An important, life-changing election will occur in the state of Maryland during autumn 2020. Here’s a hint: it’s not the presidential race. It’s Maryland’s new elective share law. No longer limited to a fractional share of the net probate estate, a surviving spouse who decides to reject what was given to him under the decedent’s existing estate plan will then receive his elective share out of the deceased spouse’s augmented estate. The Department of Legislative Services notes that the election from an augmented estate addresses the potential disinheritance of a surviving spouse while taking into account non-probate assets passing to the spouse, so as not to allow a spouse to receive more than a “fair share.” See Department of Legislative Services, Maryland General Assembly, 2019 Session, Fiscal and Policy Note, H.B. 99, page 10. The new law applies to the estate of a decedent who dies on or after October 1, 2020. H.B. 99, Section 2, Ch. 35, Acts 2019.
To give context to the changes, this article reviews Maryland’s current elective share law and the competing considerations of individual property rights and support for marital relationships when an elective share is exercised. This article also describes the new statute and the consequences of diverting assets otherwise passing to heirs, especially in the case of blended families. The law’s challenges are addressed, with a particular emphasis on using insurance in the estate plan to mitigate undesirable results when an election is made. Although the article focuses on Maryland’s new law, issues presented by a spousal election and strategies to address potential consequences apply in other jurisdictions as well, especially those that have the augmented estate concept. Virginia and West Virginia are among the 13 states that, like Maryland, calculate their elective shares based on an augmented estate model substantially similar to a version of the Uniform Probate Code. Eight other states, including Delaware, Florida, New York, and Pennsylvania, have adopted a modified form of the augmented estate. See H.B. 99 Fiscal and Policy Note at page 10.
Overview of Existing Law
Maryland’s existing elective share law is derived from a statute originally enacted in 1798, and states as follows: “Instead of property left to the surviving spouse by will, the surviving spouse may elect to take: (1) A one-third share of the net estate if there is also a surviving issue; or (2) A one-half share of the net estate if there is no surviving issue.” Md. Code, Est. & Trusts § 3-203(b). The term “net estate” is defined as property passing by the decedent’s Last Will and Testament, with no deduction for state or federal estate or inheritance taxes, and reduced by funeral and administration expenses, family allowances, and enforceable claims and debts. Md. Code, Est. & Trusts § 3-203(a).
Process for Making Election: The election is made by filing within the later of (i) nine months after the date of the decedent’s death or (ii) six months after the first appointment of a personal representative under a will. Md. Code, Est. & Trusts § 3-206. It must be in writing, signed by the surviving spouse or made by court order if the surviving spouse is under age 18 or is disabled, and filed in the court in which the personal representative was appointed. Md. Code, Est. & Trusts § 3-207.
Assets Not Affected by Election: Under Maryland’s existing elective share law, any rights the spouse has in non-probate assets such as jointly held bank accounts, life insurance proceeds, or assets passing by beneficiary designation are unaffected by the spouse’s exercise of her elective share rights. Non-probate assets passing to some person other than the spouse and other inter vivos transfers, such as to a decedent’s revocable trust, an irrevocable trust, or outright gifts, are likewise not affected by the election, absent proof of fraud. See Allan J. Gibber, Gibber on Estate Administration § 10.31 (6th ed. 2018); Karsenty v. Schoukroun, 406 Md. 409, 959 A.2d 1147 (2008).
Effect of Election: All legatees must participate in paying the elective share pro rata. Md. Code, Est. & Trusts § 3-208(b)(1). Rather than contributing an interest in specific property, a legatee may pay the surviving spouse in cash or other assets acceptable to the spouse. Md. Code, Est. & Trusts § 3-208(b)(2). The will may require a set-aside or compensation from another legatee or another part of the estate. Also, an interest renounced by the surviving spouse and not included in the net estate may be subject to a set-aside for the benefit of specified family members “who are natural objects of the bounty of the decedent in order to avoid a substantial distortion of the intended dispositions of the testator.” Md. Code, Est. & Trusts § 3-208(b)(3).
Development of Law and Consequences: The development of elective share law reflects a tension between individual property rights and marital relationships. There is a long-recognized right of a person to “alienate his personal property and his equitable interest in land, either by sale or gift, without the concurrence or assent of his wife, and if the transfer be absolute and unconditional, and without any reservation of interest in, or control over, the property to himself, and if the possession be parted with or delivered in pursuance of the conveyance.” See Rabbitt v. Gaither, 67 Md. 94, 104-05, 8 A. 744 (1887). Contrast this right with the consequences of a disposition intended to deprive the surviving spouse of property previously available to both parties, which countermands the lifetime duty of each spouse to support the other.
A decedent’s disinheritance of his spouse may be damaging to the surviving spouse’s financial well-being. A spouse’s exercise of the right to an elective share, however, may have significant consequences as well. It can disrupt legitimate expectancies of non-spousal beneficiaries, such as bequests to children and grandchildren of the decedent who are not descendants of the surviving spouse. Even when a surviving spouse’s exercise of the election is a reasonable decision based upon all facts and circumstances, taking an elective share undoes the estate plan and upends the decedent’s intent.
New Elective Share Statute
On October 1, 2020, Maryland’s elective share law will fundamentally change. The option to take against the decedent’s net estate, which generally excludes non-probate assets and lifetime gifts to third parties, will no longer be the rule. Instead, a surviving spouse who exercises his right of election will receive a share of the deceased spouse’s estate from a mix of assets that includes probate assets, property outside of the probate estate, and certain other lifetime and testamentary transfers.
Purpose of New Law: Md. Code, Est. & Trusts § 3-402, states that the purpose of the new law is “(1) [t]o ensure that a surviving spouse is reasonably provided for during the surviving spouse’s remaining lifetime; and (2) [s]ubject to item (1) . . . , to provide a testator flexibility in ordering the testator’s affairs.” Maryland’s change in the elective share statute does more than that. It reflects the evolution in testamentary dispositions of property, that is, the increasingly common use of the revocable trust as a will substitute. The new law’s determination of the property that should make up the elective share may also be based upon the characterization of the marriage relationship itself, that is, as an economic partnership and as including all assets controlled by either spouse during the marriage. See Lawrence W. Waggoner, Uniform Probate Code’s Elective Share: Time for a Reassessment, U. Mich. J. L. Reform 37, no. 1 (2003) at page 3; Patricia J. Roberts, The 1990 Uniform Probate Code’s Elective-Share Provisions –West Virginia’s Enactment Paves the Way, 95 W. Va. L. Rev. 57, 109 (1992).
Share of Augmented Estate: Similar to the former law, the surviving spouse of a decedent with issue is entitled to take a one-third share of the decedent’s estate and the surviving spouse of a decedent with no issue may elect to take a one-half share. A key difference is that “the estate subject to election” now starts with the concept of the “augmented estate.” The augmented estate consists of the following: (i) the decedent’s probate estate; (ii) the decedent’s revocable trusts; (iii) all property over which the decedent, immediately before death, held a qualifying power of disposition; (iv) all qualifying joint interests of the decedent; (v) all qualifying lifetime transfers made by the decedent; and (vi) certain life insurance policies. A later section of this article discusses how life insurance is included in the calculation.
Next, the value of the decedent’s augmented estate is reduced by certain categories of assets: (i) expenses and claims; (ii) trust assets; (iii) joint interests, lifetime transfers, and property over which a decedent had a qualifying power of disposition to which the surviving spouse consented during lifetime; (iv) irrevocable transfers; (v) life estates; and (vi) spousal benefits. Md. Code, Est. & Trusts §§ 3-403, 3-404. The chart on page 41 compares the primary differences between the decedent’s property subject to the elective share based on current law and under the new law.
Process for Making Election: As under existing law, the new law will require a signed writing filed in the appropriate court and follow the same time frames for making an election, withdrawing an election, and granting an extension. Additional steps by and notices to the spouse, the personal representative of the decedent’s estate, the trustee of the decedent’s revocable trust, and the estate tax return preparer will now be required to effectuate the election. Md. Code, Est. & Trusts §§ 3-407, 3-408, 3-409.
The new law establishes the following ordering rule for the satisfaction of the elective share, to determine the priority of payment from assets included in the estate and which are not part of the spousal benefits: (i) from the probate estate; (ii) from the revocable trust; (iii) if the decedent had more than one revocable trust, by apportionment among the trusts in proportion to the value of each revocable trust; and (iv) by the recipients of any other portions of the estate, prorated among the recipients in proportion to the value of the assets received by each recipient. The decedent’s will or trust instrument may override the ordering rule, or the parties who pay the elective share may enter into an agreement subject to court approval for payment of the elective share. Md. Code, Est. & Trusts § 3-410(a), (b).
Issues with Elective Share Law
Blended Families and Unclean Hands: The intent of an elective share statute may be to safeguard the surviving spouse from disinheritance by a conniving mate. A recent Maryland case, In re Watkins, 241 Md. App. 56, 209 A.3d 135 (Md. Ct. Spec. App. 2019), demonstrates, however, that the deceased spouse’s children from a prior marriage are sometimes the parties in need of protection. Robert’s third wife, Emeline, met him shortly before his second wife, Jasmine, died of cancer. After Robert’s death, Emeline filed for her elective share of Robert’s net estate, which was one-third because Robert had an adult daughter. The Orphans’ Court of Prince George’s County found that Emeline dominated the decedent, physically attacked him when he initially declined to marry her, and isolated him from his family and friends. The Court of Special Appeals affirmed the judgment of the Orphans’ Court, applying the common law doctrine of unclean hands to find that Emeline’s “inequitable conduct in achieving her status as a surviving spouse” barred her claim for a spousal share of the decedent’s estate. In re Watkins, 241 Md. App. at 75, 209 A.3d at 146–47.
Courts in other jurisdictions have made similar rulings. A recent article describes a New York court’s rejection of the petition of a 58-year-old substitute caregiver who had secretly married a 72-year-old man suffering from dementia while his daughter and regular caregiver were away on vacation. The new wife moved her husband’s assets into her name and changed his pension’s beneficiary designation. She exercised her elective share rights to contest the decedent’s will, which left his entire estate to be divided equally among his adult children. See Yolanda Kanes, Maryann Stallone, and Amanda Leone, Boomers, Beware: Predatory Marriage and New York’s Elective Share Law, N.Y. L. J., January 21, 2020. The New Jersey Superior Court in Chrisomalis v. Chrisomalis, 260 N.J. Super. 50, 57, 615 A.2d 266, 270 (1992), affirmed the probate court’s rejection of a widow’s attempt to exercise her elective share and set aside a valid antenuptial agreement. Andrew Chrisomalis had a family business and two sons from a previous marriage. Though Norma, the widow, knew Andrew wished to protect his estate and his sons’ interest in the business from subsequent invasion and understood that the agreement waived her elective share interest, Norma “signed the antenuptial agreement notwithstanding the fact that she did not intend to be bound by it, and openly admitted to this fraud.”
A widow’s attempt to take undue advantage of her status is not unique to Maryland’s new law. The calculation of the elective share based upon a larger pool of the decedent’s assets could, however, exacerbate the result and provide more incentives for unsavory behavior.
Unjust Distributions: An undesirable effect on other beneficial interests could occur even though a surviving spouse is not attempting a fraud on the decedent’s estate.
Scenario: Arthur’s will and revocable trust left Holly 20 percent of his gross estate for federal estate tax purposes, with 80 percent passing to Arthur’s son Zach from a prior marriage. Holly’s election would entitle her to receive one-third of the augmented estate, reducing the assets passing to Zach to a two-thirds share instead. Suppose Holly sometimes supports her brother Jared, who suffers from opioid addiction, and Arthur had considered that fact in designing his estate plan. Holly’s receipt of the larger elective share could then indirectly result in an unjust distribution to Holly’s family members in contravention of Arthur’s estate plan.
Solution: As Arthur’s heir, Zach has the right to request judicial review and modification of Holly’s election based on the circumstances involving Holly’s support of her brother. Md. Code, Est. & Trusts § 3-413.
Unimplemented Planning: An election following a spouse’s untimely death, however, may achieve a more desirable and equitable result. This may be particularly true now that assets outside of the probate estate are used to satisfy the elective share.
Scenario: Christine’s existing revocable trust executed 12 years ago left most assets to Greenpeace with only 10 percent of her estate as a marital gift under the trust to her husband Daniel. Christine also funded an inter vivos trust for their daughter Erica, which represented 10 percent of her estate at that time. As Erica reached age 14, Christine’s thinking evolved about her existing plan. She and Daniel began to discuss an amendment to her revocable trust to leave a 50 percent share of her estate to Daniel and their daughter, with the balance to charity. Sadly, Christine was killed in a freak accident before the unimplemented planning could proceed.
Solution: By taking his elective share, the assets passing to Daniel will be increased to a one-third share of Christine’s estate. He will also be entitled to satisfy his share from the assets in Christine’s revocable trust. The transfer of assets to the inter vivos trust created for Erica’s benefit is a qualifying lifetime transfer that occurred before the later of two years before Christine’s death and the date of her marriage to Daniel, which was 16 years ago. See Md. Code, Est. & Trusts § 3-404(b)(8). This reduces Christine’s augmented estate by the amount of that trust. Therefore, the total amount passing to Daniel and their daughter would be closer to the 50 percent share that Christine was contemplating at the time of her death.
Planning Opportunities and Recommendations
The new law provides an incentive for married individuals to review their existing estate plans. Such a review is important: (i) to ensure that each spouse has made adequate provision for the other, given the context of the marriage and the couple’s financial situation; (ii) to address factors that may motivate a surviving spouse to exercise the right to an election; and (iii) to protect legitimate plans to benefit a decedent’s children and transfers to non-spousal beneficiaries.
Marital Agreements and Waivers: For couples contemplating marriage or who married without an agreement, this may be a good time to explore a marital agreement. The new statute allows a waiver of the right of election through a premarital or post-marital agreement or written waiver. Md. Code, Est. & Trusts § 3-406. This is supported by Md. Code, Fam. Law § 8-101, which states that spouses may enter in agreements to address property and support rights. Note also that over half of states have enacted some form of the Uniform Premarital Agreement Act (UPAA), which permits spouses to waive rights that would otherwise arise at the death of a spouse. See UPAA Prefatory Note.
Spousal Consent: Rather than executing a comprehensive marital agreement addressing all property rights, a spouse may instead consent to the disposition of specific assets owned by the other spouse. This may not be in the form of a spousal consent to split-gift treatment under the federal gift tax laws. Md. Code, Est. & Trusts § 3-404(b)(6).
Scenario: Patty and Phil are married, and Patty has one son, Michael. Patty desires to give the beach house she inherited from her grandfather to a trust for Michael. Although Phil has been a loving and generous step-father to Michael, Patty, as a lawyer, is aware of the new statute and wants to protect her son from conflicts over an elective share in the event of her death.
Solution: To exclude the beach house from being part of Patty’s augmented estate, Phil may execute a written consent to Patty’s lifetime disposition of the property. The statute does not set out requirements for the content or form of such an instrument. To protect their respective interests, Patty and Phil should seek separate counsel to draft the consent. It would be advisable for the consent to include information such as: (i) a detailed description of the property to be transferred and method of transfer; (ii) photographs, drawings, surveys, or diagrams of the property; (iii) valuation information and the source of the valuation; and (iv) acknowledgment of and agreement by both spouses that Phil is voluntarily and knowingly consenting to Patty’s disposition of the beach house and that it will be removed from her augmented estate for purposes of the elective share statute. The consent should be executed in the presence of two witnesses and a notary public, none of whom is related to Patty or Phil. Both spouses should keep a copy for their records, and the executed original should be retained in a secure location such as in one of their attorneys’ offices.
Planning with Life Insurance
Insurance as Part of Estate: Historically, a benefit of life insurance is the ability to direct a policy’s proceeds to a beneficiary and avoid probate. The owner of the policy has the sole right to name one or more beneficiaries of a policy, and the life insurance company is mandated by the policy’s contract to pay policy proceeds to those named following the death of the insured. The new elective share statute changes this convention and, with a few exceptions, allows the surviving spouse to share in the death benefit from a policy on the life of the deceased spouse.
The portion of the life insurance death benefit includible in the calculation of the augmented estate is the amount such death benefit exceeds the net cash surrender value of the policy immediately before the decedent’s death. In the case of term insurance, the value to include in the calculation is the amount of the death benefit in excess of the total premiums paid. See Md. Code, Est. & Trusts § 3-404(b)(10). These calculations will be applied when:
- Proceeds of the insurance policy are payable to a person other than the spouse and none of the requirements to exclude life insurance (discussed below) are met; or
- Proceeds of the insurance policy are payable to a trust that is the owner and the beneficiary of the life insurance policy on the decedent’s life and of which the spouse is one of at least two beneficiaries.
The life insurance proceeds, as calculated for inclusion, may be excluded from the augmented share of the estate when:
- Proceeds are payable to a trust for the exclusive benefit of the spouse; and
- Proceeds are payable to a charity or to or for the exclusive lifetime benefit of a person who qualifies for an exemption from inheritance tax, such as the decedent’s ancestor, descendant, step-descendent, or sibling, and
- The policy was purchased before the decedent’s marriage to the surviving spouse;
- The policy was purchased more than five years before the decedent’s death; or
- The surviving spouse consented in writing during the decedent’s lifetime to the disposition of the policy proceeds (as calculated).
See Md. Code, Est. & Trusts § 3-404(b)(10)(ii), (iii).
Under the new law, it is important to conduct a review of existing life insurance policies to make sure they are held properly in or outside of one’s estate and that policies contain beneficiary designations compliant with the new elective share statute. There are also several life insurance strategies to consider in order to incentivize a spouse to not exercise the election, to protect legitimate non-spousal beneficiaries, and to uphold the decedent’s intended estate plan.
Use of Term Life Insurance: Purchase a term life insurance policy to keep in-force to offset the loss of assets under the new law, while either restructuring an estate plan or waiting for an expiration of an exception period.
Scenario: Andrew and Sarah have been married 30 years and have three children. Andrew purchases a whole life insurance policy on his life and lists as beneficiary a charity he and Sarah support. If Andrew dies within five years of purchasing this policy, Sarah may elect, under the new statute, to have a share of the death benefit proceeds, less the cash surrender value, included in the calculation of her spousal share. As Andrew and Sarah have made other financial plans for Sarah, should Andrew predecease Sarah, Andrew does not wish to have his charitable planning disrupted. Sarah could agree in writing to forgo an election, but Andrew fears the new law could be modified to prevent such a refusal.
Solution: Andrew purchases a five-year term life insurance policy on his life with the same death benefit and beneficiary as the above-mentioned whole life insurance policy. Should Andrew die within five years and Sarah makes an election under the new law under both policies, the combined remaining death benefit proceeds from both policies would satisfy Andrew’s charitable wishes.
Separate Planning for Beneficiaries: Plan the use of life insurance specifically for a spouse apart from other beneficiaries or heirs, including establishing separate trusts and policies for these separate interests.
Scenario: Jerry and Edith have been married for five years and both have minor children from previous relationships. Therefore, each wishes to make sure that financial security is locked into place for both their surviving spouses and surviving children and that any election a surviving spouse might be able to make under the new law does not upend those plans. During their marriage, however, Jerry and Edith wish to be able to make use of the entirety of their joint assets.
Solution: Jerry and Edith each form an irrevocable trust for the benefit of the other where each spouse gifts up to his or her maximum lifetime exemption amount, up to $11,580,000 in 2020. See Rev. Proc. 2019-44. This type of trust is known as a Spousal Lifetime Access Trust (SLAT). While both spouses are living, they can enjoy the full amount of the assets held in the SLATs for their benefit. If each SLAT holds a life insurance policy on the grantor spouse, at the death of the grantor spouse the death benefit proceeds can replace the loss of access the beneficiary spouse has to that trust and satisfy the surviving spouse’s share under the new law.
The unique feature of the SLAT is that it authorizes the trustee to make distributions to one’s spouse during that spouse’s lifetime. Then, at the death of the non-grantor spouse, the trust will distribute the remainder of its assets under the SLAT to other beneficiaries. The SLATs should have different terms and beneficiaries, as would be the case if one trust includes the children of a spouse’s prior relationship as remainder beneficiaries. The remaining principal of the other SLAT could pass as directed by the non-grantor spouse’s exercise of a limited power of appointment or if no such appointment was exercised, to charities selected by the trustee. Otherwise, a trust created by Edith for Jerry, with substantially identical provisions to a second trust created by Jerry for Edith, and which puts each grantor in approximately the same economic position as if he or she had retained a life estate in the other spouse’s trust, is considered to be a reciprocal trust. Under IRC § 2036(a)(1), each SLAT would be includible in the other grantor’s gross estate at death. U.S. v. Grace et al., 395 U.S. 316 (1969).
Note that the SLAT with children as remainder beneficiaries may be considered to reduce spousal benefits as defined under Md. Code, Est. & Trusts § 3-401(n) and may be available for satisfaction of the elective share. See Md. Code, Est. & Trusts §§ 3-410(b), 3-411. These issues should be considered when funding the SLATs to provide disincentives to the exercise of the elective share.
Funding of Elective Share: A life insurance policy could be purchased to fund an elective share.
Scenario: Megan is from a wealthy family and separated from her husband, Tucker. They have three adult children. Because of their religion, the couple refuses to divorce; Tucker is currently living with his girlfriend and their newborn child nearby. As Megan and Tucker are still legally married, Megan fears she is going to lose a lot of her estate she intends for her children to Tucker if Megan predeceases him. Further, Tucker will not consent in writing to forgo an election.
Solution: Megan establishes an irrevocable life insurance trust (ILIT) for the benefit of Tucker. The trust purchases a life insurance policy on Megan’s life with the trust as both owner and beneficiary of the policy. The policy’s death benefit should be in the amount to satisfy the value of Megan’s estate subject to any election Tucker would likely make under the new law.
The trustee should be granted powers to manage the life insurance policy, an important task should Megan and Tucker divorce or if Tucker predeceases Megan and the policy is no longer needed. The trustee could allow Megan as the grantor to extract the policy from the ILIT by either buying the policy back for its fair market value or substituting another asset for an equivalent value in exchange for the policy, as permitted by IRC § 675(4). The policy could then be used for other areas of Megan’s planning, including to fund another ILIT. Another option is for the trustee to donate the policy to charity for a tax deduction, which is limited to the lesser of (i) the fair market value of the policy or (ii) the trust’s basis in the policy. The basis is usually the amount of premiums paid less any dividends the policy may have provided.
Maryland’s new law affects many property interests through a complex system for the satisfaction of a spouse’s elective share. An elective share statute based upon the augmented estate concept, as is now the case in Maryland along with 21 other states, demonstrates that spouses need to consider their assets, lifetime transfers, beneficial interests of other family members, and charitable intent, all in the context of provisions for one another through their wills, revocable trusts, inter vivos trusts, and jointly-owned interests. For blended families, making planning decisions for the spouse apart from other heirs is recommended. Though a decedent’s heirs may petition a court to modify the value of the spouse’s elective share or the property to which it applies, planning ahead to address potential family conflicts is nearly always preferable to judicial intervention. Married individuals should seek guidance from an experienced estate planning attorney to minimize unwanted consequences from the exercise of an elective share upon a spouse’s death.