Check Payments upon Death of a Customer

Most agency relationships end when one party dies or becomes incompetent. There is a special rule, however, that exists for banks actings as agents and their obligations to pay and honor checks written by a customer who passed away or became incompetent. This rule may be especially important for the executor of an estate to know in order to carry out their duties with respect to handling the assets of the deceased.

What Is an Agency Relationship?

An agency relationship is a relationship between two parties where one party, the agent, agrees to represent the other party, the principal. The principal-agent relationship is fiduciary, meaning it is based on trust.  

In the case of a bank, the bank acts as an agent for the principal and makes payments when instructed, in the form of writing a check. As an agent, the bank has several duties to their customers, including:

• Loyalty;
• Performance;
• Notification; and
• Obedience. 

The bank, as an agent, must act in the interest of the customer and not use the customer’s money for itself. The bank, as an agent, must also perform its duties with reasonable skill and responsibility. The bank, as an agent, must inform the customer of any matters concerning the relationship. Lastly, the bank must act as the customer instructs, and not without the customer’s permission.

What is an Estate?

An estate is the entirety of an individual’s personal property and real property that they own at the time of their death. An estate plan is used to fulfill an individual’s wishes for their property once they pass away. It can include different instruments depending on the individual’s situation. An estate plan may include:

• The individual’s will;
• A trust and/or trusts; and/or
• A power of attorney.

A will is a legal document, usually written by an attorney but created by an individual, called a testator, that provides directions regarding how their property will be distributed when they pass away. A will may include personal property and/or real property. 

A trust is a legal instrument created by an individual to hold the property of another for the benefit of an individual known as the beneficiary. The person responsible for overseeing the trust is called the trustee. Unlike a will, the property included in a trust may be transferred to a beneficiary prior to the death of the testator. This type of trust is known as an inter vivos trust. 

Trusts can be created for individuals for many reasons and have requirements set by the testator. For example, a trust can be created for the testator’s grandchildren which includes money and is held in the trust until they either reach the age or majority or graduate college.

A power of attorney is a legal document that provides an individual with the power to make decisions for another individual should they become unable to do so. There are different types of powers of attorney, including medical and financial ones. A financial power of attorney, for example, gives an individual the right to handle another’s financials, including things such as paying bills and buying and/or selling property. 

What is an Executor of an Estate?

When an individual passes away, the entirety of their remaining belongings, property, and assets are referred to as their estate. When an individual passes away, someone will be required to manage that estate and ensure the property is properly distributed. Someone will also be responsible for ensuring debts and any other financial matters are taken care of.

The individual chosen and/or appointed to perform these required tasks is called the executor of the estate. The duties of the executor can be complex and include a variety of tasks depending on the nature of the estate.

In most cases, the executor is named in the will of the deceased. If an executor is not named in the will or an individual died without a will, the state probate court will appoint an individual to act as the executor or administrator. In many cases, this is a close friend or family member of the deceased. In some cases, it is also possible for individuals to apply to become the executor of an estate.

An executor has a fiduciary duty to act in good faith and with impartiality to make sure the wishes of the deceased are carried out to whatever possible extent. They must take reasonable steps to follow whatever instructions left by the deceased with regard to their property and assets. They also have a duty to refrain from certain actions and/or conduct, including using the deceased individual’s assets for their own personal gain and/or profit.

What Is a Bank’s Obligation to Pay Checks upon Death or Incompetence of Its Customers?

In general, a bank with the authority to pay checks written by a customer will continue to have the authority to do so. Once a bank is informed of the death or incompetence of a customer, it has a reasonable amount of time to act upon the news. Typically, this means notifying the appropriate internal departments. 

Additionally, a bank may pay for checks written prior to and on the date of the customer’s death within the first 10 days following the date of the customer’s death. This rule applies even if the bank is aware of the customer’s death.

Is There a Way to Stop a Bank from Paying These Checks?

Yes, there is a way to stop the bank from paying these checks. The bank’s authority to pay checks after the death or incompetence of the customer may be revoked by any individual claiming an interest in the account. 

For example, individuals who may be able to initiate stop-payment proceedings include:

• The surviving spouse;
• A close relative; and/or
• The customer’s creditor.

In general, the bank has no obligation to determine the validity of any stop-payment orders. However, a bank can still be held liable for damages if they fail to act in good faith or to exercise ordinary care.

What is a Stop Payment Request?

A stop payment request is a request made by a customer to the bank that gives reasonable notice not to honor a check that was written by the customer. Many states allow customers to make these requests orally. However, some states may require the request to be in writing. 

If there is a writing requirement but an individual made an oral request, they are typically required to provide the written request within 14 days of the oral request in order to keep the stop payment request from expiring. In general, written requests are valid for 6 months.

May These Rules Be Changed between the Bank and Its Customers?

Yes, these rules may be changed between the bank and customers. The two parties can enter into a contract that alters the rules to their liking.

Do I Need an Attorney Experienced with Estate Administration?

Yes, if you are the executor or administrator of an estate, you may have legal and/or tax questions that can be answered by an experienced estate attorney. An attorney will be able to review the local laws regarding estate administration and advise you on what steps need to be taken. They can also review any documents and assist during any court proceedings, if necessary.