The Claim Game
Year in and year out, the most common question from beleaguered bank operations officers is “Must I recognize the claim that this third party is making to a customer’s deposit account?”. These claims take many forms and must comply with a variety of state or federal laws in order to be recognized. Let’s take a look at the most frequently asserted claims.
Powers of Attorney. In this scenario, an individual other than the owner of the account either applies to open a new account or asks to be added to an existing account. Usually the power of attorney (POA) is clearly made in Texas, under Texas law. However, sometimes the law of a different state is applied. In this case, your bank policy may require that you contact counsel—particularly for larger balances.
A “uniform” law has been enacted in Texas and some other states that requires a bank to accept a durable power of attorney, subject to certification or opinion, with some fact situations that can support denial. (A “durable” POA is one that survives the disability or incapacity of the principal and says so in the document.) Generally, I recommend immediately requesting a certification from the agent (previously called “attorney in fact”). The POA should include an acknowledgement that is notarized. However, Texas law generally does not require the POA to be recorded in the county records unless it is being used to deal with real property.
The POA may be immediately effective or it may be “springing.” In other words, it only takes effect if the principal is incapacitated. Texas law defines “disabled or incapacitated” as occurring if a physician certifies in writing, based on their medical examination of the person, that the person is determined to be mentally incapable of managing their affairs. But check the POA to see whether it includes its own requirement for this determination. Often, they are more rigorous. Be sure to get this documentation before accepting the POA. Put this request in writing so that you don’t run afoul of the mandatory acceptance requirement.
Representative Payee. Both the Social Security Administration and the Veterans Administration permit the use of a “representative payee” in lieu of a guardian for SSI and VA benefits. The designated person must present a form from the agency, naming them to serve in that capacity. Remember to use the TIN of the beneficiary for the account. Although the beneficiary is the “owner” of the account, be sure to verify the identity of the person claiming to be the representative payee to avoid fraudsters. Finally, remember that only the representative payee can be the authorized signer on the account.
Trustee. There are two types of formal trusts: irrevocable and revocable (or “living”) trusts. Before transferring accounts (or setting them up) in either one of these, it is best to require a “certificate of trust” from the trustee. There is a statutory form in Texas for this in the Trust Code, which you can rely upon. It basically includes the pertinent information that the bank will need to administer the account but without the detail that you don’t. An irrevocable trust should have its own TIN. However, a living trust typically uses the owners (settlors) as the initial trustees and initial beneficiaries. Thus, IRS accepts their SSN as the TIN.
One thorny issue with trusts is dealing with “successor” trustees. Check the certificate of trust or trust instrument for the trigger for a successor (e.g. death, disability or resignation of prior trustee) and any required documentation of acceptance.
Guardians. In the event a party did not think ahead and execute a durable POA, they will need a guardian in the event they become mentally incapacitated. There can be separate guardians for the person and for the estate of the ward. The guardianship is documented by “Letters of Guardianship” from a probate court. Some guardians will reduce the amount of the required bond by freezing accounts, subject to court order. Keep a copy of such order in your records and do not allow checking on such an account!
Death of a Customer. If the individual leaves a will, typically it will be probated. In that event, the independent executor should provide the bank with “Letters Testamentary.” However, if there is no need for an administration, the heirs could file the will for probate as a “muniment of title.” There is no executor in that case. Rather, the persons named in the will simply inherit as provided therein. You should be provided with a certified copy of the order entered in that matter.
Another option may be the “small estate affidavit.” (Chapter 205 Texas Estates Code) This is available if the value of the estate, excluding homestead and other exempt property, does not exceed $75,000. The affidavit must be sworn to by two disinterested witnesses and then approved by a probate judge. It is then filed in the property records. Distributees of the estate should provide a copy of the affidavit, certified by the court clerk, to the bank in order to transfer accounts.
For an even smaller estate, the parties may obtain an affidavit of heirship. There is a statutory form at section 201.002 Texas Estates Code. The affiant must be familiar with the family facts but not interested in the estate. The affidavit should be filed in the county records. Many institutions will accept this document when the amount involved is modest, for example $5,000 or less.
Estate versus Multi-Party Account Beneficiary. Executors are required to file an inventory of the assets of an estate. They (or their attorney) will send a letter to banks to determine whether there are probate assets and their amount on date of death. Here is where it gets sticky. Multi-party accounts are not probate assets. Rather, they pass to the beneficiaries in accordance with contract. If that is the case, then the bank should respond that the decedent’s account(s) were multi-party ones that have been conveyed to the named beneficiaries.
Chapter 113 Texas Estates Code includes a statutory disclosure form that must be acknowledged by the account owner, with the type of account selected. However, that chapter also provides that in order to provide survivorship rights, there must be a written agreement that is signed by the parties to be bound. For joint account with rights of survivorship, the statute provides that a statement in substantially the following form is sufficient: “On the death of one party to a joint account, all sums in the account o the date of the death vest in and belong to the surviving party as his or her separate property and estate.” The disclosure form uses the following: “On the death of a party, the party’s ownership of the account passes to the surviving parties.”
All is well if the bank only has the selection form signed and there are no claims from the executor, trying to take the joint account. The thorny question is whether the signature card can create that written agreement, with an “X” next to the type of account selected. There is conflicting case law! But here is what the survivor should look for. If the signature card is part of a complete deposit account agreement, check whether that document includes the “magic” language for survivorship. If not and the account selection form was signed, arguably that disclosure is sufficiently similar to the “magic” language, and combined with the selection statement, should suffice according to some case law.
Another common multi-party account used to avoid probate is the “pay on death” or POD account. This is sometimes referred to as a “Totten trust.” These accounts pass to the named beneficiaries on the death of the owner. The Estates Code does not have similar required language in order to establish this type of account. However, it must be clearly selected, with a signature on the selection form.
Garnishments. Judgments can be collected by garnishing the judgment debtor’s accounts. The bank must be served with the writ of garnishment. Freeze the account(s). But you must also file an answer, including whether or not the judgment debtor has a safe deposit box with the bank. Ask for attorney’s fees. If there is no account, call the judgment creditor’s attorney to provide that info. To save money, they are likely to dismiss the garnishment. In any event, notify your customer about the proceeding.
Levies. There are numerous agencies that might try to levy against a customer’s account, and the rules vary depending on whether the levy comes from IRS, the Texas Comptroller of Public Accounts, the Texas Attorney General (child support) or other parties. Log it in, noting the time as well as date. Contact your customer, who may have a right to dispute it. The time frame for response and the application to subsequent deposit varies.
Conclusion. This was a whirlwind tour of some of the most common issues arising out of third party claims. Review your account procedures to make sure that you have addressed these. When in doubt, contact your outside counsel as these trigger sometimes complex legal analyses!
Authored by: Karen Neeley
Reprinted with permission from The Texas Independent Banker