184.108.40.206 The Schoukroun decision. The Court of Special Appeals in Schoukroun v. Karsenty, 177 Md. App. 615 (2007), held that assets in a revocable trust (or held in a POD account) are available for purposes of the spousal election: “Mr. Schoukroun’s decision to retain the power to revoke the trust requires that the assets of the trust be included in his estate for purposes of calculating [the] statutory share.” Schoukroun, at 633-4. Schoukroun also held that the financial accounts were also available for the spousal election: “During his life, Mr. Schoukroun retained the power to alter the beneficiary of the financial accounts … [and] the assets in those accounts must also be included in his estate for purposes of calculating [the] statutory share.” Schoukroun, at 634. However, the Court of Appeals reversed Schoukroun in 2008. The Court held that the decedent’s (Mr. Schoukroun) revocable trust and transfer-on-death accounts were not part of his net estate, and were thus not subject to his wife’s right to an elective share. The Court clarified that the holding in Knell was not a bright-line rule, and that a grantor’s retention of control over an asset is not the sole factor to consider when invalidating aninter vivos transfer as to the surviving spouse. Other factors to consider include the extent of control retained by the decedent, the decedent’s motives, the transferee’s motives, the degree to which the inter vivos transfer deprives the surviving spouse of property that she would otherwise take as part of the decedent’s estate, non-probate arrangements that the decedent made for the surviving spouse, inter vivos gifts that the decedent gave to the surviving spouse, whether the decedent actually exercised the retained control or otherwise enjoyed the property at issue, and, if so, to what extent, and the familial relationship between the decedent and the person or persons who benefit by the inter vivos transfer. Schoukroun v. Karsenty, 406 Md. 469, 959 A.2d 1147 (2008).
220.127.116.11 The background leading up to Schoukroun is useful to understand the ruling.
18.104.22.168.1 Under the Maryland statute, the spouse election section (Sec. 3-203 of Estates and Trust Article) purportedly acts against the probate estate. Indeed, the General Assembly considered and rejected the approach taken by the Uniform Probate Code (which applies the election against something akin to the federal estate tax definition of the gross estate – see Delaware law): “This Section (Estates Art. Sec. 3-203) follows generally 2-201 (UPA), except that it rejects the concept of the “augmented net estate” under which certain property which does not form a part of the estate passing under the will of the decedent is taken into consideration in determining the elective share of the surviving spouse.” Second Report of the Governor’s Commission to Review and Revise the Testamentary Law of Maryland (the “Henderson Commission”), Official Comment to Sec. 3-203 (1968).
22.214.171.124.2 Nevertheless, if an inter vivos transfer is made to improperly circumvent the marital rights of the surviving spouse, such transfer may be set aside as a fraud on the surviving spouse’s rights. For many years, the test was as stated in Whittington v. Whittington, 205 Md. 1, 106 A.2d 72 (1954); “completeness” of the transfer (also see Brown v. Fidelity Trust, 126 Md. 175 (1915)); motive for the transfer; participation by the transferee in the alleged fraud on the surviving spouse; amount of time between the transfer and death; degree to which the surviving spouse is left without an interest in the decedent’s property or other means of support (also see Kernan v. Carter, 132 Md. 577 (1918)).
126.96.36.199.3 The Court of Appeals revisited the issue. Knell v. Price, 318 Md. 501 (1990), involved a decedent who retained a life estate with power in his residence while “transferring” the remainder to his girlfriend. The decedent never gave up possession of the property, he continued to live in the residence, he retained the unrestricted power to mortgage or sell the residence, and generally he retained an “unfettered power to dispose of all interests in the property.” Under the facts in Knell, the Court of Appeals found that this exercise of “absolute dominion” made the purported “transfer” of the remainder ineffective. Knell does not overtly claim that a new standard is established.
188.8.131.52 Schoukroun is instructive when competing claims are involved in an estate. The elective share was being asserted by the decedent’s second wife. She also received directly insurance proceeds. The divorce decree terminating his first marriage provided that Mr. Schoukroun carry an insurance policy of at least $150,000 payable to his child of his first marriage, which he failed to do. The Court of Appeals decision held that the child’s claim against the estate preceded the election (“net” estate). Because the child was the recipient of the revocable trust at the decedent’s death, the entire amount of the assets in the revocable trust plus in the POD accounts were added to the estate (less the child’s claim) to calculate the 1/3 spousal amount. The trustee was to pay this amount into the estate to be available to the surviving spouse. A claim for constructive trust against the second wife’s insurance proceeds was disallowed. Thus, the decision is not the same as an augmented estate legislative approach in that it does not look at all of the asset otherwise going to the surviving spouse.
184.108.40.206 In many other jurisdictions, courts have made available property held by revocable trusts for the elective share.
220.127.116.11.1 Usually, courts find revocable trust “illusory” because of the substantial control retained by the settlor. Seifert v. S. Nat. Bank, 409 S.E. 2d 337 (S.C. 1991); Johnson v. Farmers and Merchants Bank, 379 S.E. 2d 752 (W.Va. 1989); Taliaferro v. Taliaferro, 843 P.2d 240 (Kan. 1992); McCarthy v. State Bank of Fredonia, 796 P.2d 940 (Kan. 1990). (An IRA treated as a revocable trust for elective share purposes.)
18.104.22.168.2 The issue of the availability of assets held at death in a non-probate trust, instead of by the estate, goes to the heart of the non-probate “revolution”: “Transferors use will substitutes to avoid probate, not to avoid the subsidiary law of wills. The subsidiary rules are the product of centuries of legal experience in attempting to discern transferors’ wishes and suppress litigation. Those rules should be treated as presumptively correct for will substitutes as well as for wills. Once we understand the will substitutes are nothing more than ‘non-probate wills’ and that no harm results from admitting the truth, we have no basis for interpreting will substitutes differently from wills.” Langbein, “The Nonprobate Revolution and the Future of the Law of Succession,” 97 Har. L. Rev. 1108, 1136-1137 (1984).
22.214.171.124 An election by a surviving spouse against probate property, on the other hand may not cause automatic forfeiture of rights as a beneficiary under a revocable trust. Carnahan v. Stallman, 504 N.E. 2d 1218 (Ohio 1986)) (Subsequently, Ohio reversed the result by statute.) From a policy standpoint, that is the problem of a Knell type (as opposed to legislative) solution. In Schoukroun, for example, the second wife exercised her election and kept the insurance proceeds.
126.96.36.199.1 “The significant drafting point is that the decedent-grantor can avoid the potential issue (of unfairly increasing the surviving spouse’s amount received) by stating in the revocable trust that if the surviving spouse takes the elective share he or she forfeits all trust interests.” Practical Drafting, July 1993 at 3251.
188.8.131.52 The Estates and Trusts Section Council of the Maryland State Bar Association authorized a study of the elective share statute in light of Knell and suggested changes from time to time. See Angela Vallario, “Spousal Election: Suggested Equitable Reform for the Division of Property at Death,” 52 Cath. U.L. Rev. 519 (2003).