The General Assembly has unanimously passed a Bill, signed by Governor Hogan, that makes sweeping changes to the elective share provisions of Maryland law. The new law becomes effective October 1, 2020.
The Current Statute
Currently, the elective share statute, by its terms, applies only to probate estates. It entitles a surviving spouse to elect against the provisions of a will and receive outright one-third or one-half of the net probate estate depending on whether the decedent is survived by issue (children, grandchildren, great-grandchildren, etc.). The elective share statute is designed to protect a surviving spouse against disinheritance which, historically, had its roots in the common law right of dower and curtesy. The Henderson Commission of 1969 abolished these old common law rights and replaced those rights with our current elective share statute.
If taken literally, the current elective share statute does not do a very good job of protecting the surviving spouse from disinheritance. It only applies to the probate estate so one can easily transfer property into a revocable trust or use other non-probate structures to sidestep probate altogether, thereby sidestepping the elective share provisions. However, courts have guarded against such maneuvers by extending the reach of the elective share to non-probate property. These cases were characterized as a fraud against the surviving spouse’s marital rights.
In 2008, the Court of Appeals reframed the approach to set aside sham transfers and/or other transfers when the decedent had retained control over the asset in Karsenty v. Schoukroun, 406 Md. 469 (2008) (Judge Harrell). The Schoukroun decision created an equitable test striking a balance between testamentary freedom and protecting a surviving spouse from disinheritance. However, applying equitable balancing, of course, is fraught with ambiguity. The estate and trust planning community wanted more certainty and a system that minimized the disruption that an election would have on legitimate estate planning techniques.
The new Act largely moves away from equitable balancing to a formula meant to give more certainty to the extent to which a spouse may elect against a larger base extending to non-probate assets. The Act functions in a way that keeps an estate plan intact as long the decedent adequately provides for the surviving spouse.
The new Act is complex and it will take a skilled Maryland estate planning attorney to help most individuals understand its intricacies. The Act permits the use of traditional planning methods to accomplish the desired result of keeping an estate plan intact. The complexity flows from a desire to construct a fair and predictable system that strikes a balance between testamentary freedom and guarding against improper disinheritance.
For example, a spouse can create a trust with all income going to the surviving spouse (mimicking a QTIP trust) and 75% of the value of that trust will count against the electable share right. Other trusts, such as those that are intended for the exclusive lifetime use of the surviving spouse and are governed by a discretionary distribution standard that meets or exceeds the distribution standard for special needs trusts, will be counted to the extent of 67% of the value as being received by the surviving spouse. By using these guideposts, a spouse may safely provide for his/her surviving spouse while retaining property for his/her children from a prior marriage. As long as the deemed value of the assets in trust for the benefit of a surviving spouse meet or exceed his/her elective share right, the plan will be respected.
Beware of Possible Inequities
A danger of any formulaic system is that there will be situations where the formula will create an inequity. Take, for example, a deathbed marriage engineered by a caretaker intent on benefitting from control over a wealthy, vulnerable adult patient. The standing of anyone other than a participant in the marriage to challenging the marriage is problematic.
There are few cases where a marriage has been held void post-mortem by a showing that the deceased spouse lacked contract capacity to enter into a marriage. Otherwise, few people have standing, let alone the ability to overturn such a marriage. See, for example, Hoffman v. Kohns, 385 So.2d 1064 (Fla.2d DCA 1980) where a will was set aside due to undue influence executed the day after the decedent’s marriage to his housekeeper but the wedding was upheld. The new statute provides that the amount of non-probate assets to be brought into the elective share base may be adjusted by a showing, with clear and convincing evidence, that other factors would tip the scale against including those non-probate assets. If in Hoffman most of the decedent’s assets were non-probate, the new statute would permit a court to preclude the housekeeper from reaching those assets.
The Strength of the New Statute
The strength of the new statute is that it gives planners the ability to have more certainty when balancing the interests of the client’s spouse with other obligations, such as those to children of a prior marriage. A Maryland estate planning attorney, along with the estate planning community in general, however, will need to plunge into the new statute and use the tools that it makes available if there is any concern that an elective share may disrupt a plan.
As with current law, the new provisions only apply in the absence of a marital agreement waiving the spousal right to the election. The new, expanded statute is effective prospectively for Maryland estates of decedents dying on or after October 1, 2020.
Situations Where Concerns Over the Elective Share Will Control the Structure of an Estate Plan
Estate planning lawyers commonly see at least two situations where a concern over the elective share will drive the structure of the estate plan (assuming no prenuptial or postnuptial agreement exists or is practicable).
The first situation is where client is estranged from his or her spouse and a divorce proceeding is either contemplated or pending. The client fears that he or she may die before a property settlement agreement is finalized. Before the change to the Maryland elective share statute, the client could fund a revocable trust that would (1) convert probate to nonprobate assets and (2) set out the equitable basis for not providing for the spouse. The equitable basis would basically recite the state of the marriage and the grounds for a divorce. The Schoukroun case offers guidelines for this structure.
Although the new statute would sweep nonprobate assets into the base for the election, new Estates & Trusts §3–413 permits the court to modify the formalistic application of the statute based on numerous factors, including: “the nature of the relationship between the decedent and the surviving spouse.” This permits the court to adjust the extent of the nonprobate property brought over to a surviving spouse. This judicial override could apply if the couple were separated prior to the death or if the marriage was of a very short duration – perhaps a marriage of a caregiver to an elderly, vulnerable adult.
The other common situation is when one spouse may wish to provide for his or her spouse but wants to have the property revert to his or her heirs. The new statute permits a marital trust that will count in valuing the amount going to the surviving spouse. Thus, the new statute offers a bright-line rule that, if followed, will preclude a surviving spouse from disrupting the estate plan by demanding assets outright. While this may not be a perfect solution, especially if there is a great age difference between the spouses, it works well when the couple is approximately the same age (or at least of the same generation).
A Skilled Maryland Estate Planning Attorney Can Guide You Through the Complex Nature of the Statute
The new elective share statute is complex. Nevertheless, any Maryland estate planning attorney or fiduciary litigation lawyer working in this field will need to master the new rules. Contact our office today if you have questions or concerns.