Limits on Freedom of Disposition - Protection of Spouse and Children

Question 1

What’s the Difference Between Separate and Community Property Systems

Answer 1

1. Separate Property
   
   1. No automatic sharing of earnings; whatever spouse earns or acquires is his or hers.
   2. Elective Share - Protection against disinheritance provided through elective share
2. Community Property
   
   1. Property earned or acquired during marriage is community property.
   2. No Elective Share - No elective share because each spouse owns all earnings during marriage in equal, undivided shares.

Question 2

Two Theories Justifying the Elective Share

Answer 2

1. Partnership Theory
   
   1. Elective share justified because surviving spouse contributed to decedent’s wealth
   2. Surviving spouse should be entitled to one-half of decedent’s property acquired during marriage
2. Support Obligation Theory
   
   1. Older view that marriage entails a support obligation
   2. Support theory implies:
      
      1. smaller percentage applied to all of the decedent’s property (generally 1/3).
      2. a minimum amount
      3. accounting for other resources available for support of survivor

Question 3

The Elective Share -

1. Definition
2. Amount
3. Limitations
4. Notice of Election
5. Who May Make the Election

Answer 3

1. The Elective Share - All separate property states except Georgia have elective share statutes designed to protect spouses against disinheritance, by ensuring that the surviving spouse can take a specified minimum share of the decedent’s estate. (None of the community property states has an elective share statute.)
2. Amount of Elective Share –
   
   1. Majority - the elective share amount is 1/3 of the decedent’s net estate if the decedent was survived by descendants, 1/2 if the decedent was not survived by descendants.
      
      1. The property left outright to the spouse by will is first applied. (Purpose: To avoid disruption of decedent’s testamentary plan as far as possible.
   2. UPC Accrual Approach - the amount of the elective share is tied to the length of marriage.
3. Limitations– elective share doesn’t apply if non-acquiring spouse dies first (i.e. can’t dispose of in will)
4. Notice of Election Required - The right to an elective share is not automatic.
   
   1. The spouse must file a notice of election within a specified period (usually within 6 months after the will is admitted to probate).
5. Who May Make Election - election on behalf of incapcitated spouse allowed if showing election necessary for incapacitated surviving spouse’s support during life.

Question 4

Elective Share and Non-probate Assets -

1. Revocable Trusts -
2. POD’s
3. Creditors
4. Medicare

Answer 4

1. Revocable Trusts –
   
   1. Majority – reachable by SS if revocable trust made by deceased spouse (not 3d parties)
   2. Minority -not reachable by ss
2. POD’s – no majority rule
   
   1. Restatement – yes
   2. Delaware – if taxed under federal estate tax, reachable by SS
3. Creditors – can’t force SS to choose elective share
4. Medicare – elective share counted towards SS’s resources for Medicare eligibility

Question 5

UPC Augmented Estate Approach

Answer 5

1. UPC 2-202 - The elective share (ES) amount is 1/2 of the resulting marital-property portion of the augmented estate. (ES = 50% x MPPAE – Amount Wife Already Owns)
   
   1. Add Up Marital Property
      
      1. net probate estate, including nonprobate transfers
      2. property of SS, including nonprobate transfers.
   2. Multiply by Percentage Based on Years Married
   3. Divide by Two
   4. Less Amount Spouse Already Owns
2. Major Percentage Points
   
   1. 10 years = approx 50%
   2. 15 years = 100%

Question 6

Waiver of Elective Share by Premarital or Postnuptial Agreement

Answer 6

1. Uniform Premarital Agreement Act (1983) (Half of States Follow)
   
   1. premarital agreements only.
   2. opponent must show agreement
      
      1. involuntary; OR
      2. unconsciouable and inadequate financial disclousre
2. Uniform Premarital and Marital Agreement Act (2012) (Substantial Minority of States Follow)
   
   1. applies to both premarital and postnuptial agreements.
   2. Party opposing premarital or postnuptial agreement must prove: (1) involuntarily signed; (2) no independent counsel; (2) inadequate or no notice of waiver of rights; OR (2) inadequate financial disclosure.

Question 7

Community Property Rules -

1. Generally
2. Disposition of Community Property
3. Management of Community Property
4. Community Property wtih Right of Survivorship

Answer 7

1. Generally - about 1/3 of U.S. population.
   
   1. During marriage, all earnings of the spouses, and property acquired from those earnings, are CP unless spouses agree to separate property.
   2. Each spouse owns an undivided ½ interest in the CP.
   3. The death of one spouse dissolves the community.
   4. When the characterization of property is doubtful, there is a strong presumption in favor of CP. To avoid tracing problems, a couple can make an arrangement to control the character of their property (ON EXAM).
2. Disposition of Community Property -
   
   1. Either spouse can dispose of his or her half of the couple’s community property at death.
   2. The surviving spouse owns the other half, which is not subject to testamentary disposition by the deceased spouse.
   3. The one-half of the community property belonging to the deceased spouse may be devised to whomever the decedent pleases.
   4. There is no elective share over the decedent spouse’s half of the community property because the surviving spouse already owns the other half.
   5. The community property belongs to both spouses even if title appears on its face to be in the name of one spouse
3. Management of Community Property - Each community state has different rules, but there are two general approaches:
   
   1. Majority Rule - each spouse generally has the power to manage community property, with some exceptions (e.g. real property)
   2. Texas and Wisconsin - each spouse has exclusive management over his or her earnings and property acquired that’s in that spouse’s name.
   3. Sale vs. Gift of CP - To the extent that spouse may act alone, that spouse may sell community property to a purchaser for valuable consideration. But neither spouse can make a gift of community property without the consent of the other spouse.
4. Community Property With Right of Survivorship – in 6 states, including Texas, spouses can make an agreement to hold their property in community with a right of survivorship (similar to joint tenancy).
   
   1. Eliminates need to probate community property estate.

Question 8

Traditional Conflict of Law Rules -

1. Personal Property
2. Separate or Community
3. Real Property
4. Survivorship Rights

Answer 8

1. Personal Property - The law of the state where a decedent was domiciled at death governs the distribution of the decedent’s personal property;
2. Community or Separate? - The law of marital domicile at the time that personal property is acquired controls the characterization of the property as separate or community.
3. Real Property - The law of the state where decedent’s real property is located governs the disposition of real property.
4. Survivorship Rights - The law of marital domicile at the death of one spouse controls the survivor’s rights.

Question 9

1. Moving from Separate Property to Community Property State
2. Quasi-Community Property Method

Answer 9

Under traditional law, the law of the state where the couple is domiciled when movable property is acquired determines the ownership of that property.

Quasi-Community Property Method - some CP states treat property acquired in separate property state as if acquired in community property state for probate purposes.

1. one half of the quasi-community property belongs to the surviving spouse at death, the other half is subject to decedent’s probate estate.
   
   1. BUT – if the other spouse dies first, spouse cannot dispose of quasi community property in a will.
2. Note - Texas and some other states only recognize quasi-community property in divorce actions, not in division of decedent’s estate.
3. Non-Probate Transfers – surviving spouse can reach one-half of any nonprobate transfer of quasi-community property if decedent some form of control
   
   1. (e.g., retained possession or enjoyment, or the right to income, or the power to revoke or consume, or a right of survivorship.)

Question 10

Moving from Community Property to Separate Property States

Answer 10

1. Generally, a change in domicile from a community property state to a separate property state does not change the preexisting property rights of the spouses.
   
   1. Community property continues to be characterized as such if the couple and the property move to a separate property state.
2. Step Up Basis for Capital Gains - community property is subject to special federal tax status.
   
   1. Under community property, any appreciation in value between acquisition and date of first spouse’s death is never taxed as a capital gain.
   2. If not community property, only the decedent’s one-half interest in the property receives a stepped-up basis for capital gain purposes.
   3. Lawyers in common law property states should be careful not to convert community property of incoming foreign residents to joint tenancy, which eliminates the step-up tax status.
      3.

Question 11

Miscellaneous Rights of Spouse Related to Probate -

1. Social Security
2. Pension and Retirement Accounts
3. Homestead rights
4. Personal Property Set-Aside
5. Family Allowance

Answer 11

1. Social Security - Surviving spouse entitled to decedent’s benefits.
   
   1. BUT – surviving spouse has to choose. Can’t elect decedent’s benefits while still receiving her own.
2. Pension and Retirement Accounts - ERISA gives spouse of employee survivorship rights to pension plan.
   
   1. Remember ERISA preempts contrary state law, including testamentary disposition by beneficiaries.
3. Homestead - Right to occupy family home for lifetime
   
   1. Preserves family home to the surviving spouse and minor children, free of decedent’s creditors.
   2. Amount varies by state (UPC = $22,500).
   3. Surviving spouse and minor children usually have right to occupy homestead for life and until majority, respectively.
   4. Texas Homestead No-Partition Rule – The homestead may not be partitioned among the decedent’s heirs during the lifetime of the surviving spouse as long as the surviving spouse elects to use or occupy the property as a homestead.
4. Personal Property Set-Aside - Right of surviving spouse (and sometimes minor children) to tangible personal property up to a certain value (furniture, clothing, cars etc).
   
   1. (UPC = $15,000).
   2. Usually protected from creditor’s claims
   3. Decedent has no power to deprive surviving spouse of exempt items.
5. Family Allowance - Each state has a statute authorizing the probate court to award an allowance for maintenance and support of the surviving spouse (and often of dependent children).
   
   1. (UPC = “reasonable allowance”).
   2. May be for a fixed period or continuous.
   3. Terminates after estate is closed.

Question 12

Intentional Omission of Child or Spouse from Will

Answer 12

1. Protection of Spouse – Elective Share/Community Property
2. Protection of Child – No Protection (except in Louisiana under certain conditions).

Question 13

Unintentional Omission of Spouse from Premarital Will- Common Law, Majority, CP States, UPC

Answer 13

1. At Common Law – premarital will revoked by marriage.
2. Majority - premarital will remains valid despite subsequent marraige.
3. CP States - doesn’t matter re SS gets half CP.
4. UPC 2-301 – SS omitted from premarital will gets intestate share unless:
   
   1. Will contemplates marriage to surviving spouse;
   2. Will expresses intent to be effective regardless of marriage; or
   3. Testator provided for spouse outside the will with intent that transfer be in lieu of testamentary provision in will.

Question 14

Unintentional Omission of Child - UPC

Answer 14

UPC 2-302 -

1. Definition of Pretermitted Child – if a testator fails to provide in his will for any of his children born or adopted after the execution of the will, the omitted after-born or after-adopted child receives a share in the estate unless:
   
   1. The Will intentionally omits pretermitted children; or
   2. Testator provided for pretermitted child by transfer outside will and evidence of intent that such transfer is in lieu of testamentary provision in will.
2. Pretermitted Child’s Share –
   
   1. T Has No Living Children – afterborn/afteradopted omitted child gets share equal to intestate share for children.
      
      1. Exception - unless will devised entire estate to other surviving parent of omitted child.
   2. T Has Living Children and Provided For – omitted afterborn/afteradopted child gets equal share from devises made to then-living children under will

Question 15

Unintentional Omission of Child - Texas

Answer 15

1. Definition of Pretermitted Child - a pretermitted child is a child born or adopted after the execution of a parent’s will and either during the testator’s life or within 300 days of the testator’s death, and the child:
   
   1. Is not provided for in the will;
      
      1. Note – contingent beneficiaries count as provided for.
   2. Is not mentioned in the will; and
   3. Is not otherwise provided for outside the will and is intended to take effect at testator’s death.
2. See attached image for shares info.