of Trust is not an actual deed as described above because it does not give the lender legal title to your home like the Warranty Deed. Instead, the Deed of Trust gives the lender certain rights in your home in exchange for the lender giving you the loan to complete the purchase. One of those rights is the right to foreclose on your home if you default in making your monthly mortgage payments under the Promissory Note.

As you can see, it is important to be familiar with the payment and default provisions of the Promissory Note because the lender cannot foreclose under the Deed of Trust until you have defaulted under the Promissory Note. A lender performing a non-judicial foreclosure is bound to follow the provisions in the Deed of Trust regarding foreclosure as well as the statutory laws governing foreclosure that are found in the Texas Property Code.

What laws must a lender follow when performing a non-judicial foreclosure?

In addition to the provisions in the Deed of Trust that will set the rules for fore closure of you r property, there are statutes that set certain minimum requirements that apply to all non-judicial foreclosures of residential properties in Texas.

These laws are contained in Chapter 51 of the Texas Property Code. Because compliance with these statutes has been established as the minimum requirements for a lender, most deeds of trust do not impose any additional requirements on lenders above and beyond the minimums found in Chapter 51 of the Texas Property Code.

However, it is possible that your Deed of Trust may contain terms that require the lender to provide additional notices before performing the foreclosure sale, that provide you with a right to pay the missed mortgage payments to stop the foreclosure sale, or that provide you with the right to redeem your property after the foreclosure sale occurs. Again, it is very important that you review and become familiar with your rights under the Deed of Trust to ensure that the lender has not violated any of those rights in performing the foreclosure. The discussion that follows regarding the foreclosure process will assume that your Deed of Trust only requires the lend er to follow the requirements of Chapter 51, which is probably the most common scenario for most residential properties.

 

What steps are involved in a non-judicial foreclosure?

Once a homeowner has missed a mortgage payment and is in default under the Promissory Note, the lender may attempt several unofficial steps to resolve the problem such as collection calls, letters, acceptance of partial payments, or negotiating a temporary payment plan. Assuming that these efforts have not resolved the problem and the lender is ready to proceed with a non -judicial foreclosure, the following actions must be performed by the lender:

  • Notice of Default and Intent to Accelerate (First Notice)

Your lender or its attorney must send you a letter by certified mail notifying you that you have at least twenty (20) days to cure the default, or in other words, to make any payments that were missed plus any late charges that may have been assessed. There is no requirement that the homeowner actually receive the letter so simply ignoring certified mail letters or refusing to sign from them will not protect you. Instead, you should read all letters and mailings from your lender carefully to ensure that you do not miss a deadline or opportunity to fix the problem. If the back due payment s are not brought current within the 20 days, the lender has the right to demand that the entire loan amount be paid immediately.

  • Notice of Sale and Acceleration of Debt (Second Notice)

After the 20-day period has expired, the lender must send a second letter by certified mail notifying you that the entire loan balance is now due, and the failure to pay will result in the sale of your home. Again, there is no requirement that you actually receive or read the notice as long as it was sent by certified mail to the last known address on file with the lender. This reinforces the importance of notifying your lender if your mailing address changes after you purchase your home. This Notice of Sale will provide the details surrounding the foreclosure sale including the date, time, and location of the sale, as well as the name and address of the Trustee, who will perform the sale. The notice must be provided at least twenty-one (21) days before the sale occurs. The Notice of Sale must also be posted at the county courthouse in the designated location and filed with the County Clerk’s office.

It is possible that after receiving the First Notice or the Second Notice you are contacted by your lender offering to negotiate a resolution, delay the foreclosure, or other possible solution. These individuals may not be working with or communicating with the attorneys who are performing the foreclosure. If you communicate with anyone other than the Trustee or attorney who sent the First Notice or Second Notice, you should contact the Trustee or attorney who sent the foreclosure notices to make sure that they are aware of the offer made by the lender and ask them to confirm in writing that the foreclosure sale will be postponed. Unless you have written confirmation from the Trustee or attorney that the sale will be delayed, you should assume that it will occur at the time and date in the Second Notice. It is a good idea to get all offers, promises, or other representations from the lender or Trustee in writing so that you have a complete and accurate history of the communications.

  • Foreclosure Sale

In Texas, foreclosure sales must occur on the first Tuesday of the month at the designated area of the county courthouse.

If the first Tuesday of the month is a holiday, the sale will proceed as usual and will not be delayed until the next business day. The designated area for foreclosure sales is usually the front steps of the courthouse, but may be located elsewhere in the courthouse. The County Clerk’s office will be able to direct you to the proper location. The sale must occur betwee n 10:00 a.m. and 4:00 p.m. The Notice of Sale will state the earliest time at which the sale will begin, and the actual sale must take place no later than three (3) hours from the time stated in the Notice of Sale. For example, if the Notice of Sale states that the foreclosure sale will begin at 11:00 a.m., the actual sale cannot occur after 2:00 p.m. If the Trustee does not perform the foreclosure sale on the proper date, at the proper time, and at the proper location, he or she must start the whole process over at the beginning by reissuing the required notices.

The Trustee named in the Deed of Trust and Notice of Sale will announce the property being sold by reading the Notice of Sale out loud. At this time, the Trustee will announce the rules for the auction and wi ll ac cept bids for the pro perty. Generally, property sold at foreclosure sale is sold to the highest bidder for cash. The lender will be able to bid an amount up to the debt owed without actually producing any cash at the sale. If the bids exceed the debt owed, then the lender will have to produce enough cash to account for the difference between the sales price and the debt. Once the sale is complete, the Trustee will record a Foreclosure Deed or Trustee’s Deed in the real property records. This deed will have a similar effect as the Warranty Deed described above in that it will transfer legal title to the property from the current homeowner to the high bidder at the foreclosure sale.

  • Distribution of Proceeds

Once the sale concludes, the Trustee divides the proceeds. First, expenses relating to the sale are paid. These include advertising the sale, sending and filing the required notices, and trustee’s and attorneys’ fees other than those provided in the Promissory Note. Next, the unpaid principal, interest, late fees, attorneys’ fees, and other unpaid charges as provided in the Promissory Note are paid followed by any junior or inferior lienholders. Any remaining funds will be paid to you as the homeowner.

  • Eviction

The new owner of the property, who is usually the lender, must provide the previous homeowner with three (3) days to vacate the property. If the homeown er refus es to leav e the proper ty, the new owner can file an eviction lawsuit in the justice of the peace court. The JP will usually schedule a hearing within 7-14 days. If the JP determines that the homeowner is improperly occupying the property, the judge will enter an eviction order providing five (5) days to vacate the property at which time the sheriff or constable will remove the homeowner from the property.

  • Deficiency Action

After completion of a non-judicial foreclosure, the lender has two (2) years from the foreclosure sale to file a deficiency lawsuit if the high bid at the foreclosure sale is not enough to pay the lender the debt owed to and the expenses associated with the foreclosure. A deficiency lawsuit is not permitted for lenders who foreclose on a home equity loan. For example, if the homeowner owes the lender $100,000 and the lender purchases the property at the foreclosure sale for $75,00 0, the n the lender could file a lawsuit seeking a judgment for the $25,000 deficiency.

However, as the homeowner, you can challenge the lender’s lawsuit if you believe that the value of the property is greater than the amount bid at the foreclosure sale. Using the example above, if you believe that the fair market value of the property is $95,000, you may submit evidence of the value to the court. If the court finds that the fair market value is $95,000, then the lender will only be able to collect the difference between the debt owed and the fair market value, in this case $5,000. This law is in place to prevent lenders from making low bids at the foreclosure sale and then going after the borrower for large deficiencies. If you are served with a law-suit seeking a deficiency judgment after a foreclosure, you should contact an attorney to determine if the lender is seeking an amount greater than what it is entitled and to assist you in presenting evidence of the home ’s fair market value to reduce the amount that the lender can collect.

  • No Right of Redemption for Non-Judicial Foreclosure

In Texas, there is no right of redemption for homeowners after a non-judicial foreclosure. A right of redemption is where the homeowner can buy back their home for a certain time period after the foreclosure sale occurs. Rights of redemption do exist in other states and in Texas when dealing with a foreclosure by the government for the nonpayment of property taxes . However, there is no right of redemption in a non-judicial foreclosure of a residence.

What options are available to avoid a non-judicial foreclosure?

  • Loan Modification/ Alternative Payment Plan

A foreclosure can be cancelled, delayed, or avoided at any time prior to the sale at the courthouse. Obviously, the best time to reach a resolution is during the 20-day period after receipt of the First Notice. During this time, you are only required to pay the pas t due amou nts and not the entire loan amount. If you believe that you will be able to gather the necessary funds to bring the loan current, it would be wise to cont act the lender and keep them informed on your progress as they may be willing to extend the 20-day period if they believe that the matter can be resolved without further action. If you cannot pay the entire amount that is due, your lender may be willing to agree to a payment plan, loan modification, or other arrangement to bring the loan current and ensure that you will be able to make future payments.

In certain situations, it is possible that your lender must consider modification if your home loan qualifies under new laws passed to provide relief from rising foreclosures. In February 2009, the Federal govern-ment introduced a comprehensive Financial Stability Plan to address certain financial problems affecting the nation. Included in the plan is the Making Home Affordable plan, which was designed to stabilize the housing market and help struggling homeowners get relief and avoid foreclosure. The Home Affordable Modification Program (“HAMP”) provides eligible homeowners the opportunity to modify their mortgages to make them more affordable. To apply for a modification under HAMP,you must:

  • Be the owner-occupant of a one- to four-unit home.
  • Have an unpaid principal balance that is equal to or less than:

o 1 Unit: $729,750 o 2 Units: $934,200

o 3 Units: $1,129,250 o 4 Units: $1,403,400

  • Have a first lien mortgage (deed of trust) that was originated on or before January 1, 2009
  • Have a monthly mortgage payment (including taxes, insurance, HOA dues) greater than 31% of your monthly gross (pre-tax) income
  • Have a mortgage payment that is not affordable due to a financial hardship that can be documented

Only your lender or mortgage servicer can con firm whether you qualify for a modification so it is important to contact them immediately upon receipt of a First Notice or other notice indicating that you may be in default under your Promissory

Note. In fact, you may contact your lender prior to actually missing a payment if you are struggling financially to make your monthly mortgage payments.

Lenders who participate in the Home Affordable Modification Program may not proceed with a foreclosure sale on an eligible loan until the home owner has been evaluated for the program and, if eligible, a trial modification offer has been made. Participating lenders must use reasonable efforts to contact homeowners facing fore-closure to determine their eligibility, including in-person contacts at the servicer’s discretion. Foreclosure sales may not be conducted while the loan is being considered for a modification or during the trial period. Additionally, once a homeowner has entered into a trial period plan by submitting the first trial period payment, the servicer may not take the first legal action to initiate a new foreclosure. A list of loan servicers who are participating in the Program may be found at http://www.makinghomeaffordable.gov/contactservicer.html.

The Home Affordable Refinance Program gives homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac an opportunity to refinance into more affordable monthly payments. The Home Affordable Fore closure Alternatives Program provides opportunities for homeowners who can no longer afford to stay in their home but want to avoid foreclosure to transition to more affordable housing through a short sale or deed-in-lieu of foreclosure.

All of these programs are discussed in more detail on the website, www.MakingHomeAffordable.gov. The site is designed to provide detailed information and resources about these programs, to allow homeowners to connect with free HUD-approved counseling organizations , to find the application documents necessary for the Making Home Affordable Program, and to find answers to frequently asked questions.

  • Deed in Lieu of Foreclosure

A deed in lieu of foreclosure involves a scenario where the homeowner voluntarily transfers ownership of the property to the lender. Deeds in lieu of foreclosure have certain advantages over non-judicial foreclosures such as they are quicker to complete, cost less money for the lender, and are more confidential than a public sale. How ever, this is usually only an option where ownership of the property is free and clear of mortgages, liens, and encumbrances. A lender will not want to accept a deed in lieu of foreclosure when the property is burdened with debts to other parties or when the re will be a potential for a large deficiency judgment. Ultimately, exercising this option is at the discretion of the lender and the homeowner will be left with the same final result as with a foreclosure – the loss of their residence.

  • Bankruptcy

The filing of a bankruptcy petition will immediately stop a foreclosure sale from occurring as of the filing of the petition.

However, you will be required to continue making some type of regular payments and make some payments toward the delinquency as part of your bankruptcy plan. Filing for bankruptcy is a major event and should not be taken lightly or performed without careful consideration . If you believe that this may be the option to stop a foreclosure, you should consult an attorney with experience in bankruptcy or consumer law to determine if you will be able to successfully complete a bankruptcy plan.

CONCLUSION

Dealing with the potential loss of your home is a stressful and traumatic experience. While there are certain situations where foreclosure cannot be avoided, there are several actions that can be taken before trouble arises to avoid the fore closure of your home. The Texas Foreclosure Prevention Task Force offers the following tips to avoid foreclosure:

  • Don’t ignore the problem.
  • Cont act your servicer soon er rather than later if you think there may be a problem.
  • Don’t ignore communications from your servicer. Return their calls and open mail from them.
  • Understand foreclosure prevention options.
  • Contact a HUD-approved non-prof-it housing counselor for assistance.
  • Review your budget an d make changes as necessary. If you don’t have a budget, create one and stick to it!
  • Be aware of foreclosure scams and don’t become a victim.
  • Know your mortgage rights.

It is our hope that this pamphlet will provide assistance in accomplishing at least a few of the tips listed here. There are many resources available for homeowners facing foreclosure including those listed in this article although this article should not be considered a complete list of resources for assistance with foreclosures. To take advantage of the available resources and to place themselves in the best position to avoid foreclosure, all homeowners should educate themselves on the terms of their loan documents and basic foreclosure law, actively work with their lenders to resolve the problem early in the process, and seek out assistance from qualified groups. While it will not always result in success, ignoring the problem and refusing to communicate with the lender will certainly result in the foreclosure occurring.

 

*This article is provided as a public service by the State Bar of Texas and Texas Young Lawyers Association.

What is Title Insurance?

What is Title Insurance?

(January 2015)

A title is a legal term that refers to the ownership records about a piece of real estate. The records could include the transfer of any property rights and any loans using the property as collateral.

Title insurance protects you from claims of ownership, outstanding debts of previous owners, and other title problems that you didn’t know about before you bought the property. It doesn’t insure against fire, flood, theft, or any other type of property damage or loss.

Before selling a title insurance policy, a title company will check for problems with your title by looking at public records, including deeds, mortgages, wills, divorce decrees, court judgments, tax records, liens, encumbrances, and maps. The company will then defend you in court if there is a claim against your property, subject to certain limitations. If the company loses, it will pay you for covered losses up to the amount of your policy.

Most people buy title insurance from the title company that closes the sale of their property. The company will hold any earnest money in a trust account until the sale is complete.

Types of Title Policies

In Texas, the two most common types of title policies are loan policies that protect lenders and owner policies that protect property buyers.

Loan Policies

Most lenders will require you to buy a loan policy — also known as a mortgagee policy — if you want to borrow money for the property. This policy will repay the balance of your mortgage if a claim against your property voids your title. A loan policy covers up to the amount of the principal on your loan.

Loan policies are effective until you repay the loan. Most lenders will require you to buy a new loan title policy if you refinance your home. When the new loan pays off the existing loan, the old loan policy expires. You will get a premium discount on a new loan policy if you refinance within seven years.

Owner Policies

Owner polices protect you from the risks listed in the policy. The price of the policy is usually included in your closing costs. An owner policy only covers you up to the value of the property at the time you bought the policy. It doesn’t cover any increase in your property’s value, unless you buy an increased value endorsement.

An owner policy remains in effect as long as you or your heirs own the property or are liable for any title warranties made when you sell the property. You should keep your owner policy, even if you transfer your title or sell the property.

Policy Language

Title policy forms in Texas are standardized. This means the policy language is the same, regardless of which company sells the policy.

It’s still important that you read your policy carefully because different companies may describe their coverage exceptions differently. Pay special attention to Schedule B of the policy, which explains any limitations, exclusions, exceptions, and special conditions. You might want to discuss these exceptions with an attorney before you close on a real estate deal.

Also, check the policy’s legal description of the land against your survey and your earnest money contract. Title insurance generally doesn’t protect against boundary disputes with neighbors. You can buy this coverage for an additional premium.

A title policy doesn’t guarantee that you will be able to sell your property or borrow money on it, or that you won’t lose money if you do sell it.

What a Title Policy Covers

If someone claims an interest in your property, a title company will defend your title in court. The company will pay for a loss if there are lien issues or errors or omissions. If you get notice of a previous lien on your property, contact your title company immediately and follow your policy’s claim-filing procedure. Failure to do so could jeopardize your claim.

Lien Issues

  • A previous owner failed to pay
    • a mortgage or deed of trust
    • a judgment, tax, or special assessment
    • a charge by a homeowners or condominium association.
  • There is a lien on your title for labor and materials the contractor bought without your consent. Generally, your policy protects you if you buy a house already built, but not if you own the land and contract with a builder to build your home. Talk to an attorney about your rights.
  • There are other liens or claims against your title that aren’t listed in the policy exceptions.

Errors or Omissions

  • Leases, contracts, or options on your land weren’t recorded in the public records.
  • The title policy didn’t tell you about legal restrictions on how you can use your property.
  • There is an easement that isn’t in public records and that you don’t know about. The title policy assures you a legal right of access to your property. This means that you have a right to travel from your property to a public street or road
  • Someone didn’t properly sign the chain of title, or a notary public made an error on the document, made an error in recording the document at the county clerk’s office, or didn’t deliver the deed according to statutory requirements.
  • A deed or other document in your chain of title is invalid as a result of forgery, fraud against the rightful owner, a signature given under force, or a signature given by a person legally incompetent to sign or claiming to be someone else.

What a Title Policy Doesn’t Cover

A title policy generally won’t cover mistakes or defects, financial issues, or rights issues.

Mistakes or Defects

  • Problems with your title that happen after you bought the policy.
  • Problems that you create or problems that are unrelated to your or the lender’s property interests. Call an attorney to learn more about your property rights. Any special exceptions – such as a public utility easement -the title company added during the title examination process must be listed in Schedule B of your policy. The company must tell you about each exception and give you enough information to easily locate it in public records.
  • An unrecorded title defect that you knew about or allowed to happen.

Financial Issues

  • Penalties if you don’t pay for your property.
  • Certain taxes and assessments. Your title policy ensures that all property taxes and assessments are paid for the most current year available. However, certain tax exemptions claimed by previous owners could result in more taxes being assessed against your property in the future. If you buy property with borrowed money, the lender may ask that its mortgagee policy delete the exception for “subsequent taxes and assessments by any taxing authority for prior years due to change in land usage or ownership.” In such cases, the title company may require that the taxes be calculated and paid.

Rights Issues

  • Losses resulting from rights claimed by “parties in possession,” such as renters or anyone else occupying the land. If you object to the exception, the title company may inspect the property and delete the exception from your policy. The title company may charge for the inspection.
  • Homestead, community property, or survivorship rights of a policyholder’s spouse. Texas homestead laws address the rights of a spouse or survivors of a property owner.
  • Claims from other people who may have certain rights if your property is near a body of water or has a river or stream flowing through it.

Other Issues

  • Condemned land, unless a condemnation notice appeared in the public record on the policy date or the condemnation occurred before the policy date.
  • Violations of building and zoning ordinances and other laws and regulations related to land use, land improvements, land division, and environmental protection.
  • Restrictive covenants limiting how you may use the property and stating the requirements for buildings constructed on the property. Schedule B lists these restrictions. Request copies of restrictions and have your attorney explain them.

Title Policy Premiums

You only pay a title policy premium once, at the closing of the sale. The buyer and seller may negotiate who pays the premium.

The Texas Department of Insurance sets title insurance premium rates. Rates are based on the property’s sale value using a sliding scale. For example, the basic premium for a $50,000 property is $522, and the basic premium for a $100,000 property is $875.

Some title companies add extra charges for tax certificates and escrow fees, recording fees, and delivery expenses. Review any extra charges carefully; you may negotiate or demand documentation of the true cost of these services. You may ask to see your closing papers a day in advance. You may also have an attorney attend the closing with you.

Always Buy from a Licensed Company

You may choose any title company you want; you don’t have to use a company selected by a real estate agent or lender.

Make sure that whatever company you use is a licensed title company. It’s illegal to sell title insurance without a license in Texas. If you buy from an unlicensed company and the company goes broke, your claims could go unpaid. The Texas Title Insurance Guaranty Association pays claims up to $250,000 per claimant or $250,000 per policy against licensed companies that become insolvent.

To verify that a company is licensed, call TDI’s Consumer Help Line at 1-800-252-3439 or online at www.tdi.texas.gov.

Complaints against Agents or Title Companies

If you have a dispute about your premium or a claim, contact your agent or the title company. Item No. 10 of your policy conditions should list the company’s toll-free number.

If you can’t resolve your problem with the agent or company, you can file a complaint with TDI. Include the title company’s full name and your policy number on all letters and documentation. TDI has a single complaint form for all types of insurance including auto, homeowners, life, health, title, and workers’ compensation. Please follow the instructions on the form to provide additional information for certain types of complaints, for example, title, HMO, and workers’ compensation claim complaints. Also health care providers should use Attachment A, accessed via a link within the form, to provide additional claim-specific information.

For information on filing an insurance-related complaint, visit our website at www.tdi.texas.gov/consumer/complfrm.html or call the Consumer Help Line at 1-800-252-3439 between 8 a.m. and 5 p.m., Central time, Monday-Friday.

For More Information or Assistance

For answers to general insurance questions, for information about filing an insurance-related complaint, or to report suspected insurance fraud, call the Consumer Help Line at 1-800-252-3439 between 8 a.m. and 5 p.m., Central time, Monday-Friday, or visit our website at www.tdi.texas.gov.

You can also visit HelpInsure.com to help you shop for automobile, homeowners, condo, and renters insurance, and TexasHealthOptions.com to learn more about health care coverage and your options.

For printed copies of consumer publications, call the Consumer Help Line.

To report suspected arson or suspicious activity involving fires, call the State Fire Marshal’s 24-hourArson Hotline at 1-877-4FIRE45 (434-7345).

The information in this publication is current as of the revision date. Changes in laws and agency administrative rules made after the revision date may affect the content. View current information on our website. TDI distributes this publication for educational purposes only. This publication is not an endorsement by TDI of any service, product, or company.

*Information Provided by the Texas Department of Insurance

Oil and Gas Basics

Oil & Gas Basics for Homeowners

This article is designed for homeowners who have been approached by someone wanting to lease their mineral estate. This article is not meant to be a substitute for legal counsel, but to provide homeowners with basic knowledge of some of the most common terms used in many residential oil and gas leases so homeowners are more educated when making decisions regarding their mineral estates.  It is based on Texas law, which is different from many other states and how other states treat mineral leasing.

Common Lease Terms

Bonus – An initial, one-time payment by the lessee to the mineral estate owner (or lessor) for the execution of an oil and gas lease by the mineral estate owner.

Estates – There is a mineral estate and a surface estate in Texas. These estates are considered “one estate” unless they have been severed by you or a previous owner. For example, you may sell your home and the surface estate on which it sits, but retain ownership of the mineral estate underneath your home and surface. This causes a severance of the two estates. If you do not specifically exclude the mineral estate from the sale of your home (by “reserving” or “excepting” the mineral estate in the deed you execute), it will be sold with your home.

Force Majeure Clause – States that if the production of oil or gas fails due to one or more of the events specifically listed in the lease (such as an “act of God”) or other events beyond the reasonable control of the lessee, the lease will not automatically terminate because the performance of the lessee’s obligations will be excused due to these causes. Sometimes the lessee’s performance is excused until the “event” ends, but the lease may also limit the “force majeure event” to a certain time period, such as not more than one consecutive year.

Habendum Clause – Provides the duration of the lessee’s interest by setting the length of the primary term and defining the secondary term.

Lessee – Person or entity who obtains the rights and obligations of mineral development under the executed lease.

Lessor – Person or entity executing a lease in favor of the lessee. For the purposes of this brochure, the lessor is typically the “homeowner” and/or “mineral owner.”

Mineral Estate – In Texas, the mineral estate is comprised of five separate and distinct parts, which are referred to generally as the mineral owner’s “bundle of sticks.” This bundle of sticks includes: (1) the right to develop; (2) the right to lease; (3) the right to receive bonus payments; (4) the right to receive delay rentals; and (5) the right to receive royalty payments. By executing a mineral lease, the mineral owner is “leasing” its right to develop the minerals to the lessee/oil and gas company in exchange for the payment of a bonus, delay rentals, and/or royalties.

Pooling – Consolidation of leased land with adjoining leased land to form a “unit.” When this occurs, each lessor in the unit receives a proportional share of royalties paid for any well drilled on land included in the unit.

Primary Term – The specific period of time, typically three to five years, during which a lease may be kept in force even though there is no production of minerals.

Royalty – The mineral estate owner’s/lessor’s share of production.

Rule of Capture – This Rule allows the owner of a mineral estate to drain oil or gas from under his neighbor’s land (his neighbor’s mineral estate) without liability. A person who extracts oil and/or gas from beneath his land acquires ownership of the extracted oil and/or gas even though they may have been drained the minerals from beneath the surface estate of their neighbor.

Savings Clause – Clause(s) in the lease that operate to hold the lease despite the lack of production of oil or gas.

Secondary Term – The term of the lease after the primary term ends, usually continuing for as long as minerals are being produced.

Shut-in Clause – A clause allowing a lessee to continue the lease after expiration of the primary term when the well is capable of producing oil or gas in paying quantities, but is not producing due to a lack of a suitable market.

Shut-in Royalty – Payment to the lessor in order to maintain the lease after the primary term when the well is capable of producing oil or gas in paying quantities, but is not producing due to a lack of a suitable market.

Surface Estate – The land on which your home is built (and everything other than the minerals that have been reserved).

Warranty Clause – A warranty is a guarantee. This clause permits the lessee to seek and possibly recover damages (such as return of any lease bonus payment the homeowner has received) if there is a failure in the title regarding the mineral estate. In many cases, the lessee wants the homeowner to provide a “general warranty deed,” meaning the homeowner is warranting that she owns the mineral estate. Sometimes a quitclaim deed is included instead of a general warranty. A quitclaim deed does not warrant anything. Through a quitclaim deed, the homeowner is merely conveying the mineral estate to the lessee if she owns the mineral estate. (Most likely, the title work performed when you purchased your home does not warrant that you own the mineral estate.)

Frequently Asked Questions and Answers

Can I sign a lease with more than one company? No, leasing your mineral rights is exclusive, so you cannot sign with more than one company.

What does it mean when the lease states a 3-year primary term with 2-year option? The company will pay you the bonus for the first 3 years. If the company cannot keep the lease in force through production of minerals or a savings clause, then the company has the option to pay you another bonus to hold the lease for another two-year primary term.

When will the lease expire? The lease will expire at the end of the primary term (unless there is an option which the company exercises) unless oil or gas is being produced. Once oil or gas is being produced, the lease will continue so long as oil or gas is being produced in paying quantities (enough to make a profit).

Will I need to get a legal release (called subordination agreement) from my mortgage company? Your mortgage holder or the oil and gas company may require a subordination or non-disturbance agreement. (A subordination agreement is a written agreement between holders of liens on a property that changes the priority of mortgage, leases, judgment and other liens under certain circumstances.)

Who regulates the oil and gas companies? Currently, the Texas Railroad Commission regulates the oil and gas industry in Texas. However, at the time of printing the Texas Legislature had a bill pending to abolish the TRC, create the Oil and Gas Commission, and transfer all the powers and duties of the TRC to the Oil and Gas Commission. In addition, your municipality may also enact specific ordinances regarding the drilling sites.

What should I do if I decide to sell my house — can I keep the mineral estate?  If you decide to sell your property after you have signed the oil and gas lease, you have the option to sever your mineral estate from your surface estate. You can sell your house, which is part of the surface estate, and retain the mineral estate or vice versa. Be sure to tell your realtor whether you wish to retain the mineral rights. If you are selling the property yourself, consult an attorney for the proper language to retain the mineral estate.

How will the oil and gas lease affect my taxes, if at all? Income from oil and gas leases is considered income for federal taxation purposes. All bonuses and royalties should be included on your income tax returns.

Are there any sales scams? Yes. You should always verify that you are leasing your mineral estate and not selling it (unless you intend to sell the mineral estate). There have been reports of purchase agreements that were written to “appear” as a lease.

 

*This article is provided as a public service by the State Bar of Texas and Texas Young Lawyers Association.