The Elective Share has no Friends: Creditors Trump Spouse in the Battle Over the Revocable Trust

• Author: Angela M. Vallario
• Position: Angela M. Vallario is an Associate Professor at the University of Baltimore School of Law; B.S. (University of Florida); J.D. (University of Baltimore School of Law); LL.M (Georgetown Law Center). I am grateful to Austin Cohen, Alison Graham, Brittney Grizzanti, and Kiernan Waters.
• Pages: 333-360

THE ELECTIVE SHARE HAS NO FRIENDS: CREDITORS TRUMP SPOUSE IN THE BATTLE OVER THE REVOCABLE TRUST ANGELA M. VALLARIO * I. ! I NTRODUCTION A revocable trust is a popular estate planning tool used to disinherit a spouse in sixteen jurisdictions. 1 In common law jurisdictions, a surviving spouse, who is dissatisfied with his or her inheritance, has the right to receive an elective share of the decedent’s estate regardless of the decedent’s estate plan. 2 However, sixteen jurisdictions have defined a dissatisfied spouse’s rights with a fractional share of the deceased spouse’s “net probate estate,” allowing one spouse to disinherit the other, by single-handedly transferring his or her assets to a revocable trust. 3 To add insult to injury seven of these common law jurisdictions have recently codified trust law making it seamless for the decedent’s creditor to be paid from revocable trust assets. 4 The elective share is one of few limitations imposed on testamentary freedom. 5 Common law property jurisdictions have created a public policy-based statute for married persons that prohibit the first-to-die spouse from disinheriting his or her surviving spouse. 6 To avoid disinheritance, common law jurisdictions statutorily protect a surviving spouse (spouse) with an elective share. 7 The elective share arose in the early nineteenth century as a Copyright © 2016, Angela Vallario. * Angela M. Vallario is an Associate Professor at the University of Baltimore School of Law; B.S. (University of Florida); J.D. (University of Baltimore School of Law); LL.M (Georgetown Law Center). I am grateful to Austin Cohen, Alison Graham, Brittney Grizzanti, and Kiernan Waters. 1 See Terry L. Turnipseed, Community Property v. The Elective Share , 72 LA. L. REV. 161, 179 (2011). 2 Id. at 161. 3 Id. at 162. 4 See infra note 19. 5 Robert H. Sitkoff, Trusts and Estates: Implementing Freedom of Disposition , 58 ST. LOUIS U. L.J. 643, 644 (2014) (recognizing that there are some limitations on testamentary freedom, which include those testamentary provisions that violate public policy as well as the Rule Against Perpetuities). 6 See John H. Langbein & Lawrence W. Waggoner, Reforming the Law of Gratuitous Transfers: The New Uniform Probate Code , 55 ALB. L. REV. 871, 874 (1992); Melvin J. Sykes, Inter Vivos Transfers in Violation of the Rights of Surviving Spouses , 10 MD. L. REV. 1, 2 (1949). 7 Sykes, supra note 6, at 2. 334 CAPITAL UNIVERSITY LAW REVIEW [45:333 replacement of dower and curtesy rights. 8 At that time the nature of wealth shifting from real to personal property made dower and curtesy obsolete. 9 The elective share protected the spouse from disinheritance by guaranteeing him or her with a fractional share of the deceased spouse’s net probate estate, a method known as the traditional elective share. 10 However, like the shift from real to personal property there has been a subsequent shift in wealth from probate to non-probate assets (like revocable trusts) making the traditional elective share equally obsolete and inadequate to protect a spouse from disinheritance. A revocable trust is an arrangement created during the decedent/settlor’s lifetime whereby the decedent/settlor transfers trust assets to himself, herself, or a third party as trustee but maintains control by its trust terms giving the decedent/settlor the ability to revoke, alter, or amend. 11 The titling of the assets in the name of the trustee (even if it is the decedent/settlor) is what converts the asset from probate to non-probate and outside the reach of the traditional elective share statute. 12 It has been recognized for many years that the traditional elective share is inadequate to protect a spouse from disinheritance by a revocable trust. 13 At first, courts created equitable common law modifications in response to the ineffective traditional elective share to protect the spouse from being disinherited with a revocable trust. 14 The inequities of the traditional elective share and common law modifications mandated reform. Reform efforts in Pennsylvania and New York inspired the National Conference Commissioners on Uniform State Laws to draft the Uniform Probate Code (UPC) introducing the “augmented estate” concept. 15 The thrust of the UPC’s augmented estate was to include non-probate assets (like revocable trusts) into the spouse’s elective share calculation. 16 The UPC promulgated an augmented estate model for other jurisdictions to follow. 17 8 Id. 9 Id. 10 See Turnipseed, supra note 1, at 162. 11 Alan Newman, Revocable Trusts and the Law of Wills: An Imperfect Fit , 43 REAL PROP. TR. & EST. L.J., 523, 524 (2008). 12 See Turnipseed, supra note 1, at 179. 13 See Newman v. Dore, 9 N.E.2d 966 (N.Y. 1937). In Newman , the testator transferred his entire property into a revocable trust for the purpose of diminishing his estate and reducing the surviving spouse’s elective share amount. Id. at 968. Finding this to be a contrivance upon the rights of the surviving spouse, the court held that the trusts were subject to the spouse’s elective share. Id. at 969. 14 See, e.g. , id. at 966. 15 See Langbein & Waggoner, supra note 6, at 872. 16 See id. at 881. 17 See infra Section IV.A. The Uniform Probate Code introduced the “augmented estate” elective share approach in 1969, which statutorily includes both probate and non-probate 2017] THE ELECTIVE SHARE HAS NO FRIENDS 335 Yet more than fifty years after reform efforts began, sixteen jurisdictions have not garnered enough support to pass elective share reform (holdout jurisdictions). 18 Although elective share reform has stalled in the holdout jurisdictions, seven of these jurisdictions have codified trust law, making the revocable trust statutorily available to the decedent’s creditors (trust reform). 19 A consequence of the trust reform in seven of the holdout jurisdictions is dramatically unfair because at the death of a decedent/settlor, a creditor is preferred over the decedent's spouse. 20 This Article identifies the great unfairness with the legislation in the seven holdout jurisdictions, and recommends that holdout jurisdictions promptly revive elective share reform to resolve the problem. The following hypothetical of Dana Decedent (Dana) and Sam Spouse (Sam) will be used to illustrate the various rights to Dana’s revocable trust throughout this Article. Dana and Sam have been married for twenty years, both having worked and contributed to their marital home worth $520,000 owned as tenants by the entireties. Dana decides to implement a revocable trust and transfers $2,000,000 to a revocable trust, maintaining complete control and access to the assets during his lifetime, and designates Dana’s Law School alma mater to receive the trust balance at Dana’s death. Dana’s will leaves everything to Sam. Dana has a car, valued at $30,000 which is not transferred to the trust, and owes a credit card company $50,000. To provide some context as to the problem, the first section of this Article will address the historical development of the traditional elective assets in calculating the spouse’s elective share. See UNIF. PROBATE CODE §§ 2-202, 2-203 (amended 2010). 18 The sixteen holdout jurisdictions that have failed to enact elective share reform: Alabama, ALA. CODE § 43-8-70 (2010); Arkansas, ARK. CODE ANN. § 28-39-401 (Supp. 2015); Connecticut, CONN. GEN. STAT. § 45a-436 (2013); District of Columbia, D.C. CODE § 19-113 (2015); Illinois, 755 ILL. COMP. STAT. 5/2-8 (2015); Indiana, IND. CODE § 29-1-3-1 (2010); Kentucky, KY. REV. STAT. ANN. § 392.080 (LexisNexis 2010); Maryland, MD. CODE ANN., EST. & TRUSTS § 3-203 (LexisNexis 2011); Mississippi, MISS. CODE ANN. § 91-5-25 (West 2010); New Hampshire, N.H. REV. STAT. ANN. § 560:10 (2014); Ohio, OHIO REV. CODE ANN. § 2106.01 (West 2014); Oklahoma, OKLA. STAT. ANN. tit. 84, § 44 (West 2010); Rhode Island, 33 R.I. GEN. LAWS § 33-25-2 (2011); TENN. CODE ANN. § 31-4-101 (2015); Vermont, VT. STAT. ANN. tit. 14, § 311 (2010); and Wyoming, WYO. STAT. ANN. § 2-5-101 (2015). 19 Seven of the sixteen holdout jurisdictions have trust reform: Alabama, ALA. CODE § 19-3B-505 (LexisNexis 2015); District of Columbia, D.C. CODE § 19-1305.05 (2013); Kentucky, KY. REV. STAT. ANN. § 386B.5-040 (LexisNexis Supp. 2015); Maryland, MD. CODE ANN., EST. & TRUSTS § 14.5-508 (LexisNexis Supp. 2015); New Hampshire, N.H. REV. STAT. ANN. § 564-B:5-505 (Supp. 2015); Vermont, VT. STAT. ANN. tit. 14A, § 505 (2010); and Wyoming, WYO. STAT. ANN. § 4-10-506 (2015). 20 Supra note 19. 336 CAPITAL UNIVERSITY LAW REVIEW [45:333 share and the underlying public policy supporting the statute. 21 Secondly, the Article examines the traditional approach, consisting of the traditional elective share and common law modifications in the holdout jurisdictions. 22 Thirdly, the Article provides an overview of the elective share reform among the twenty-five reform states and trust reform in seven of the holdout jurisdictions. 23 Finally, the Article takes a closer look at who is to blame for the unfair consequences in the holdout jurisdictions, and urges the immediate revival of elective share reform. 24 II. ! H ISTORY AND P OLICY S UPPORTING THE E LECTIVE S HARE There are two marital property systems in the United States, the common law system 25 and the community property system. 26 A married person in common law jurisdictions may accumulate and title property in each spouse’s separate name. 27 Historically, upon the death of one spouse, the economic protection for the surviving spouse, who might otherwise be left without support, was dower and curtesy. 28 By the early 21 See infra Section III.A. 22 See infra Section III.B. 23 See infra Sections IV.A–IV.C. 24 See infra Part V. 25 See Angela M. Vallario, Spousal Election: Suggested Equitable Reform for the Division of Property at Death , 52 CATH. U. L. REV. 519, 523 (2003) (noting that the common law system allows a husband and wife to separately acquire and title property...