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Issues That Can Cause Surety Bonds to be Flagged for Scrutiny

Issues That Can Cause Surety Bonds to be Flagged for Scrutiny

In the complex and nuanced world of probate proceedings, the issuance of surety bonds plays a pivotal role in safeguarding the assets and interests of estates, minors, etc. However, not all probate bonds sail through the approval process without scrutiny. Various factors prompt insurance companies to flag certain bond applications, necessitating additional information before granting approval.

We’ve outlined some of the reasons various probate bonds are sometimes flagged and the critical information required for their approval.

Probate Bonds – Key Concerns and Red Flags

  • Mid-term bond replacement: Generally speaking, this is frowned upon as it may be a red flag for improprieties, not to mention the potential issue associated with having a prior surety relative to claims that may arise. Why is the bond being replaced? Has a final accounting been presented and filed with the court? It is imperative that a final accounting take place in order to decide to write a replacement bond.
  • On-going business: Some estates contain a business that the Administrator/Executor will be required to continue. It is important to learn what the fiduciary’s qualifications are to run that business and if the court approved the continued operation. Generally this is an exposure a surety does not want to cover under their bond. It leaves the option for business partners/ clients to make a claim with the estate if there are disagreements with how the business functions are handled.
  • Indebtedness to estate: The fiduciary is obligated to pay the debt and writing the bond could make the surety guarantor of the payment. It is for this reason that the surety may require the fiduciary’s payment of the debt prior to issuance of the bond. This situation is also worrisome for fear that the fiduciary will misappropriate funds into their own accounts.
  • Known dispute amongst the heirs: Anyone who has a beneficial interest in the estate may take legal action to enforce the principal’s performance of duties. If there are disputes among the beneficiaries there will be more scrutiny on how the estate is carried out leaving for more risk of claims.
  • Fiduciary is not a US Citizen.
  • Fiduciaries have had prior bankruptcy within the past 5 years. Review/credit report. There may be extenuating circumstances such as high medical bills that cause the bad credit report. Differentiating between poor financial management and misfortunes is important with approving the bond. A bad credit report doesn’t rule out a bond being approved. However, it does raise more questions that need to be answered.
  • Fiduciary resides out of state of the court jurisdiction making communication between fiduciary, attorney, court & Surety difficult. If the fiduciary designates the lawyer as resident agent then this is less of a concern. However, if the fiduciary doesn’t designate the lawyer to be a resident agent then there is reason for concern. Will the fiduciary be able to make it to all the court hearings? Will the final accounting and all other forms be filed properly?

Underwriting Issues for Incompetents/Minors

Similar to an Administrator/Executor plus focus is placed on the ward him/herself. How old is the ward? Where will the ward reside? Is the residence the same for the Ward and the Fiduciary? What is the ward’s relationship to the Fiduciary?

The Fiduciary’s specific duties are detailed in the Statute. The fiduciary must adhere to statutory requirements and in following the advice of legal counsel.

  • Long Term Obligation: Usually longer-term continuous obligations based on the age of the minor child or the incompetent. The longer the obligation the more chance of risk or loss. If for a minor child in most instances the bond is to the child’s majority, which is 18 years old in all states except Alabama which is 19. The age of the Ward and the nature of the ward’s incompetency from a doctor would be the determining factor or the duration of the bond. The longer the obligation the more supervision would be required by the Fiduciary.
  • Parents as Fiduciary: While it would be presumed to be the best, a parent may take on more liberties with assets of the estate of their child than fiduciaries who are less personally and emotionally involved. For example Parents are responsible for the education and support of their child for which the court will disallow use of estate assets for this purpose unless financial hardship or other unusual circumstances. All asset expenditures have to be used to directly benefit the ward.
  • Investment responsibility: The Fiduciary is responsible to manage and invest assets on behalf of the Ward. Assistance from professional investment brokerage or attorneys is necessary.
  • Annual accounting: Required as proof of purchase items secured on behalf of the ward. The court will review all receipts & expenditures, bank accounts and securities to determine if the Fiduciary is handling their duties properly.

Additionally, for larger guardian, conservator or committee bonds, we may also require either a “restricted account or a ”joint control agreement” with the attorney as co-signor on the account, or request the attorney be a Co-Principal on the bond. For a restricted account we need the wording in the court order. Please note that even with court restrictions there may not be necessary mechanical controls in place to prevent the principal from gaining access to funds.

Specific Underwriting Considerations

  1. There is a Business Attached to the Estate (Ongoing Business)
    • It is important to learn what the fiduciary’s qualifications are to run that business and if the court approved the continued operations.
    • Surety would need to understand the loan structure and plan for the business. i.e. will it be sold to a partner or a buyer or close down the company. What is the timing?
    • It makes the estate last longer if there is no plan for the business.
    • Business partners can make claims.
  2. Qualifying Fiduciary –
    • Low Credit Rating/Declared Bankruptcy
    • Unqualified Money Manager- Background and experience? Are they financially stable? If the fiduciary is not related to the deceased/ward, why was the appointment made?
  3. Conflict \with Siblings/Family –
    • Anyone who has a beneficial interest in the estate may take legal action to enforce the fiduciary’s performance of duties.
    • Fiduciary’s indebtedness to estate – The fiduciary is obligated to pay the debt and writing the bond could make the surety guarantor of the payment. It is for this reason that the surety may require the fiduciary’s payment of the debt prior to issuance of the bond.
  4. An Out-of-State Resident as Representative – fiduciary resides out of state of the court jurisdiction, making communication between fiduciary, attorney, court & Surety difficult. Find out logistics as to how they will make it work. If they don’t Designate the attorney there is worry about not enough oversight.
  5. Prior Surety Involvement – If there is one, why is the change of surety companies? If there was a claim, prior surety involvement could be an issue.

If you have any questions about these red flags or surety bonds in general, contact us: info@maddenberstrom.com.

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