The Elective Share and the Erosion of Dispositive Control

Public policy has long discouraged one spouse from disinheriting his or her surviving spouse. The common law concepts of dower and curtesy gave a forced interest in a deceased spouse’s estate to the surviving spouse. Dower and curtesy have given way to the modern statutory model of the elective share which allows a surviving spouse to take a share of his or her predeceasing spouse’s estate, regardless of what was written in the predeceasing spouse's will.

The elective share is set by state statute and varies anywhere from one third to three quarters of the estate, depending on the jurisdiction and which family members survive.

One fundamental question in applying the elective share is “what constitutes the ‘estate’ from which the elective share is taken?” Under the laws in Maryland and the District, this “estate” is defined as the “net estate”– traditionally a probate concept. However, case law in Maryland has exposed other non-probate assets to an election on the theory that such assets were fraudulently placed outside the reach of the election.

Recently the Maryland Court of Special Appeals further clarified Maryland law regarding what assets make up the net estate. In Schoukroun v. Karsenty (177 MdApp. 615, 937 A.2d 262), decided December 11, 2007 (Cert. petition filed on January 31, 2008), the Court expanded the size of the “net estate” from which the surviving spouse’s elective share may be taken, while eroding the ability of the decedent to control and dispose of his estate. The Court’s decision challenged and, in fact, changed conventional practice by suggesting that standard probate avoidance tools such as a Transfer on Death (“TOD”), beneficiary designations and revocable trusts may also be included in one’s net estate.

Fraud on the Marriage and Jurisdictional Differences

In Schoukroun, the decedent left life insurance proceeds to his wife and some brokerage accounts and his revocable trust assets to his daughter. Circumstances similar to these--a second wife and a minor child from a previous marriage in conjunction with an estate not large enough to cause an estate tax liability—are not uncommon.

This tidy and seemingly simple design was derailed by Mr. Schoukroun’s widow, who claimed that her husband defrauded her by transferring assets to his revocable trust during his life, and using a TOD beneficiary form that did not name her. Under case law then existing, a claim of fraud on the marriage was the necessary element for the widow to show in order to try and bootstrap the revocable trust and TOD property into the probate net estate under Grove v. Frame, (285 Md. 691, 402 A.2d 892 (1979)) as further delineated under Knell v. Price, (318 Md. 501, 569 A.2d 636, (1990).

The gist of the Schoukroun opinion (at the risk of oversimplification) is that if you make anyone other than your spouse the beneficiary of an asset over which you retain “dominion and control,” you are committing fraud on the marriage as a matter of law. Your estate plan can then be unraveled to some degree by your surviving spouse (or your domestic partner in the District, if D.C. law follows Maryland law in this case). “The [decedent’s] intent is simply of no consequence…” according to the Court.

What is more remarkable, and reflects the inequities created by this evolving area of the law, is that the net estate is seemingly not grossed up by assets the surviving spouse may receive through non-probate transfers, permitting the surviving spouse to essentially “take a second bite of the apple.”

In Virginia, the augmented estate, modeled after the Uniform Probate Code (the “UPC”), includes, roughly, the net probate estate (but not excluding transfer taxes), plus gifts the decedent made to the surviving spouse, gifts the decedent made to others during the marriage, property transferred during the marriage in which the decedent retained a right to enjoyment, power to appoint and/or joint interest with right of survivorship, and gifts the surviving spouse made to others which are derived from the decedent (§64.1-16.1 of the Code of Virginia).

In Maryland, however, the absence of a statutorily-defined augmented estate leads to considerable uncertainty. The case-by-case implementation of a pseudo augmented estate has left Marylanders to navigate through the uncertainty created by an ad hoc concept of the net estate and the resulting elective share.

The inclusion of separate property also varies between the jurisdictions. For example, property which a wife inherits from her parents, and which would be considered separate property in a divorce, is considered separate property (and therefore not “reachable”) under Virginia’s augmented estate. However, it appears that as long as a Maryland wife retained “dominion and control” over the inherited assets, upon her death such inherited assets would be included in her “net estate” and would increase her husband/survivor’s elective share.

Advising After Schoukroun

One of the absolutes we can take from Schoukroun is that when representing a surviving spouse in an estate administration context in Maryland, particularly where there are other beneficiaries such as step-children, electing against the will is an important consideration on the estate administration checklist. Even if the spouse has received substantial non-probate assets, election against the will of the deceased spouse will likely benefit the surviving spouse. Naturally, in this situation the surviving spouse who is also the Personal Representative, must have separate counsel to advise her regarding her elective share claim against the estate.

While it is clear that an election against the will may be beneficial for the surviving spouse, advising the Personal Representative may be more problematic during the period of time in which the surviving spouse may elect. The Schoukroun decision effectively stalls administration of the estate due to the lack of clarity regarding what will be included in the net estate where there is a potential election.

Schoukroun erodes the ability of an individual to control where his or her assets are going when there is a surviving spouse. As a result of Schoukroun, it is as important to discuss prenuptial and marital agreements with clients as it is to discuss wills and powers of attorney. With the use of a prenuptial or marital agreement, the client can navigate the murky legal waters with the purpose of insulating his or her estate plan from an election against the will and a claim of fraud on the marriage. Additionally, carefully worded dispositive language and beneficiary designations tying a surviving spouse’s portion to the lack of an election against the will at the death of the predeceasing spouse is an important consideration.

For parents planning to leave wealth to their children, consideration should be given to long-term (e.g., “dynasty”) trusts. Placing assets in trust for the lifetime benefit of a child would likely insulate such assets from an election against the child’s will at the child’s death by the child’s surviving spouse. Including such tools in parents’ wills effectively serves as a prophylactic “parental prenuptial” keeping family assets out of Maryland’s net estate and Virginia’s augmented estate. (However, note that Virginia’s augmented estate excludes assets the decedent received as a gift or an inheritance, once those assets are comingled with marital assets they lose their separate nature and become a part of the augmented estate.)

The recent ruling may also have an effect on long-standing laws relating to contracts (such as life insurance, IRA’s and annuities) and the Uniform Transfer-On-Death Security Registration Act. For example, a financial institution that distributes assets to a named non-spouse beneficiary prior to the passing of the statutory time to file the election against the will may risk being named as a defendant in a claim of fraud on the marriage. A waiver of the right to file the elective share by the surviving spouse would reduce delays and allow financial institutions and personal representatives to proceed with both distributions and administration.

The same argument may have been made by opponents of the augmented estate, claiming that the threat of an election against the augmented estate could drag financial institutions into the same murky waters. For the nearly two decades the augmented estate has been a part of Virginia law, the legislature and the Courts have worked to shape and refine it. Although it is not a perfect system, it seems less likely to generate litigation and uncertainty since it takes a broader view of what comprises the decedent’s assets and which assets should participate in funding the elective share.

How to Fix the Problem In Maryland

As a result of the uncertainty created by Schoukroun, legislative intervention is needed. Although the Maryland State Bar Section Council on Estate and Trust Law has repeatedly brought proposed augmented estate legislation to the attention of the legislature, Maryland lawmakers have not seen fit to seriously take up the matter. The consequence is that a system of planning is threatened by piecemeal decisions that do not adequately or equitably address the many facets of this issue. Clearly, as Maryland’s Court of Special Appeals calls for in the Schoukroun opinion, legislative intervention would add certainty and give control back to individuals planning their estates.

(J. Max Barger is an attorney with Paley Rothman in Bethesda, Md. who concentrates his practice in the Estate Planning and Estate/Trust Administration areas. He can be reached at 301-951-9343 or mbarger@paleyrothman.com.)