The Maryland Legislature recently made it more difficult (but not impossible) to disinherit a spouse. When one spouse dies, the survivor has rights to the marital estate. However, the deceased spouse could have owned assets in a way that shielded them from the surviving spouse’s marital rights. The key change made by the new law is the expansion of assets subject to the surviving spouse’s election. The change is expansive but not all encompassing.
A surviving spouse has long had a right to elect against a probate estate. The survivor’s share is a guaranteed inheritance of a percentage of the decedent’s probate assets. Even if there is an inheritance in a will, the surviving spouse can always opt instead to inherit the percentage designated by law. The surviving spouse can elect to receive one-third of the assets if the decedent had surviving children and one-half if there were no surviving children. That hasn’t changed in a century. But the definition of a probate estate against which the election could be made, has changed.
The problem for the survivor was that the probate estate included only assets owned in the decedent’s sole name. Sole ownership is rather limited: not jointly owned, no beneficiaries designated, and not owned in trust. Assets owned in one’s sole name pass pursuant to a will, if one has been executed, or by the laws of intestacy in the absence of a will. Given the narrow definition of probate assets, it was easy to disinherit the surviving spouse.
For example, if Harry Husband died first owning all his assets in a revocable living trust, he had no probate estate. The survivor’s right to elect was meaningless because there were no probate assets. If Harry owned a life insurance policy with a beneficiary designation, that was not a probate asset. Assets with beneficiary designations like retirement accounts, annuities, and insurance policies are NOT probate assets.
The new law attempts to protect the interests of a surviving spouse. The law codifies the concept of an augmented estate which includes not only the probate estate, but also revocable trusts, jointly titled accounts, and more. Essentially, the law tries to capture most everything that an individual owns, not just the probate property that passes under the Will at death. The survivor will have an expanded array of assets against which an election to inherit will be made, beginning in October 2020.
This issue arises more commonly in second and third marriages. In those situations, the spouse might give priority to children or other family members over the new spouse. In order to direct an estate to blood relations, a spouse might attempt to own assets in such a way as to disinherit the surviving spouse.
This law change is designed to protect the surviving spouse who might otherwise have been disinherited but is frustrating for the spouse who had other ideas. Therefore, additional planning is important.
While the new law gives the surviving spouse a right to make an election against the augmented estate, there are still some limitations and opportunities for planning.
First, the new law does not include assets held in irrevocable trusts and third-party trusts. For example, an irrevocable life insurance trust – a trust funded with life insurance – with the death benefit paid into the trust upon death is not part of the augmented estate.
Second, the new law does not include qualified special needs trusts for persons with disabilities as part of the augmented estate. If one spouse wishes to create a trust to help support and maintain a disabled relative, the new law will not thwart their planning.
Third, in the case of a second marriage (or more), the couple should consider a pre-nuptial agreement to set out their expectations and their rights. I believe that good fences make great spouses. The need for understanding and limitations is most important where there are children from prior relationships and critically important where there are children with disabilities who may need the inheritance for their future support and health.
Fourth, a spouse can place assets into a marital trust for the benefit of the survivor with the remainder directed to family or other beneficiaries upon the death of the surviving spouse. In that way the survivor gets needed income and assets, but the remainder goes back to the grantor’s family at the survivor’s death.
If you are in Maryland, married, and concerned about the ultimate disposition of your estate to benefit someone other than your spouse, it is time to visit your lawyer.