Back to the Future: Schoukroun and the Spousal Election. ©

Maryland provides, by statute, that a surviving spouse may elect to receive a percentage of the net estate of the deceased spouse instead of what is provided by Will:

  • 3-203. Right to elective share.

(a) General. Instead of property left to him by will, the surviving spouse may elect to take a one-third share of the net estate if there is also a surviving issue, or one-half share of the net estate if there is no surviving issue.

(b) Limitation. The surviving spouse who makes this election may not take more than a one-half share of the net estate.

(c) Calculation of net estate. For the purposes of this section, the net estate shall be calculated without a deduction for the tax as defined in § 7-308 of the Tax-General Article. (An. Code 1957, art. 93, § 3-203; 1974, ch. 11, § 2; 1978, ch. 111; 1992, ch. 346; 2003, ch. 234.)[1]

As is clear from the statute, net estate means that estate passing by testate succession or, in other words, the net probate estate. Herein lies the conceptual problem with the elective share statute. Increasingly, a person’s wealth consists of non-probate assets: retirement plans, revocable trusts, annuities. Thus, the relationship between one’s wealth and probate assets may be somewhat haphazard.[2]

This shift in the nature of property ownership caused many states to adopt an “augmented estate” approach by applying the election against probate and non-probate property.[3]

The mechanism in Maryland for expanding the elective share right to non-probate property traditionally relied on suits based on the so-called “fraud upon the marital rights.” Indeed, existing Est. & Trusts § 3-203 was a rejection of an augmented estate approach and an affirmation of this case-by-case method:

In recent years, with the increasing use of various estates and interests created during lifetime, life insurance, etc., a great portion of the property owned by married persons does not become part of the “estate” of the spouse first dying. This has the result – frequently unintended – of allowing the surviving spouse a disproportionately large share of the decedent’s total property, while at other times the share of the spouse is actually less than that contemplated by the statute.

The Boulder Draft of the Uniform Probate Code attempts to resolve this problem as to the share of the surviving spouse by giving the spouse of a testate or intestate decedent an elective share of a “net augmented estate.” Under this proposal, the property in which the surviving spouse would have an interest would include, in addition to the probate estate, transfers incident to death, transfers with retained control or survivorship, and other gratuitous transfers, as well as life insurance proceeds, annuities, pensions and community property. See 2-202 (UPC).

The Commission felt that the question of whether an estate should be augmented by inclusion of property, other than that being administered upon, for purposes of increasing the interest of the surviving spouse could be satisfactorily handled in accordance with the existing law relating to fraud upon marital rights. See, e.g., Sykes, “Inter Vivos Transfers in Violation of the Rights of Surviving Spouses,” 10 Md. L. Rev. 1 (1949); Sykes, §§ 183 and 184.[4]

Until 1990, the case law approach employed an examination of whether a non-probate disposition was a fraud on the marital right to election based on a facts and circumstances test:

In Maryland, the completeness of the transfer and the extent of control retained by the transferor, the motive of the transferor, participation by the transferee in the alleged fraud and the degree to which the surviving spouse is stripped of his or her interest in the estate of the decedent have all been considered material, and no one test has been adopted to the exclusion of all other tests. As pointed out by Mr. Sykes in his article above referred to, there are several other factors which have been or may be considered as pertinent, such as the relative moral claims of the surviving spouse and of the transferees, other provisions for the surviving spouse, whether or not he or she has independent means and the interval of time between the transfer and the death of the transferor.

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No general and completely satisfactory rule to determine the validity or invalidity of transfers alleged to be in fraud of marital rights has yet been evolved in this State. The test of degree has been recognized, and so have its shortcomings. It remains a very practical consideration among the facts and circumstances to be considered in connection with the completeness and genuineness of a transfer where the transferor, by naming himself as trustee and as a beneficiary, or by means of an agreement with his donees, has retained some control over the subject of the gift or trust under scrutiny. In the light of the family relationships of the parties involved in this case, in the absence of any fraud or undue influence practiced by the decedent’s sons and in view of the amount and proportion of the property formerly owned by the decedent which the widow will receive, we do not find any basis upon which the trusts created in these savings accounts should be stricken down.[5]

 

In Knell v. Price, 318 Md. 501, 569 A.2d 636 (1990), the Court of Appeals seemed to change the approach of weighing various factors in favor of a bright-line test. Knell “had a cast of three: William A. Knell – the husband, Violet E. Knell – his wife, and Jesse Annabelle Price – the ‘other woman’.[6]” The Knells lived together as husband and wife for 22 years at which point they separated due to marital difficulties. The Knells remained separated and living apart for the following 27 years although no formal separation agreement was executed nor was a divorce action ever filed. Mrs. Knell continued to live in the marital home that the couple had purchased together during the marriage; Mr. Knell began living with Ms. Price a year after the separation and continued to live with her until Mr. Knell’s death. Sometime during the period when Mr. Knell and Ms. Price were together, Mr. Knell purchased another house with the title in his name. After acquiring the property, Mr. Knell conveyed the property to a straw man who immediately re-conveyed the property to Mr. Knell as life tenant with full powers and the remainder to Ms. Price. After Mr. Knell’s death, his estranged wife elected against the will (which, presumably, left her nothing) and sought to have the spousal election apply to the property. The trial Court and the Court of Special Appeals applied the Whittington test and found that no fraud had been committed. The Court of Appeals, however, reversed the decision of the lower courts and held that the elective share extended over non-probate property when a decedent retained substantial control over that property during his or her lifetime.

Knell v. Price seemed to established a per se rule when dominion and control is retained over property by the decedent:

“But here, it is perfectly clear that Mr. Knell retained control of the property during his lifetime by establishing a life estate in himself with unfettered power in him, while living (except by will), to dispose of all interests in the property fee simple. He did not part with the absolute dominion of the property during his life. His conveyance, through a straw man, of the remainder of the property was not complete, absolute, and unconditional. The law pronounces this to be a fraud on the marital rights of Mrs. Knell. His reluctance to relinquish control over the disposition of the property during his lifetime defeated his intention.”[7]

Knell is consistent with decisions rendered by other jurisdictions in interpreting elective share statutes. This trend may reflect the practice of avoiding probate through use of jointly-held accounts, revocable trusts, or similar devices which has made obsolete the use of the probate estate as the sole measurement. Seifert v. So. Nat’l Bank, 305 S.C. 353, 409 S.E.2d 337 (1991), held that in giving a spouse an elective share right the legislature did not intend to limit this right to the probate estate when a decedent exercised power over that property:

“Surely, then, it was not the legislature’s intent to allow this substantial right (to the elective share) to be circumvented as respondents urge. Thus, we hold that, where a spouse seeks to avoid payment of the elective share by creating a trust over which he or she exercises substantial control, the trust may be declared invalid as illusory, and the trust assets may be included in the decedent’s estate for the calculation of the elective share.”

 

Id.; see also Newman v. Dore, 275 N.Y. 371, 9 N.E.2d. 966 (1937); Staples v. King, 433 A.2d 407, 409-10 (Me. 1981) (“However, where the married person purports to transfer property out of his estate but in fact retains substantial control over the property for his lifetime, such a transfer will not be effective against claims of the surviving spouse…”).

Similarly, in Sullivan v. Burkin, 390 Mass. 864, 460 N.E.2d. 571 (1984), the Massachusetts Supreme Court used non-probate assets to establish a baseline in calculating the elective share when control of the asset was retained by the deceased spouse. The court held that it was proper to extend the elective share beyond the probate estate because of the significant changes happening in the law:

“The interests of one spouse in the property of the other have been substantially increased upon the dissolution of the marriage by divorce. We believe that, when a marriage is terminated by the death of one spouse, the rights of the surviving spouse should not to be so restricted as they are by the rule in Kerwin v. Donaghy. It is neither equitable nor logical to extend to a divorced spouse greater rights in the assets of an inter vivos trust created and controlled by the other spouse than are extended to a spouse who remains married until the death of his or her spouse.”

 

Id. at 577.

In Schoukroun v. Karsenty, 177 Md. App. 615 (2007), the Court of Special Appeals extended the principle of Knell v. Price to a revocable trust and pay on death accounts. Because the inter vivos transfers are not “complete, absolute, and unconditional,” the transfers are per se funds on the spousal election. Schoukroun has been granted certiorari at 404 Md. 152 (2008).

The Court of Appeals reversed, effectively returning to a pre-Knell approach.[8]

Interestingly, however, Knell itself was left standing (although one wonders how.) Schoukroun invites one to look at various elements to determine whether the elective share extends to non-probate transfers:

To summarize, when a surviving spouse seeks to invalidate the non-probate disposition of an asset, a scrutinizing court must focus on the nature of the underlying inter vivos transfer. If it was “complete and bona fide” or done in “good faith” (both phrases meaning the same thing in this context), the court must respect the estate planning arrangements of the decedent and may not invalidate the transaction; however if it was “a mere device or contrivance,” “a mere fiction,” “a sham,” or “colorable” (each also sharing the same meaning in this context), the court shall invalidate the underlying transaction as to the surviving spouse… In order to answer this question, a court must consider whether the decedent truly intended that the inter vivos transfer divest her or him of ownership in form, but not in substance. Stated in more practical language, the question for a court to decide is whether the decedent intended that the transfer change nothing, except how the property is directed at the decedent’s death. Notwithstanding our previous references to “fraud” on marital rights, because we ultimately are not concerned with whether a decedent intended to deprive her or his surviving spouse of property, we emphasize today that it is more helpful for a court to think of a sham transfer in this context as an unlawful frustration of the surviving spouse’s statutory share.

 

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First, as a threshold matter, a surviving spouse must show that the decedent retained an interest in or otherwise continued to enjoy the transferred property. In Mushaw, we said that “where [a decedent] does not part with dominion over the property transferred, the issue of good faith is immediately raised.”

 

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Second, as a guiding principle, courts should not employ their equity powers to second-guess reasonable and legitimate estate planning arrangements. Cf. Winters, 254 Md. at 585, 255 A.2d at 27 (noting that the decedent’s decision to provide for his grandchildren and great-grandchildren was “not only understandable but legitmate”); Whitehill v. Thiess, 161 Md. 657, 661, 158 A. 347, 348 (1932) (noting that, under the circumstances, decedent’s decision to leave everything to her children despite her surviving husband was “reasonable and just”); Brown, 126 Md. at 180, 94 A. at 524 (stressing the “reasonable character” of the decedent’s trust). For this reason, we think that a surviving spouse has a high hurdle to overcome.

 

Third, our case-law offers considerable guidance with respect to what factors are relevant to determining, in this context, whether a decedent intended that an inter vivos transfer be a sham. For the guidance of the trial court (and posterity), we will chronicle and elucidate those factors that we consider most relevant, beginning with the factors that we approved expressly in Whittington.

 

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The extent of the control retained by the decedent probably is the most useful indicator when scrutinizing an inter vivos transfer.

 

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A decedent’s motives are also cogent to consider. Whittington, 205 Md. at 12, 106 A.2d at 77. In an early case, Collins v. Collins, we invalidated a deceased husband’s inter vivos transfer of all of his real and personal property, on the eve of his second marriage, to his children from a prior marriage. 98 Md. 473, 474, 57 A. 597, 597 (1904). There, the decedent’s motives revealed themselves in the fact that he led his surviving wife to believe that he continued to own the property outright and that she would receive a share of it when he died.

 

*          *          *

 

In other cases, however, we have relied on evidence of the decedent’s motives as an indicator that the assailed inter vivos transfer actually was intended to be complete and bona fide. As we already explained, in Gianakos, we considered the trial court’s finding that the decedent wanted to retain control over his restaurant property so that he could keep his son, to whom he transferred the remainder, “active in the business.”

 

*          *          *

 

Part and parcel to assessing the motives of the decedent is consideration of the transferee’s motives as well. See Whittington, 205 Md. at 12, 106 A.2d at 77. This requires that a court consider what were the true terms of the transfer. We could envision a scenario in which the decedent gave her or his property to someone, subject to a mutual understanding that the decedent remain the real owner. Unfortunately, there is a dearth of precedent on this point. Hays, however, provides some insight.

 

*          *          *

 

Whittington also provides some insight about how a transferee’s actions may bear on the validity of a decedent’s inter vivos transfer. We noted there the absence of “fraud on the part of the donees shown as to their father [the decedent] or their step-mother.” Whittington, 205 Md. at 13, 106 A.2d at 78. In other words, a court should consider not only whether there was collusion between the decedent and the beneficiary, but also whether the beneficiary intended to defraud the decedent or the surviving spouse.

 

*          *          *

 

The degree to which an inter vivos transfer deprives a surviving spouse of property that she or he would otherwise take as part of the decedent’s estate is also extremely significant.

 

*          *          *

 

Looking at the degree to which an assailed inter vivos transfer depleted the value of property available to a surviving spouse necessarily requires a court to consider also non-probate arrangements that the decedent made for the surviving spouse.

 

*          *          *

 

Another factor that commands weight is whether the decedent actually exercised the retained control or otherwise enjoyed the property at issue, and, if so, to what extent. Simply put, use of the property suggests that the decedent did not intend really to part with ownership; conversely, failure to exercise retained powers may suggest that the decedent intended to alienate the property.

 

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A final factor that courts should pay particular attention to is the familial relationship between the decedent and the person or persons who benefit by the challenged inter vivos transfer.

 

It would appear that we have returned to Whittington with a vengeance!

One question not addressed is whether the transfer is actually reversed (thus bringing the property into the probate estate for the benefit of creditors) or whether it is simply a reversal for the benefit of the spouse.

Schoukroun presents planning opportunities. If a client wishes to by-pass the spouse (and does not want, or cannot get, a marital agreement) the use of a revocable trust becomes important. It is important, of course, to establish a permissible intent as in Schoukroun.

[1]           Md. Code Ann. (2001 Repl. Vol., 2008 Cum. Supp.) Estates and Trusts Article § 3-203 (hereafter Est. & Trusts § ___.)

[2]           John H. Langbein, “The Non-Probate Revolution and the Future of the Law of Succession”, 97 Harv. L. Rev. 1108 (1984).

[3]           Angela M. Vallario, “Spousal Election: Suggested Equitable Reform for the Division of Property at Death”, 52 Cath. U. L. Rev. 519 (2003).

[4]           Governor’s Commission to Review and Revise the Testamentary Law of Maryland, Article 93 Decedent’s Estate (1968) (hereafter “Henderson Commission Report”) Cmt. 3-102.

[5]           Whittington v. Whittington, 205 Md. 1, Cmt. 12-13 (1954).

[6]           318 Md. at 502.

[7]           Id. at 512.

[8]           Karsenty v. Schoukroun, 406 Md. 469, 959 A.2d 11476 (2008).