Microsoft Word - 1-2014 Customer Diesttsmedia.ttstrain.com/DiesHOLC060216.docx · Web viewPOD...

WHAT TO DO WHEN A CUSTOMER DIES

by Terri D. Thomas, JD [email protected]

om

June 2, 2016

The information contained in this material and the accompanying presentation is designed for reference use only. It is presented with the understanding that Terri Thomas is not rendering specific legal advice, and use of the same does not create an attorney-client relationship. If specific legal advice or other expert assistance is required, the user should contact a competent professional.

©2016, Terri D. Thomas, JD 2

Presented and Produced by: Terri D. Thomas, JD

Terri D. Thomas, JD is the Director of the Kansas Bankers Association Legal Department, which specializes in providing compliance and legal assistance to Kansas banks.

Terri has worked with financial institutions for thirty years in various capacities. Most notably, she served for fourteen years as in-house legal counsel and trust officer for Bank of America and its Kansas predecessors. She has also served as a trust department manager and branch manager.

Receiving her Bachelor of Arts degree from Kansas State University in 1985, Terri continued her education at Washburn University School of Law and obtained her Juris Doctor in 1988. Presently, she serves as an Adjunct Professor at Washburn University School of Law in Topeka, Kansas and the University of Kansas School of Law in Lawrence, Kansas, and is a frequent seminar presenter for financial associations in the Midwest.

Directed by:

Total Training Solutions, LLC


WHAT TO DO WHEN A CUSTOMER DIES

by Terri D. Thomas, JD

THE DEPOSIT SIDE

1. Death of Sole Depositor; No Payable on Death Clause

a. Payment of Checks

The Uniform Commercial Code provides that a financial institution is not liable for paying checks after a drawer has died until it has notice of the death. Even with notice of the death, a bank may, but is not required, to pay checks for up to ten (10) days after the customer has died unless a person claiming the account (such as a payable on death beneficiary) orders payments to be stopped.

“UCC-4-405. Death or incompetence of customer. (a) A payor or collecting bank’s authority to accept, pay, or collect an item or to account for proceeds of its collection, if otherwise effective, is not rendered ineffective by incompetence of a customer of either bank existing at the time the item is issued or its collection is undertaken if the bank does not know of an adjudication of incompetence. Neither death nor incompetence of a customer revokes the authority to accept, pay, collect, or account until the bank knows of the fact of death or of an adjudication of incompetence and has reasonable opportunity to act on it.

(b) Even with knowledge, a bank may for 10 days after the date of death pay or certify checks drawn on or before that date unless ordered to stop payment by a person claiming an interest in the account.”

The official comment for this provision states as follows:

“Official Comment. 1. Subsection (a) follows existing decisions holding that a drawee (payor) bank is not liable for the payment of a check before it has notice of the death or incompetence of the drawer. The justice and necessity of the rule are obvious. A check is an order to pay which the bank must obey under penalty of possible liability for dishonor. Further, with the tremendous volume of items handled any rule that required banks to verify the continued life and competency of drawers would be completely


unworkable.


One or both of these same reasons apply to other phases of the bank collection and payment process and the rule is made wide enough to apply to these other phases. It applies to all kinds of “items”, to “customers” who own items as well as “customers” who draw or make them; to the function of collecting items as well as the function of accepting or paying them; to the carrying out of instructions to account for proceeds even though these may involve transfers to third parties; to depositary and intermediary banks as well as payor banks; and to incompetency existing at the time of the issuance of an item or the commencement of the collection or payment process as well as to incompetency occurring thereafter. Further, the requirement of actual knowledge makes inapplicable the rule of some cases that an adjudication of incompetency is constructive notice to all the world because obviously it is as impossible for banks to keep posted on such adjudications (in the absence of actual knowledge) as it is to keep posted as to death of immediate or remote customers.

2. Subsection (b) provides a limited period after death during which a bank may continue to pay checks (as distinguished from other items) even though it has notice. The purpose of the provision, as of the existing statutes, is to permit holders of checks drawn and issued shortly before death to cash them without the necessity of filing a claim in probate. The justification is that these checks normally are given in immediate payment of an obligation, that there is almost never any reason why they should not be paid, and that filing in probate is a useless formality, burdensome to the holder, the executor, the court and the bank.

This section does not prevent an executor or administrator from recovering the payment from the holder of the check. It is not intended to affect the validity of any gift causa mortis or other transfer in contemplation of death, but merely to relieve the bank of liability for the payment.

3. Any surviving relative, creditor or other person who claims an interest in the account may give a direction to the bank not to pay checks, or not to pay a particular check. Such notice has the same effect as a direction to stop payment. The bank has no responsibility to determine the validity of the claim or even whether it is “colorable.” But obviously anyone who has an interest in the estate, including the person named as executor in a will, even if the will has not yet been admitted to probate, is entitled to claim an interest in the account.”

b. ACH Payments

Similarly, ACH payments from a decedent’s account may be paid if originally authorized by the decedent. However, it is generally advisable to follow the ten- day rule set forth for checks so that payments are not made to parties


who


should otherwise be required to file claims into the decedent’s estate. If payments are made that should not have been debited, the executor/ administrator of the estate will have the ability to recoup the payment from the payee.

c. Where an Estate is Established

As a general concept, where an individually-owned account has no payable-on- death beneficiary, those funds must be held until an estate has been established. The estate is responsible for handling the decedent’s financial affairs, and will be represented by either an executor (if there’s a will) or an administrator (no will). Once the estate is established, it “steps into the shoes” of the decedent and becomes the true owner of the account. Accordingly, the account must be redocumented to show the estate as owner. The estate should have its own EIN for this purpose. [Attorneys often question whether an estate is really required to have an EIN. A 1984 IRS Revenue Ruling specifically addresses the question, and yes, an estate really does need an EIN.]

d. Estate Accounts; Account Set Up

When a depositor dies, account funds are usually passed to others through joint tenancy, payable-on-death clauses or living trusts. Funds not passed to others through these methods become property of the decedent’s “estate.” The estate, which is responsible for handling the decedent’s account funds, “steps into the shoes” of the depositor and becomes the owner of the account. As such, the estate will be in a position to enforce any rights or claims the decedent might have had against the institution. For instance, if an unauthorized debit card transaction has occurred on the decedent’s account, the estate would be able to file an unauthorized transaction claim under the Electronic Funds Transfer Act (Regulation E) against the financial institution.

Terminology involving the estate will differ depending on whether the depositor died with or without a will. If the depositor died with a will, the will (or court) will appoint an executor (a woman is called an “executrix”) to distribute the estate as directed in the will. A court document called “Letters Testamentary” will legally establish the executor’s authority. If the depositor dies without a will, the court will appoint an administrator (a woman is called an “administratrix”) to distribute the estate according to state law. In this case, the legal document establishing the administrator’s authority is called “Letters of Administration.” (Some states may refer to the administrator as a “Personal Representative.”)


Owner of Funds

Estate (Addie Mae Doe Estate)Titling of Account

Addie May Doe Estate, John Doe Executor Addie Mae Doe Estate, John Doe Administrator

TIN

The executor/administrator is required to apply for and receive a special employer identification number (EIN) for the estate. It is this EIN which must be used on this account.

Under section 6049 of the Internal Revenue Code, every person who makes interest payments, or who receives interest payments as a nominee, totaling $10 or more during any calendar year must make a return, according to the form or regulations prescribed by the Secretary, setting forth the total amount of such payments, or the total amount includible in gross income, and the name and address of the person to whom paid.

Section 1.6049-1 of the Income Tax Regulations set forth the requirements for the reporting of interest and designates Forms 1099, Statement for Recipient, and 1096, Annual Summary and Transmittal ofU.S. Information Returns, as the proper forms to use for the information return.

Under section 6109(a) of the Code, every person required to make a return must include the identifying number prescribed for securing proper identification of the person. Any person required to make a return for another person must request the proper identifying number from that person, and that person must furnish the proper number to the person making the return.

Under section 31.6109-1(a) of the regulations, returns required to be filed must reflect such identifying numbers as are required by each return and its related instructions.

Failure to provide such required information can result in penalties ranging from $50 to $100.

Rev. Rul. 64-99, 1964-1 (Part1) C.B.482, holds that if a return or other document is required to be filed for an estate or trust, including returns of information under section 6042 and 6049 of the Code, the


fiduciary must obtain and furnish an identifying number to be included in that return or document even though the estate or trust will be closed during the year. The identifying number to be used by an estate or trust is an employer identification number. It must be furnished to any payor of interest or other person required to make a return with respect to the estate.

Payors of interest must use the identifying number of the person to whom the account is payable in reporting interest on Form 1099. If the interest is payable to an estate, under Rev. Rul. 64-99 the administrator or executor must furnish the estate’s employer identification number, not the decedent’s social security number, to the payor. If the interest is paid to a surviving joint owner, the survivor must furnish his or her identifying number to the payor.

Signer/Handler

Executor/Administrator (John Doe)

Documentation

Order Appointing Executor or Letters Testamentary or Letters of AdministrationSignature card signed by Executor/Administrator

CIP

Under CIP rules, the estate is the customer, not the individual opening the account (i.e., the executor/administrator). In addition, the estate is a separate legal entity from the decedent. This means that when the estate takes over the accounts owned by the decedent, it should be treated as a new customer.

Required Information for Estate NameAddress TIN (EIN)

Documentary Verification Letters Testamentary Letters of Administration


Verification

The bank’s CIP policy will determine what information is required to verify the identity of its customers. This may include some of the following:

Non-Documentary Verification

Check verification services Credit reportPhone call Welcome letter Delivery of checks

Verification of Signatories

The bank may choose to verify the identity of the executor or administrator, depending on the bank’s CIP policy, and in connection with customer due diligence procedures required under other provision of the bank’s BSA policy.

Note: Funds passed to others by joint tenancy accounts, payable-on-death accounts or living trusts are not part of the decedent’s estate.

e. Where There is No Estate

If an estate, is never established, the bank must continue to carry the account in the name of the decedent. Typically, there are various ways that family members can establish their right to the funds. The most common of these procedures, Claim of Heir Affidavit and a Determination of Descent procedure, are discussed below. Most states have adopted these procedures to handle small estates (typically deemed to be less than $20,000 - $75,000 depending upon state law. If the funds are never transferred in such a way, the account will become “unclaimed” under most states escheat laws.)

i. “Claim-of-Heir” Affidavit

Under this procedure (adopted by many states), an “heir” can make a legal claim on the decedent’s deposit account without going through probate. To make this claim, the heir (claimant) must provide the bank with an affidavit showing that (1) the decedent’s estate does not exceed


a specific statutory amount, (2) even if there is a will, no estate has been established, and (3) the claimant would have received the funds if an estate had been established (through a will or by intestate procedure).

The term “estate” includes only the type of assets which would be subject to probate laws. This makes it clear that insurance proceeds, trust assets, and property held in joint tenancy would not be included in the estate cap.

Contact local counsel if you are unsure about whether your state has adopted this process.

ii. Determination of Descent Procedure

Another method of distributing estate assets allows family members (or any “interested” person) to petition the court for a Decree of Descent to establish inheritance rights to the deceased’s property. This procedure can typically only be used where no will has been filed (i.e., the person died “intestate”), and time has passed since the date of death (as defined by state law). Usually this procedure is used when the decedent has left real estate, but it can be used where there is personal property, such as bank accounts or securities, in the name of the decedent. The benefit of this procedure over the Claim of Heir Affidavit is it can usually be used on an estate of any size. All that is normally required is the beneficiaries making sure the decedent’s debts have been paid and then bring an action for a determination of descent to determine ownership of the property. Upon receiving a certified copy of the Decree of Descent, the bank can transfer the funds in accordance with the Decree.

iii. Unclaimed funds

If no claim is made under the claim-by-affidavit procedure (above), the bank must hold the account until it becomes “unclaimed” under the state’s unclaimed property statutes. At the end of the period, the funds must be transferred to the state’s treasurer as unclaimed property.

2. Death of the Depositor with Co-Owner and/or Payable on Death Clause

a. Joint Tenancy (With Right of Survivorship and Not as Tenants in Common)


While both joint tenants are alive, each legally owns 100% of the funds. Upon the death of one joint tenant, the surviving joint tenant will still own 100% of the funds in the account. Bankers should document the ownership change as soon as reasonably possible, and where necessary, obtain a new TIN. Note: Even if a joint tenancy account has a payable-on-death provision, that provision does not come into play until all owners have died.

b. Tenants in Common

The funds in a “tenants in common” account are owned proportionately unless the signature card (or other relevant contract) indicates differently. If there are two owners for example, each owner is presumed to own one-half of the funds in the account. Where one owner dies, the bank must (1) determine the decedent’s portion, and (2) hold that portion for the decedent’s estate. The remaining funds belong to the surviving tenant-in-common owner.

c. Tenancy by the Entirety

Some states recognize “tenancy by the entirety” as a form of account ownership between a husband and wife. In this form of ownership the husband and wife, while alive, are treated as a single "legal entity", separate from the individuals themselves. When either the husband or wife passes away, the balance of the account transfers to the survivor in the same manner as joint tenancy with right of survivorship. A POD clause on this type of titling will work the same as joint tenancy with right of survivorship as well.

d. Individual Account with Payable-On-Death (POD) Clause

After the death of all owners, funds in a POD account automatically transfer to the named beneficiary(ies). Usually, a payable-on-death agreement states that, upon the death of the owner, the surviving beneficiaries must share equally---- if a named beneficiary dies before the owner, that beneficiary’s heir receives nothing. The distribution will be controlled by the banks POD documentation.

e. Joint Tenancy Account with Payable-On-Death (POD) Clause

Where a joint tenancy account has a POD provision, that provision will


not take effect until all joint owners have died. Where one joint owner dies, all funds are automatically passed to the surviving joint owner---the payable-on- death clause is ignored until the last joint tenant dies.

f. Tenants in Common Account With Payable-On-Death (POD) Clause

If a POD account is owned by two or more people as tenants in common, the balance of the owner’s legal share of the deposit account transfers to the owner’s POD beneficiary.

g. Payable-On-Death (POD)Tidbits

i. Separate Contract

While the typically-used signature card (or certificate of deposit) may be sufficient to create POD, a separate contract which establishes the specific details of the POD account may also be used. While the signature card may contain a space to list beneficiaries, a separate contract may provide more details. For example, how funds must be distributed when one of several beneficiaries predeceases the owner (the deceased beneficiary’s share will normally be distributed among the living beneficiaries—not passed to the deceased beneficiary’s children). These separate contracts are readily available from several forms companies.

ii. Minor Beneficiary

Minors can be the beneficiaries of POD accounts. State law will control how POD funds are paid to minors. Consult local counsel to determine your state’s requirements. Additionally, the POD contract can pay to the child under a states Uniform Gift/Transfer to Minor’s Act laws.

iii. Beneficiary Information

It is common for banks to simply list the names of POD beneficiaries on the signature card or the separate contract without further identifying information. But lack of identifying beneficiary information could become a problem upon the death of the account owner, particularly if all the account owner’s relatives are deceased. One bank, for example, found itself trying to locate a “Sue Smith” (not her real name) in Baltimore,


Maryland, and trying to verify (without any identifying information) that she was the intended beneficiary. The easiest way to deal with this type of problem is to get a TIN, telephone number, and complete address for each beneficiary from the account owner when establishing the POD.

A beneficiary’s TIN is required when paying out the account to the beneficiary (under POD or joint tenancy). Payors of interest must use the identifying number of the person to whom the account is payable in reporting interest on Form 1099. If the interest is payable to an estate, under Rev. Rul. 64-99 the administrator or executor must furnish the estate’s employer identification number, not the decedent’s social security number, to the payor. If the interest is paid to a surviving joint owner (or beneficiary) the survivor (beneficiary) must furnish his or her identifying number to the payor.

Under CIP rules, a bank is not responsible to verify the identity of beneficiaries of accounts when POD provisions are established. The account should be verified the way it would be in the absence of a POD designation (i.e., as an individual or joint account). However, upon the death of the owner the beneficiary would become the customer and CIP steps should be taken if the beneficiary is going to keep the account at the bank.

iv. No Safe Deposit Boxes

Typically, payable-on-death provisions do not work on safe deposit boxes since ownership of the contents of the box is not determined by the titling on the box.

v. Account Used As Collateral and Setoff

Remember that, upon the owner’s death, a POD beneficiary only receives ”the balance of the owner’s legal share.” If the owner has pledged the account as collateral for a loan, the beneficiary will simply step into the deceased owner’s shoes and get whatever the owner would have received. If the loan is in default, the bank will use the account to pay the loan, and the beneficiary will receive whatever is left, if anything. Accounts containing payable on death or Totten trust clauses may also be subject to a bank’s right of setoff. There is only one known case on this issue (out of Ohio), and it upheld the bank’s right to exercise setoff on a payable on death account at the owner’s death. The theory used is that the payable on death beneficiary’s interest in the account is only as great as the original owner’s interest. As a result, since the original owner’s interest would be subject to the bank’s setoff right, the


beneficiary is subject to the same action. Local counsel should be consulted to confirm what is permitted by state law.

vi. FDIC Insurance

A POD account is a particularly good account for FDIC insurance purposes. The funds in the account are covered up to $250,000 per beneficiary as long as the beneficiary is a natural person, charity or non-profit entity—and this coverage is in addition to the insurance which covers the other accounts of the owner or beneficiary. Special rules apply if a POD account has more than five beneficiaries and more than $1.25 million in a single institution. In that case, the account will be insured for the greater of $1.25 million or the aggregate beneficial interest of all the beneficiaries (up to a maximum of $250,000 per beneficiary).

To fully understand the beneficial POD insurance coverage, bankers must also be aware of an interpretive quirk in the law which permits the coverage ($250,000 per beneficiary) to be claimed by each joint owner. For example, where Husband and Wife jointly establish a $1,000,000 account and name their two children as payable-on–death beneficiaries, the account is insured for the full $1,000,000 ($500,000 per beneficiary through Husband plus $500,000 per beneficiary through Wife).

Under the FDIC regulations, the beneficial POD insurance coverage exists only if the bank complies with the following documentation rules:

The term “payable on death” or “POD” must be shown in the title of the account (on the actual signature card or certificate of deposit); and

The beneficiaries must be listed by actual name and not as “all living children” or “all heirs.” These names need not be listed on the signature card or certificate of deposit, and are normally listed in a separate payable-on-death contract.

vii. Death of Beneficiary: Per Stirpes Distribution

Under widely-accepted, but apparently not mandated procedures, funds in payable-on-death accounts are paid out to all surviving beneficiaries. If a named beneficiary predeceases the owner, that beneficiary’s “share” does not pass on to his/her heirs. Standard payable-on-death forms normally include wording to this effect.


Bankers often inquire whether the standard POD contract wording can be amended to provide for per stirpes distribution of the account funds upon the death of the owner. Under per stirpes distribution, if a beneficiary predeceases the owner, that beneficiary’s share is passed on to his/her heirs. Banks should carefully consider, however, whether they want to accept this kind of responsibility upon the death of the owner. Even where the payable-on-death contract specifically names the heirs to be paid in the event of a beneficiary’s death, a proper payout could require some investigation on the part of the bank. And remember—the owner can change beneficiaries (to include the heirs of a deceased beneficiary) at any time! Allowing per stirpes distribution greatly (and possibly unnecessarily) complicates the bank’s responsibility and liability.

viii. State Tax Issues

Some states require POD monies to be held until the state has determined whether taxes are due. Consult with local counsel if you are not certain as to your state’s requirements.

ix. Spousal Interests

Many states require a spouse to consent to POD or beneficiary designations that pay to a party other than the spouse. These non-spousal designations are not automatically invalid. Instead, they might be set aside by a court if the spouse did not consent in writing. Consult with local counsel about your state’s laws in this area.

x. Not a Substitute for Advanced Estate Planning

POD accounts are designed to be extremely simple and straightforward—“When I die, give the balance of this account to John and Margaret.” Where a bank customer attempts to use a POD account as a substitute for a complicated will, the bank should urge the customer to consult an attorney to handle his/her estate planning matters. Clearly, the bank will not want to become involved in legally advising the customer on estate planning or estate taxes. A bank does have some flexibility in setting up a POD account (the separate contract may specifically indicate how funds will be allocated to the beneficiaries upon death), but a simple and straightforward account is in the bank’s (and customer’s) best interest.

xii. How Do You Find A Missing Beneficiary?


If you are having trouble locating a POD beneficiary after the owner has died, consider changing the mailing address or correspondence to include the beneficiary’s name. Possibly whoever is receiving the decedent’s mail will know the beneficiary and inform the beneficiary of the account. Furthermore, this action has been taken in order to complete a transaction request by the original customer so privacy issues should not be a concern. Eventually, if the funds are not claimed, they will escheat under the state’s unclaimed property statutes.

xiii. Totten Trusts v. Payable on Death

Under general legal principles, a depositor can also leave funds to a beneficiary by establishing a “Totten Trust.” A Totten trust typically is titled: “Mary Doe in trust for Little Jane Doe.” Totten trusts are legal in most states, but the Totten trust rules are unclear. Since POD accounts are so clearly authorized and detailed by most state statues, nearly all banks use POD accounts instead of “Totten Trust.”

[For FDIC insurance purposes, the FDIC refers to payable-on-death accounts as “testamentary accounts” and this classification includes Totten trusts.]

3. MISCELLANEOUS DEPOSIT SIDE ISSUES

a. Handling Checks Payable to Deceased Customer

Bankers frequently must deal with the situation where the payee of an existing check has died. How should this check be handled? Can someone else endorse it on behalf of the deceased payee? Here are the rules:

b. General Rules

Where the payee of a check dies, the check becomes part of the payee’s estate, the following rules will apply:

Surviving Spouse Cannot Sign

The spouse of the deceased payee never has the authority to sign on behalf of the deceased. Even if the spouse is holding a power of


attorney, the power of attorney terminates at the decedent’s death and would no longer be valid.

Executor/Administrator Can Sign

If an executor or administrator has been appointed by the probate court, the executor/administrator may endorse the check on behalf of the deceased payee. Such an endorsement should read as follows: “John Jones by Mary Jones, executor of the estate of John Jones.”

Where Executor is Not Appointed

If an executor/administrator has not been appointed, the check should be returned to the issuer so that the issuer can determine (1) whether payment should be made, and (2) to whom payment should be made. If the issuer decides payment should be made to another party (such as a surviving spouse), the issuer should draft a new check.

Can the Bank Endorse?

Under the UCC, a depository bank can accept a check without an endorsement, as long as that check is deposited into the payee’s account or otherwise credited to the payee. It is unknown, however, whether the bank’s authority to “supply the missing endorsement” ceases upon death of payee. If the bank knows of the payee’s death, the bank needs to weigh the possible risks of supplying the deceased payee’s missing endorsement and depositing the item to the payee’s account.

Special Treasury Department Rules

The Treasury Department has issued special regulations regarding the endorsement of U.S. Treasury checks issued to deceased payees. The handling of such checks will depend on the category of the check.

There are three types of checks that the right to payment does not terminate with the death of the payee:

Interest payments; Tax refunds; andPayment for goods and services


For these checks, the executor or administrator may endorse the check on behalf of the decedent by using the following endorsement: “John Jones by Mary Jones, executor of the estate of John Jones.”

If an executor or administrator has not been appointed, the person claiming the check must return the check to the government agency which issued the check. That agency will then determine the appropriate owner.

Where the Treasury check is of a type other than those listed above, that check may not be negotiated after the death of the payee, but rather must be returned to the government agency which issued the check for determination of 1) whether payment is due and (2) to whom payment should be made.

Where a social security benefit check is made jointly to husband and wife and one of the payees dies, the surviving payee should return that check to either the Social Security District Office or the Treasury Regional Financial Center. That office may authorize payment of the check to the surviving payee by placing a stamped legend on the face of the check redesignating the survivor as the sole payee. SOURCES: 31 CFR 240.10,12,13,14 and 15. According to “A Guide to Federal Government ACH Payments and Collections,” an ACH credits for federal benefit payments should be returned when the account holder is deceased.

Reclamation

U.S. Treasury will have the right to reclaim funds that were sent directly to the bank and deposited to a deceased recipient’s account. To do so, U.S. Treasury issues a “Reclamation Notice”. U.S. Treasury will have the right to reclaim ACH benefits within 120 days of learning of the death of the recipient (claiming funds that were deposited for up to six years after the deposit). For checks, U.S. Treasury will have one year from the date the check was issued to reclaim the funds. The reclamation process can be completed through written demand from U.S. Treasury or through a direct debit being assessed against the financial institution’s Fed account.

c. Authorized Signer on Accounts

An authorized signer is a limited power of attorney. Therefore, the powers of an authorized signer to do business on an account are


automatically terminated upon the death of the account owner (as principal of the power of attorney). The bank should not continue to follow the instructions or pay checks issued by the authorized signer unless otherwise directed to do so by an executor/ administrator, surviving owner, a POD beneficiary on the account, or a court order.

d. Death of Corporate, LLC or Partnership Signer

A corporation outlives its incorporators and officers, and does not die, even when the people running the corporation do. Even in a sole shareholder corporation, the death of the sole shareholder will not affect the viability of the corporation itself. The sole shareholder owned the stock issued by the corporate entity, not the corporate entity itself, and that stock will be transferred to another, whether by will, trust or other transfer. The shareholders receiving the stock will be able to select a new board and officers using the articles of incorporation and bylaws of the company. The board will then be able to execute new corporate resolutions with the bank, appointing new authorized signers. The rules will also hold true for other legal entities. For instance, the death of a member of a limited liability company will not affect the viability of the limited liability company. If a LLC member dies who was a signer on the LLC’s account, the remaining members should execute a new LLC authority/resolution appointing a new signer. The death of a partnership may or may not affect the existence of the partnership based upon the terms of the partnership agreement and state law. The agreement and state law should be consulted when determining what the effect of the partner on the partnership might be.

e. Garnishment and Levy Actions Should be Stayed

Most states require creditors to file claims against the decedent’s estate. What this means is that garnishments actions and other tax levies are claims against the decedent’s estate. Creditors may not be paid until after other claims have been paid. For that reason, a garnishment that is served on the bank on deceased accountholder should typically be sent back to the court explaining that no money is being held due to the death. At that point, the garnishing creditor will be required to file a claim into the decedent’s estate. Confirm with local counsel as to your state’s laws.

f. Exercising Right of Setoff


A bank should have the right to setoff against funds owed to the decedent for debts owed by the decedent to the bank. On a multiple party account, the amount that can be set off is the proportionate amount the decedent owned of the account prior to death (normally an equal share if not otherwise defined), unless the bank specifically contracted to setoff against the entire balance of the account in its account agreement. It is always advisable to notify the estate administrator of said action and to consult with local counsel. If there is a POD beneficiary on the account, the bank should consult with local counsel to ensure that state law will permit setoff of the decedent’s death against the account formally held by the decedent. There is only one known case on this issue (out of Ohio), and it upheld the bank’s right to exercise setoff on a payable on death account at the owner’s death. The theory used is that the payable on death beneficiary’s interest in the account is only as great as the original owner’s interest. As a result, since the original owner’s interest would be subject to the bank’s setoff right, the beneficiary is subject to the same action. Local counsel should be consulted to confirm what is permitted by state law.

Sole Owner Box Deputy/Authorized Signer ceases;

States usually have a procedure for the box to be opened immediately after death in order to locate burial instructions and will. The box is then sealed pending estate administration. Consult with local counsel to find out your state’s procedures;

Bank is usually required to have at least two employees present when box is opened so that a full inventory can be performed;

The Safe Deposit Side


Joint Tenancy Box- JTWROS When one owner dies, the other owner

typically continues to have access rights, however some states restrict the access and/or removal of property by a co-owner until the state determines whether the decedent owes any taxes to the state;

Estate executor/administrator may have limited right to access box unless a court order or permission from the joint tenant has been provided.


THE LOAN SIDE

Even though every loan officer knows that a bank customer could die at any time, banks tend to be unprepared for how to best deal with the occurrence. Unfortunately, the death of a borrower can have a significant legal and practical impact on a loan department. The situation can be further complicated by lenders who fail to take appropriate steps to protect collateral and record claims. The following is a discussion of the various legal and practical issues that lenders need to understand and address to ensure that the financial institution is prepared to deal with the borrower’s death.

1. Using “Death” as a basis for default

a. Commercial Note Language

The death of a borrower (or even a guarantor) will be a default under all promissory notes and/or security agreements. The language appearing in commercial notes will usually be clear. The note will say something like:

“Upon the occurrence of any of the following events of default, this Note and any other obligation or liability of Borrower to the Lender shall, at the option of the Lender, become immediately due and payable: (1) default in the performance of any liability or obligation of Borrower or of any co-maker, endorser, guarantor or surety of any liability of Borrower to the Lender, including default in the payment of any part of the principal of or interest upon this Note as the same becomes due; (2) failure of Borrower promptly to furnish additional security when requested by the Lender to do so; (3) depreciation in value of the collateral or any additions thereto or substitutions therefore, or any part thereof, to the extent that this Note is not regarding by the Lender as properly secured; (4) determination by an officer of the Lender that the collateral has become unsatisfactory to the Lender; (5) determination by an officer of the Lender that a material adverse change has occurred in the financial condition of Borrower or of any co-maker, endorser, guarantor, or surety thereof; (6) death, dissolution, termination of existence, insolvency, business failure, or appointment of, or application for the appointment of, a receiver of any part of the property of, service of any order of attachment, garnishment, or


the existence of making or issuance of any tax lien or similar process on or with respect to any property of, assignment for the benefit of creditors by, or the commencement of any proceedings under any bankruptcy act or insolvency laws by or against Borrower or any co-maker, endorser, guarantor or surety hereof; (7) any other event which causes the Lender, in good faith, to deem itself insecure.”

Clearly, a lender has the right under the terms of the note, to use the borrower’s death as a basis of default. This allows the bank to take steps to collect the debt owed and protect the collateral used to secure repayment.

It is important to remember that an heir of the decedent does not have the automatic right to extend or renegotiate the terms of the decedent’s note, even if the heir is living in or using the collateral.

b. Uniform Consumer Credit Code/Consumer NoteDefault Language

While not as clear as the commercial language found in notes about the effect of a customer’s death, death is equally considered a default on consumer loans under consumer credit statutes, including the Uniform Consumer Credit Code (UCCC). The language that is frequently found is as follows:

“Default is defined as (a) Borrower fails to make a payment in full when due; or (b) the prospect for payment, performance or realization on collateral is significantly impaired.”

This generic language sometimes causes confusion for lenders. It does not specifically say that when the borrower dies, the loan will be in default. However, most would agree that the borrower’s death gives the bank the basis to believe the prospect for payment and performance on the loan is in question. This is the justification for treating the death as a default on the loan.

2. Is a “Right to Cure Notice” required?

Right to cure notices (specifically those required under consumer protection statutes or the UCCC) are normally only required on payment defaults, unless the bank otherwise agreed to provide the notice for all defaults. Since “death” of the borrower is not a payment default, no right to cure notice needs to be sent. This is only logical since “death” as the basis for default cannot be “cured”. However, some lenders are very generous and have agreed to provide a right to cure notice for ANY default on a loan. As a result, the bank may be obligated to send such notice to


co-makers or the decedent’s estate before taking action to repossess collateral or otherwise collect the debt owed. A bank must read its own note terms to determine whether it has agreed to provide the notice, regardless of legal requirements. Note: New RESPA servicing rules restrict the bank’s ability to foreclose on residential real estate loans until the loan is past due 120 days. As a result, the bank may be required to accelerate the note due to the death in order to start the 120-day clock.


3. Determination of Decedent’s Role in Borrowings

Upon notification of a death, the bank must determine the impact of that death on the current lending situation. For instance, if the decedent was the sole borrower on a note, then his death will have more of a financial impact on a loan than if the customer was a co-maker or guarantor on a loan, or an officer of a corporate borrower.

LLC)

a. Individual Borrower (Consumer/Sole Proprietor/Single-member

i. Locate collateral

Personal property, by its nature, can be easily concealed or otherwise misplaced. As a result, the bank must take and has a right to take adequate steps to protect its interests. If the collateral was jointly owned, the bank should contact the joint owner to determine where the collateral is and make arrangements for inspection of it. Be aware that collateral which is held in “transfer on death” or “payable on death” titling has a high propensity for “disappearing” if the bank has not taken adequate steps to protect its interest.

ii. Secure the collateral

Personal property collateral should be inspected and accounted for, and if the property is subject to waste, deterioration or impairment, the bank should take steps to protect the property (this includes vehicles that were individually owned by the decedent). If an estate is to be opened, then the bank can make arrangements directly with the executor/ administrator to protect the collateral on the bank’s behalf. Charges incurred can usually be assessed to the loan under the terms of the security agreement. If the property is in the possession of a third party (either with a beneficial interest or under a contractual arrangement), the financial institution should either make arrangements to take possession of the collateral or should be comfortable that the third party will protect it on the financial institution’s behalf.

iii. Equity belongs to the decedent’s estate or heir(s) at law

A bank should use diligence in protecting collateral in its possession (actual or constructive). Any equity that the borrower might have had in the collateral will become an asset to the borrower’s estate, and ultimately to the heir(s) at law.


iv. Discontinue advances on credit lines

If the only borrower is an individual/sole proprietor under a line of credit, the bank should discontinue making advances for any parties other than the court-appointed estate representative (and even then, the bank should make sure that advances will be repaid by the estate).

In some cases, the sole proprietor has an authorized signer on his line of credit that has been given the power to request draws on a line of credit. This authorized signer is, for all legal purposes, an attorney in fact under a limited power of attorney. Upon the death of the borrower, the limited power of attorney ceases. As a result, the bank may increase its financial exposure by continuing to make advances from a line of credit on behalf of those who are not legally obligated to repay the loan.

v. Sole-member LLC issues

A sole-member LLC is different from a sole proprietor. With a sole proprietorship, the individual is doing business him/herself; when the person dies, the business essential dies. A sole-member LLC is different because when the sole member dies, the LLC lives on. The sole-member owns “membership shares” in the LLC. So when the sole-member dies, the shares can be transferred to another person, either through the decedent’s estate or via titling the shares with a “transfer on death” designation. As a result, from a legal aspect, the LLC can continue to operate with little or no interruptions. Therefore, a bank may find it is able to continue to do business with the LLC entity, even though the sole member has passed away. The real issue for the bank is a practical one. If the sole member was responsible for the success of the business, will someone else who inherits the membership shares of the LLC be able to continue the success?

b. Consumer co-makers

The death of a co-maker on consumer paper is a default under the terms of the agreement (see Section I (b) above). However, in many cases, the bank’s collateral was owned by the co-makers as joint tenancy with rights of survivorship (JTWROS) or as tenants in common or as tenancy by the entirety, and is now in the possession of (and in the case of JTWROS and tenancy by the entirety, is now solely owned by) the surviving co-maker. In most cases, the bank will find it more efficient to contact the surviving co- maker to determine future payment intentions, rather than exercising its default remedies.

There will be circumstances in which the bank will find that the surviving co- maker is financially unable to maintain the loan payments. The bank will


have

©2016, Terri D. Thomas, JD29

to determine whether it wants to rewrite the note or to take possession of the collateral (the bank will still have a right to collect a deficiency from either the estate or the co-maker) presuming it properly disposes of the collateral as required by the laws of its state (UCC-Article 9).

c. Partnerships

In addition to the collateral issues described above, if the decedent is a partner of a general partnership or the general partner of a Limited Partnership, the bank will want to examine the partnership agreement to determine the impact said death has on the business affairs of the partnership. For instance, if the partnership is organized under the original Uniform Partnership Act, the death of a partner is a basis for dissolution, which could impact the enforceability of future advances made to the entity. Under the revised Uniform Partnership Act, the death of the partner will not cause the partnership to dissolve, but rather will cause the deceased partner’s interest to be dissolved (and bought out) by the remaining partners. The key in this area is to not advance on loans without knowing who will ultimately be responsible for payment. Note: The death of a limited partner or a member of on LLC will rarely have a significant legal impact on the entity. However, there could be a practical impact if the decedent was a key person to the entity (see “Corporations” below).

d. Corporations/Multi-member LLC

The death of a corporate officer (or member of a multi-member limited liability company) is legally not a significant issue from a lender’s perspective. In addition to taking the steps to protect collateral described in subsection “a” above, the bank should have a new corporate resolution completed by the borrower’s board of directors indicating who the replacement authorized officer will be for future advances/ borrowings.

Practically, the bank should assure itself that the corporation’s ability to do business after the death of the officer is not affected. For instance, the bank may have some concern about the ability to repay a debt if the borrower is a closely-held corporation, and the decedent was a key person. The corporation could conceivably fail because of the death of the officer. Hopefully, the bank has foreseen this possibility and obtained sufficient insurance coverage for the loan or has adequate collateral to secure repayment. If not, the bank may be able to use the “Adverse Change” or “Insecurity” sub-sections of the Default section of the standard promissory note to declare the default [see the “Default” language in Section 1 (a)].


e. Decedent as Guarantor

Depending upon the circumstances, the bank may have a basis for deeming itself insecure if the decedent was a guarantor of another borrower’s debt. The basis for this may be in the promissory note [see the language in Section 1(a)]or in the guaranty form itself. Using the more generic language of default will allow the loan to be accelerated and demand for payment to be made.

f. Pending loan closings or loans not advanced

What should a financial institution do if the borrower dies prior to loan closing or before loan proceeds have been advanced on a recently closed loan? In most cases, the bank will not want to continue the process of closing or advancing on a loan for which a borrower or co-borrower has passed. Death clearly affects the financial condition of the sole borrower, and will normally affect the financial condition of joint borrowers.

Frequently, this type of situation occurs when the borrower ran a family business as a sole proprietor, and the family needs the loan proceeds to continue operating the business. The bank should refuse to advance the loan funds or continue with the closing by formally putting the decedent’s estate (or family) on notice that the loan will not be completed due to the “pre-closing” or “pre-funding” default. The financial institution can then take steps to analyze the effect of the borrower’s death on the business enterprise.

By advancing funds without additional underwriting and new loan documentation, the bank may be unnecessarily complicating its legal position and putting itself at risk of not being repaid. Legal counsel should be consulted to determine what the bank’s course of action should be.

(4) Determine to who the collateral is to be distributed

The bank should examine the trust or the will admitted to probate to determine the decedent’s intent with regard to the collateral. In some cases, the bank may be able to approach the distributee with a proposal for the distributee to assume the debt (especially if the bank’s terms are favorable). This frequently works with on-going business operations or real estate. It some cases, it works with motor vehicles. For example, the borrower might leave his car to his grandchild under the terms of his will. The bank has a purchase money security interest in the car. The grandson may be willing to assume the loan terms in order to keep possession of the car. The bank is happy because it continues to be paid


under the original terms and the grandson is happy because he gets to keep the car. Be careful when co-makers or guarantors are involved, however. The bank should always make sure that it will not be


adversely the obligations of co-makers or guarantors by allowing such assumption. For Regulation Z (Truth in Lending Act), assumptions are typically treated as new loans, requiring new disclosures to be given to the assuming borrowers.

(5) The role of insurance

The lender should determine whether a credit life policy was purchased in association with the debt. If so, a claim should be filed. The bank will need a certified copy of the death certificate from the executor/administrator. If separate life insurance was used as collateral for the loan, the bank will want to confirm that a claim has been filed by the estate administrator. Filing insurance claims can take time. The bank should be prepared to work with the decedent’s estate and the insurance company for a considerable period of time before being paid.

(6) Setoff

Because death is a default, the bank may want to use its right of setoff against deposit accounts held by the decedent (in the decedent’s name individually or as a joint tenant). Be careful not to use setoff between corporate debts and individual deposits (or vice versa). Additionally, it is unclear as to whether setoff would be permitted to satisfy the decedent’s credit card debt since the Truth in Lending Act generally prohibits the act of set off on credit card debt, but does not address whether such prohibition would apply to the decedent’s estate.

Furthermore, the bank should keep in mind that, with the exception of government benefit payments such as Social Security or Veterans benefits, it can almost always exercise setoff against deposits held by the decedent for borrowings of the decedent, even using those accounts that contain payable on death or Totten trust clauses. There is only one known case on this issue (out of Ohio), and it upheld the bank’s right to exercise setoff on a payable on death account at the owner’s death. The theory used is that the payable on death beneficiary’s interest in the account is only as great as the original owner’s interest. As a result, since the original owner’s interest would be subject to the bank’s setoff right, the beneficiary is subject to the same action. Local counsel should be consulted to confirm what is permitted by state law.

(7) Sale of Collateral After Foreclosure

Some states, while permitting the bank to take possession or otherwise


protect the collateral securing a decedent’s promissory note, will not permit the bank to sell the collateral until an order has been issued from the probate court. It is for this reason that a bank should seek the advice of legal counsel before disposing of collateral after a customer has passed. This is especially true when the collateral was the borrower’s residence, and the borrower’s family is still living in the home.

(8) Keeping the Borrower’s Business Alive

Sometimes the decedent’s estate or heirs want to keep the business viable. To do that, the bank may be asked to waive default or even loan additional funds. This raises new issues for financial institutions to consider.

a. Lending to an Estate

The decedent’s estate may attempt to continue operating the decedent’s business interests in order to retain the business’ value for the estate, its creditors and the heirs-at-law. To do this, the bank may be asked to extend credit (or continue offering credit) to the estate. Loans may also be needed to pay estate taxes, especially in situations where the estate assets are not liquid. Loans to estates are typically for a short period of time until the business can be transferred to a new operator or until assets can be liquidated to pay creditor claims.

In making a loan to an estate, a bank should (in addition to standard loan documentation):

1. Have a copy of the court order appointing the executor/administrator; and2. Have a court order that specifically approves of the loan terms, including the pledging of assets to secure repayment of the loan by the estate.

If the executor/administrator insists that state law gives the estate automatic permission to borrow funds and pledge property, then request a copy of the state law for the bank’s records, or alternatively, an attorney’s opinion should be obtained.

b. Lending to a Trust

Loans made to trusts upon the decedent’s passing are typically for longer periods of time. Unlike the estate, which has the goal of transferring the business interest to heir(s)-at-law, the trust is frequently the long-term operator of the business concern. As a result, a bank will want to look at the viability of the trust as a borrower no differently than when it looks at any other borrower.


When loaning money to a trust (when the grantor is not the trustee, such as in decedent situations), the bank should remember that the trust is a free- standing legal entity with the full power to borrow money and pledge trust assets for those monies loaned to the trust, unless the trust document specifically limits or removes those powers.To document a loan to the decedent’s trust, a bank should:

1. Examine the trust instrument to confirm the trustee has the power to borrow money and pledge assets to secure repayment of the debt; or

2. If permitted by your state’s trust laws, obtain a certification of trust form in which the trustee provides an affidavit as to the unrestricted powers to borrower and pledge; or

3. Obtain an attorney’s opinion that the trustee has the unrestricted power to borrow money and pledge assets.

(9) Practical Issues

Practically, the bank will have to exercise patience after a borrower’s death. In most cases, the bank will not have to use heavy-handed tactics, and in fact, using such tactics will usually backfire, either with adverse publicity or adverse probate court rulings. Remember, this is an emotional time for the borrower’s family. The family has to make many major decisions, and frequently it is difficult to get the parties to focus on the bank’s issues. Once the bank has confirmed that the collateral securing the loan is safe, the bank should be able to work with the estate representative to satisfactorily satisfy the debt, either by surrender of the collateral, assumption of the debt by another party or through the probate claims procedure (see “External Actions” below).

(10) External Actions

a. Probate

When an individual debtor dies, there will be an estate established to settle the decedent’s affairs. If the debtor died with a will (testate), then there will be an executor/executrix appointed by the court (usually by a court order of appointment). If there is no will (intestate), then usually an administrator/administratrix will be appointed with Letters Testamentary or similar court order. The administrator is also called a “personal representative” in some states.


If the decedent’s personal accounts and collateral are insufficient to satisfy the debt owed to the financial institution, the bank may have to file a claim against the decedent’s probate assets. This is a procedure that is unique state-to- state. Therefore, if the bank is being advised by an executor/administrator to file a claim, it should seek the advice of legal counsel to accomplish the same. The format for the claim is usually mandated by state law or local court rules. Some state bar associations sell the claim form as well.

Here is an example of a claim form used in Missouri:


How does the claim process work? Many states have a claim “classification” system in which creditor claims are classified by priority. Frequently, funeral expenses are first class claims and are paid first. Administrative and last illness claims tend to be paid next. Third class claims tend to be judgment liens, tax liens , child support or domestic court orders, and fourth class claims tend to be everything else, including the payment of promissory notes (whether secured or unsecured). If the note is secured, most states will permit the bank to take possession of the collateral in order to protect its value. The bank can then seek confirmation from the court that the collateral can be sold. Once sold (or if the bank surrenders it to the estate) the unsecured portion of the claim will be paid from the estate assets available.

Most states have a “claims bar date” for the filing of estate claims. Bar dates range from four months to two years after the estate is opened, or even longer, depending upon a state’s laws. The claims date usually begins to run from the time that notice is published in the probate court’s local newspaper. The publishing of the notice serves as “formal notice” to creditors that the borrower has died and that if money is owed, a claim must be put on file with the probate court. If the creditor fails to respond within the time mandated by the notice, the creditor’s claim could be barred.

If there are insufficient assets in the probate estate to satisfy all claims, most states provide for a procedure to bring non-probate assets into the probate estate. This procedure can be very costly and time consuming, and frequently fails. Therefore, this type of action should be done only as a last resort.

b. If an estate has not been opened:

If the bank finds that no estate has been opened, despite the fact there are assets and claims to be administered, it should consult with legal counsel. Most states have procedures for third parties to force the opening a probate estate, if there are probate assets to be administered. However, this is a costly and time consuming process, and should be done only where the debt is substantial and recovery from the probate estate is likely. If there is nothing to recover, the creditor will be out the amount of its original claim, as well as the legal expenses in forcing the estate to be opened.

Word of Warning

Dealing with the death of a borrower is a complicated process that requires


the bank to exercise good judgment and patience. Taking action without knowing the exact consequences of that action could result in a financial institution not only losing the ability to collect the money due, but could also result in loss of collateral and significant legal expenses. The wise financial institution will seek the advice of legal counsel before taking any action against the decedent’s estate, the collateral, co-makers or guarantors to make sure that it fully understands the potential ramifications of its acts.

Microsoft Word - 1-2014 Customer Diesttsmedia.ttstrain.com/DiesHOLC060216.docx · Web viewPOD...

Documents

Transcript of Microsoft Word - 1-2014 Customer Diesttsmedia.ttstrain.com/DiesHOLC060216.docx · Web viewPOD...