A s a direct result of the nation’s worst natural disaster, a new client, Mrs. Breaux (not her real name), was sitting across the conference table in early January, barely three months after Hurricane Katrina changed the face of New Orleans forever. Mrs. Breaux’s home, located in the Mid-City section of New Orleans, suffered severe damage and was uninhabitable. Nonetheless, she was one of the lucky ones. Unlike many of her neighbors, she had insurance and her adjuster promised a check within days.
The problem: the check would be made payable to her mother, who died 35 years ago. Because the client’s mother’s estate had never been opened, the mother still was both the record owner of the property and the insured under the flood and homeowner’s insurance policies. Now, like thousands of other Katrina victims, Mrs. Breaux required legal help to negotiate the insurance check and clear title so her family home could be either sold or refinanced to pay for needed repairs.
It is impossible to determine how many estates in Louisiana will need to be opened and how many titles will need to be cleared, but one effect of Hurricane Katrina has been to highlight the local custom of not opening estates (called “successions”) unless needed to clear title for a sale. Now, following Hurricanes Katrina and Rita, clearing title is necessary to negotiate insurance settlement checks made payable to “owners” who have been dead for years; to sell property that cannot be rebuilt or repaired, or simply to move to higher ground; to refinance homes needing repairs but with no or inadequate insurance coverage; and to take advantage of federally financed recovery programs designed to compensate “owners” for up to $150,000 in uninsured losses. To further complicate matters, ownership of the home often is divided among several co-owners in multiple generations, requiring the opening of several estates to clear title.
Unfortunately for thousands of low- and moderate-income homeowners, Louisiana does not provide an economical means of accomplishing this. Even though Louisiana law provides for an immediate transfer of ownership at death to the “universal successors” (heirs or remaindermen) and to particular legatees, La. Civ. Code Ann. art. 935 (West Supp. 2006), most title examiners will not approve title in the absence of a judicial proceeding and a judgment of possession formally recognizing the new owners. This is true even though the Louisiana Civil Code provides specifically that before the qualification of the executor or administrator, a successor may exercise rights of ownership both for the successor’s interest in an asset of the estate as well as for the successor’s interest in the estate as a whole. La. Civ. Code Ann. art. 938 (West Supp. 2006).
Louisiana does not permit real estate to be held in a joint tenancy with a right of survivorship
Several factors appear responsible for the large number of unopened and unsettled estates in Louisiana. First, unlike virtually all other U.S. jurisdictions, Louisiana does not permit real estate to be held in a joint tenancy with a right of survivorship or in a tenancy by the entirety, under which ownership of the family home would pass immediately to the surviving joint tenant or surviving spouse by operation of the law and outside of probate. In Louisiana, real estate (known as “immovable property” in the civil law) cannot be owned in a joint tenancy with survivorship rights, a form of ownership that seems to work exceedingly well in other jurisdictions for the vast majority of taxpayers who are not concerned about federal or state death taxes or overfunding the marital deduction.
Although joint tenancy with right of survivorship is simply not recognized in the civil law for land, Louisiana has made limited exceptions. Bank accounts payable on death to a survivor are authorized (a law initially enacted as a mechanism for securing another layer of insurance protection through the Federal Deposit Insurance Corporation). Similarly, U.S. savings bonds that are designated as payable on death to a named beneficiary are given effect as a result of case law. See Free v. Bland, 369 U.S. 663 (1962) (holding that federal regulations governing U.S. savings bonds prevail over state law to the contrary). No serious efforts have been undertaken to permit real estate to be owned in joint tenancy, perhaps out of a concern that the proposal would likely be opposed by civilian attorneys and lawmakers as yet another encroachment of the common law into Louisiana and another potential erosion of Louisiana’s forced heirship law. Generally, Louisiana’s heirship law requires that a portion of the estate go to children age 23 or younger or to children of any age who are permanently incapacitated when the parent dies. La. Civ. Code Ann. arts. 1493, 1495 (West Supp. 2006).
Increasing the number of titles to be cleared is the state’s community property regime. Louisiana is one of nine community property jurisdictions in the United States. Except in those cases in which the family home was inherited by one of the spouses (and thus constitutes separate property), the existence of community property means that the number of potential owners of family homes has doubled because, in most cases, the home is acquired with community funds from the marriage during the existence of the community. Further increasing the number of potential owners (and estates to clear) is the effect of Louisiana’s laws on the succession to property in intestacy. For community property, if an intestate decedent leaves children and a surviving spouse, it is the children who inherit the deceased spouse’s one-half interest in the family home, subject to a legal usufruct (roughly equivalent to a life estate at common law) in favor of the surviving spouse that will terminate on death or remarriage. La. Civ. Code Ann. arts. 888, 890 (West Supp. 2006). With community property, the surviving spouse will be the intestate heir only when there are no children or more remote descendants. La. Civ. Code Ann. art. 889 (West Supp. 2006). If the home is separate property, the children inherit the home in intestacy to the exclusion of the surviving spouse. In fact, with separate property, a surviving spouse will not be an “heir” when there is no will, unless there are no children, no siblings (or descendants of deceased siblings), and no parents surviving the deceased spouse. La. Civ. Code Ann. arts. 891–894 (West Supp. 2006). The effect of Louisiana’s intestacy laws is to further fragment ownership of the home, creating more co-owners and more estates to settle to clear title.
Another factor contributing to a general sense of lack of urgency in opening estates and clearing title is that the time period for probating wills following the death of the decedent is virtually unlimited. Under the Louisiana Code of Civil Procedure, a will may be admitted to probate within five years after the judicial opening of the succession of the decedent. La. Code Civ. Proc. Ann. art. 2893 (2006). Accordingly, if no estate has been opened in court, the time period during which a will may be filed for probate is unlimited. The Louisiana legislature has recognized the widespread practice of not opening estates and provided a significant incentive to do so. In 1997 the legislature effectively repealed Louisiana’s inheritance tax. The inheritance tax now does not apply to estates of persons dying after June 30, 2004, but only if the estate has been judicially opened not later than the last day of the ninth month following the death of the decedent or if a judgment of possession is rendered before that date.
In other jurisdictions with lengthy or expensive probate proceedings, revocable living trusts that become irrevocable at death frequently are used to avoid probate and to transfer property to survivors quickly. Although Louisiana’s Trust Code would permit the use of revocable living trusts for exactly this purpose, several factors contribute to their lack of use. First, trusts are a common law vehicle that has been imported into this civilian jurisdiction by adoption of a Trust Code that attempts to balance civilian concerns with the law of trusts, but Louisiana has no widespread tradition for using trusts. Second, persons in Louisiana are more accustomed to the use of usufructs as trust substitutes. Usufructs in favor of the surviving spouse can arise in intestacy or may be granted or confirmed by will. A usufruct—which essentially divides ownership between a usufructuary (with rights to use the property and enjoy its income) and one or more “naked owners” (remaindermen)—is viewed as simple and routine and does not require a trustee or even a separate bank account.
Another factor inhibiting the use of revocable trusts for home ownership is a 2003 order of the Louisiana Tax Commission that directed parish (county) assessors to deny the homestead exemption for most revocable living trusts. In May 2006, the Louisiana legislature approved a proposed constitutional amendment (H.B. 389) that would make clear that revocable living trusts qualify for the homestead exemption. It will be presented to the voters for approval in a statewide election on September 30. The importance of this exemption cannot be overstated. In Louisiana, the homestead exemption is constitutionally protected and shelters the first $75,000 in value of the family home from most property taxes. One criticism of the system is that, depending on where a person lives and his or her relationship with the parish assessor, the “assessed” value of real property often is far less than the fair market value. Before the 2003 Louisiana Tax Commission order, different assessors in different parishes took different legal positions regarding the applicability of the exemption to living trusts. Because of this uncertainty, attorneys sometimes were reluctant to advise clients to place their homes into living trusts and risk losing the homestead exemption. The author was able to obtain private letters from certain assessors that the homestead exemption would continue to be available for a home placed in a revocable trust, but such letters were of questionable validity and certainly were not binding on future assessors.
The number of title issues popping up after Hurricane Katrina is ironic in light of Louisiana’s streamlined probate procedure.
The number of title issues popping up after Hurricane Katrina is ironic in light of Louisiana’s streamlined probate procedure. Unlike jurisdictions in which formal probate is mandated and creditors are required to file formal claims in the probate proceeding (delaying the distribution of assets and curtailing other acts of administration in the interim), Louisiana allows two separate fast-track options. When no administration is required, it is possible literally to open and close the estate the same day through a procedure called a simple placing into possession without administration. La. Code Civ. Proc. Ann. arts. 3001–3062 (2006). The rights of the deceased’s creditors are not prejudiced (they still can make claims against the heirs who accept the estate), and the liability of heirs and legatees (called the “successors”) is limited to the value of the property actually received, valued at the time the heir or legatee receives it.
In 2001, Louisiana adopted an independent administration law for cases in which administration will be needed—for example, when there are debts to settle, property to sell, or a federal estate tax return to file. Under Louisiana’s statutory scheme, once an independent succession representative has qualified in court, he or she then may generally administer the estate as a trustee would independently administer a trust, without any requirement to seek or obtain court approval. Generally, the independent executor or independent administrator is not required to go back to court until the estate is ready to be closed and distributed. The independent administration option is particularly useful for the vast majority of estates in which there is no conflict and the heirs and legatees are in agreement. It is available for both testate and intestate estates. For estates in which there is conflict among the heirs or legatees, full administration may be appropriate, and this option is retained.
Louisiana also provides a nonjudicial procedure to transfer assets for “small” ($50,000 or less) estates, but this procedure is available only if the decedent died intestate and without any real estate other than a cemetery plot. Some practitioners have discussed whether to make the procedure available as an economical means of clearing title to homes now owned by multiple parties and generations (and requiring the opening of several estates to clear title), but at this point no legislation has been presented to the legislature that would permit nonjudicial proceedings to transfer title to real property even in small estates.
Numerous factors contributed to the lack of urgency in opening estates and clearing title, which resulted in legal title to many tracts of land being held by multiple parties and generations. The widespread devastation caused by Hurricanes Katrina and Rita will prod property owners to clear title in order to negotiate insurance settlement checks, sell property, refinance loans, and take advantage of federally financed recovery programs.