Friday, April 28, 2017
The title of today’s post may seem odd. But you might be surprised to know that the issue does come up from time to time. I vividly remember an estate planning conference I had with a married couple when I was in full-time practice. When I was one on one with the husband, he commented to me that he wanted to cut his wife out of everything. He was serious, and it presented some interesting representation issues. After the initial shock of the question, I was able to make a few points that seemingly changed his mind.
But, can a spouse be disinherited? While generally the answer is “no,” there are some things that can be done (at least in some states) that can seriously diminish what a spouse receives upon death. It’s important to have a basic understanding of how this can happen, and a recent court opinion illustrates the point.
First things first – spousal rights largely depend on state law. With that in mind, when a person executes a will, they have the ability to say who gets their property upon their death – with a major exception. That exception is designed to protect a surviving spouse. The surviving spouse can’t be intentionally disinherited, unless they have signed a prenuptial or postnuptial agreement (in states where those are recognized).
In some states, the extent to which the surviving spouse is protected depends on the length of the marriage, or whether the couple had children born of the marriage, or whether the deceased spouse had “probatable” assets. Further complicating matters, some states are “community property” states. In these states, the surviving spouse automatically gets one-half of the couple’s “community property” (basically, property acquired during marriage while domiciled in a community property state). Other states follow the Uniform Probate Code (UPC). In these states, the surviving spouse can automatically take a portion of the deceased spouse’s probate estate, non-probate property and property that is titled in the name of either spouse. Yet other states follow only part of the UPC and allow the surviving spouse to make an election to take part of the deceased spouse’s probate estate and a portion of the non-probate assets. Still other states don’t follow the UPC and limit a disinherited spouse to take only a part of the deceased spouse’s probate estate. So, if there aren’t any probate assets (basically, assets that don’t have a beneficiary designation or survivorship feature) the surviving spouse is at risk of receiving little to nothing. In these states, for example, the use of a revocable living trust (coupled with a “pourover” will) can be used to hold what would otherwise be probate assets to avoid probate and a claim of the surviving spouse.
Of course, there are nuances in each state’s law, but the above comments paint a picture of how a surviving spouse can be left a limited to non-existent inheritance.
A recent court opinion from Iowa highlights how a spouse can be, at least partially, disinherited. In In re Estate of Gantner III, No. 16-1028, 2017 Iowa Sup. LEXIS 40 (Iowa Sup. Ct. Apr. 21, 2017), the decedent died, leaving a surviving spouse and two daughters. The marriage was a second marriage for both spouses and they had only been married a few months when the husband, an investment advisor, died accidentally. His will provided for the distribution of his personal property and established a trust for the benefit of his daughters. In addition, 90 percent of the residue of the estate was to be distributed to the daughters. In accordance with her rights under state law, the surviving spouse filed for an elective share of the estate and requested a spousal support allowance of $4,000 per month. The daughters resisted the surviving spouse’s application for spousal support, claiming that the decedent’s retirement accounts (two IRAs and a SEP IRA) were not subject to the spousal allowance because they were not part of the decedent’s probate estate. The IRAs were traditional, pre-tax, self-employed IRA plans and executed spousal consent forms were provided to the court. However, the issue that the surviving spouse had consented to the beneficiary designations was never brought up as a defense to the statutory claim for a spousal allowance. The focus was solely on a provision in state law.
The probate court determined that the decedent’s probate estate would not have had enough assets to pay a spousal allowance without the retirement accounts included. The surviving spouse claimed that the retirement accounts should have been included in the probate estate for purposes of spousal support based on Iowa Code §633D8.1 that provides that “a transfer at death of a security registered in beneficiary form is not effective against the estate of the deceased sole owner…to the extent…needed to pay…statutory allowances to the surviving spouse.” The surviving spouse argued that because the funds in the accounts were likely mutual funds or index funds, that the accounts should be “securities” within the statutory meaning. The daughters disagreed on the basis that the Uniform Iowa Securities Act excludes any interest in a pension or welfare plan subject to ERISA. The probate court ruled for the daughters on the basis that the retirement accounts were not available for spousal support because they were not probate assets and became the personal property of the daughters at the time of their father’s death. The probate court also noted that the Iowa legislature would have to take action to make beneficiary accounts available to satisfy a spousal allowance.
On appeal, the Iowa Supreme Court affirmed. The court noted that the accounts were traditional IRAs governed by I.R.C. §408 that pass outside of the probate estate under Iowa law and were not covered by Iowa Code §633D as a transfer-on-death security. The retirement accounts were not “security” accounts merely because they contained securities. Rather, it is a custodial account that does not actually transfer on death to anyone other than a spouse.
The point that the IRAs were traditional IRAs is a key one. Had they been “qualified plans” (known as a “401k” plan), I.R.C. §417(a)(2) in conjunction with I.R.C. §401 requires the spouse’s consent to not be named as a beneficiary. While the spouse had executed the necessary consent forms to the decedent’s traditional IRAs (which the court didn’t focus on, instead focusing on state law), had they been qualified plans, then the federal rules would have controlled and provided greater protection for the surviving spouse.
Some state legislatures have taken action in recent years to protect spousal inheritance rights upon death. In some state, for instance, no longer is it possible to use a revocable trust to effectively disinherit a spouse. Other states, have modified the rules on transfer on death accounts or payable on death accounts. In any event, knowing and understanding spousal inheritance rights is something worth knowing about. There are many situations that can arise which could lead to the rules becoming very important to a surviving spouse or, as in the case of the husband that asked the question those many years ago, a spouse wanting to leave the surviving spouse little to nothing.