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Beware When Attempting to Devise Assets to Someone Other Than Your Spouse

It is not unusual for a husband or wife to transfer assets at their death to someone other than their spouse. The surviving spouse may not need the asset, the asset may be a family heirloom that is intended to stay within the deceased spouse’s bloodline, the asset may be transferred to a trust for the benefit of the spouse to prevent the assets from being transferred to the surviving spouse’s new love interest, or the transferor may simply have children by a prior marriage that he or she wishes to favor over the surviving spouse. Despite these often legitimate reasons to bypass the spouse, many clients are surprised to learn that the law generally protects, at least in part, a surviving spouse’s right to receive assets upon the death of their spouse.

N.C. Gen. Stat. 30-3.1, et. seq., permits the surviving spouse to claim an elective share against the total net assets of his or her deceased spouse. Significantly, there is virtually no distinction between probate and non-probate assets for purposes of calculating the deceased spouse’s total net estate. Prior to October 1, 2013, the surviving spouse’s share ranged from one-sixth (1/6) to one-half (1/2) of the deceased spouse’s total net assets depending on the number of children of the deceased spouse and whether the deceased spouse’s children were also children of the surviving spouse.

This framework was particularly significant in the case of blended families. For example, assume Joe and Millie are married when each is age sixty-eight and sixty-nine respectively. It is a second marriage for both Joe and Millie and both spouses have children by a prior marriage. Joe’s assets have a value of approximately $800,000 and Millie has separate assets with a value of $1,000,000. Both Joe and Millie verbally agree that each of their respective assets will remain titled separately and will be devised to each of their respective children upon their death. Seventeen years later, Millie dies at a time when her assets are worth $1.2 Million. Millie devises Joe one-sixth of her assets and leaves the rest to her two children. Joe and his children, faced with the loss of Millie who was his primary care-giver, want more assets to guard against Joe’s estate being depleted for his care. Under the law prior to October 1, 2013, Joe has no right to an elective share under these circumstances. Joe received one-sixth (1/6) of Millie’s estate which fulfills his elective share entitlement.

Effective October 1, 2013, the method for determining the surviving spouse’s percentage share of the deceased spouse’s assets was substantially changed. N.C. Session Law 2013-91 amended N.C. Gen. Stat. 30-3.1 to provide that the share of a surviving spouse of a decedent dying on or after October 1, 2013 is based on the number of years the surviving spouse was married to the decedent and is no longer dependent, in whole or in part, on the decedent’s number of children. A surviving spouse who was married to the decedent less than five years is entitled to fifteen percent (15%), twenty-five percent (25%) if married at least five years but less than ten years, thirty-three percent (33%) if married at least ten years but less than fifteen years, and fifty percent if married for fifteen years or more.

This amendment substantially changes the rights of married couples in situations like Joe and Millie. Upon Millie’s death, Joe would be entitled to fifty percent (50%) of Millie’s total net assets as the couple was married for more than fifteen years. To the surprise of Millie’s heirs, this could lead to Joe receiving nearly $400,000 more than Millie intended.

With a little planning, Millie could have avoided or substantially altered this result. Spouses may waive their right to an elective share (as well as other marital rights upon death) through a written waiver signed by the waiving spouse so long as the waiver was executed voluntarily and the waiving spouse received a fair and reasonable disclosure of the property and financial obligations of his or her spouse unless the spouse also waives that right. This is generally done in the form of a prenuptial or postnuptial agreement. Now you may be thinking that Joe would never have agreed to such a waiver, particularly if Millie discovered the issue shortly before her death. Millie, however, may still prevent Joe from receiving the assets outright at her death through the use of a properly structured trust.

In short, anyone wishing to devise assets to someone other than their spouse should carefully consider the effect of the surviving spouse’s elective share and other marital rights. A little planning in this regard can go a long way.

About the author: Stephen focuses his practice on business entity formation and structuring, business succession planning, wealth transfer planning, and tax-exempt organizations. Please contact Stephen with questions about this article.