The North Carolina legislature recently enacted significant changes to our state’s Elective Share statute. These changes are applicable to the estates of decedents dying on or after October 1, 2013. As a result of these changes, many surviving spouses will now be entitled to receive a larger percentage of their deceased spouse’s estate, and if they don’t receive this larger percentage, can file an elective share claim against the deceased spouse’s estate. This could result in additional assets of the decedent being distributed outright to the surviving spouse, contrary to the decedent’s estate plan. The new North Carolina Elective Share statute will require North Carolina estate planning attorneys to review and revise certain of their clients’ estate plans to ensure this new law will not disrupt their clients’ estate distribution scheme.
Background on Elective Share Statutes
Elective share statutes are intended to prevent a decedent from either partially or completely disinheriting a surviving spouse by requiring a decedent to leave a minimum percentage of the decedent’s net assets to his or her surviving spouse at death (hereinafter referred to as the “Elective Share Amount”), either by will (or other testamentary disposition, such as under a Revocable Trust), designation of the surviving spouse as beneficiary of a non-probate asset such as life insurance, annuities, or retirement accounts, or as a joint owner with right of survivorship of the decedent’s bank and investment accounts or real estate. In the event the surviving spouse does not receive the Elective Share Amount, then the surviving spouse can claim an elective share of the decedent’s net assets equal to the Elective Share Amount. If the surviving spouse has only been partially disinherited, then the difference between the percentages of the net estate the surviving spouse has actually received and the Elective Share Amount (i.e., the deficit or “make-up” amount) is transferred outright to the surviving spouse. The amount due the surviving spouse is satisfied from the assets under the control of the Executor in the decedent’s estate and/or by asset transfers from the person(s) in possession of the decedent’s assets at death, pursuant to an Order of the Clerk of Court.
Under the former North Carolina Elective Share statute, the minimum percentage of a decedent’s net assets to which a surviving spouse was entitled at death was based upon three factors:
- Whether the surviving spouse was the decedent’s first spouse or a successive spouse.
- Whether the decedent had surviving children (or surviving issue of a deceased child) from a previous marriage.
- Whether there were children born to or legally adopted by the decedent and the surviving spouse from their marriage.
Depending upon the application of one or more of these factors to a particular decedent, a surviving spouse under the former North Carolina Elective Share statute could potentially be entitled to as little as one-sixth (16.667%) of the decedent’s net assets or as much as one-half (50%) of the decedent’s net assets, notwithstanding the length of the marriage. For example, a surviving spouse who had been married twenty (20) years to a decedent with children from a prior marriage would only be entitled to one-sixth (1/6) of the decedent’s net assets if the decedent failed to provide adequately at death for the surviving spouse. Even a surviving spouse in a long-term first marriage with the decedent who had more than one (1) child with the decedent would only be entitled to one-third (1/3) of the decedent’s net assets.
The new North Carolina Elective Share statute eliminates the above factors in determining the Elective Share Amount. The sole factor now used to determine the Elective Share Amount is the length of the marriage between the decedent and the surviving spouse. The longer the decedent and the surviving spouse were married at the time of the decedent’s death, the greater the Elective Share Amount, which may be left to the surviving spouse either outright or in a trust solely for the benefit of the surviving spouse that meets certain other requirements.
Under the new Elective Share statute, N.C.G.S. Section 30-3.1, beginning October 1, 2013 the minimum percentage of the decedent’s net assets which must be allocated by a decedent to his or her surviving spouse is as follows:
- If the decedent and the surviving spouse were married less than five (5) years, the surviving spouse is entitled to fifteen percent (15%) of the decedent’s net assets;
- If the decedent and the surviving spouse were married at least five (5) years but less than ten (10) years, the surviving spouse is entitled to twenty-five percent (25%) of the decedent’s net assets;
- If the decedent and the surviving spouse were married to each other at least ten (10) years but less than fifteen (15) years, the surviving spouse is entitled to thirty-three percent (33%) of the decedent’s assets; and
- If the decedent and the surviving spouse had been married to each other fifteen (15) years or more at the time of the decedent’s death, the surviving spouse is entitled to fifty percent (50%) of the decedent’s net assets.
It appears this new elective share statute has created an interesting anomaly with our state’s intestate succession act which may need to be addressed or clarified by our legislature. Under the North Carolina Intestate Succession Act, the intestate share of a surviving spouse who had two or more surviving children with the decedent (or one surviving child and surviving lineal descendants of one or more deceased children) is entitled to the first $60,000 of the decedent’s personal property plus one-third (1/3) of the excess, and one-third (1/3) of the decedent’s real property. See N.C.G.S. Section 29-14. Under the new North Carolina Elective Share statute, which applies to both testate and intestate estates, the share of a surviving spouse who has been married to the decedent fifteen (15) years or more is entitled to receive at least fifty percent (50%) of the decedent’s net estate. N.C.G.S. Section 30-3.1. Consequently, it appears you could have a situation in which a surviving spouse who was married to a decedent for fifteen (15) years or longer and had at least two (2) children with a decedent who died intestate could file an elective share claim to increase his or her share of the decedent’s estate from one-third (1/3) to one-half (1/2).
In light of these changes, estate planning attorneys will need to be aware of these new required minimum percentages as they advise their married clients on their estate plans, especially those clients who may be in a second or successive marriage and have children or other family members from a prior marriage for whom they also want to provide an inheritance. In addition, estate planners with clients whose current plans provide for a division of assets between their surviving spouse and other family members based upon the old Elective Share Statute should revise such plans to comply with the larger required minimum percentages.
Use of Marital Trusts to Satisfy Elective Share
Clients who do not want to satisfy the Elective Share Amount with an outright bequest to the surviving spouse will require the use of a marital or spousal trust as defined under N.C.G.S. Sections 30-3.2 (3c) (g) and 30-3.3A (e). The marital trust must be for the exclusive benefit of the surviving spouse during his or her lifetime (i.e., there can be no other current mandatory or discretionary trust beneficiary) and have the following trust provisions for the benefit of the surviving spouse:
- The surviving spouse is either entitled to all of the net income from the trust at least annually, or if the distribution of the net income to the surviving spouse is subject to the discretion of the Trustee, such discretion must be subject to a legally enforceable ascertainable standard which requires the distribution of trust income for the health, maintenance, and support of the surviving spouse.
- The principal of the spousal trust must also be available for invasion for the benefit of the surviving spouse, in such amounts as determined by the Trustee in its discretion shall be necessary for the surviving spouse’s health, support, and maintenance.
- In exercising the above-described discretion, the Trustee can be allowed or required under the terms of the marital trust to take into consideration the other income, assets, and means of support available to the surviving spouse.
- The Trustee of the spousal trust at all times during the lifetime of the surviving spouse must be a “non-adverse” Trustee which is defined under N.C.G.S. Section 30-3.2(3) as either (a) a person who does not have any substantial beneficial interest in the trust which would be adversely affected by the exercise or non-exercise of the powers the Trustee possesses over the trust, or (b) a person who is subject to removal as Trustee by the surviving spouse with or without cause, or (c) a corporation licensed to serve as a trustee under the laws of the State of North Carolina (such as a bank or trust company).
The benefit of using a marital trust complying with these requirements is that the entire value of the marital trust is treated as being allocated to the statutory share required to be set aside for the surviving spouse. However, at the surviving spouse’s death, the assets remaining in the marital trust can be distributed to the decedent’s other family members without any direction or control by the surviving spouse.
Pre-Marital and Post-Marital Agreements
Another option available to address a possible elective share claim filed by the surviving spouse is for the husband and wife to execute a partial or complete waiver of the surviving spouse’s elective share rights by agreement, either prior to, or after, the marriage. Under N.C.G.S. Section 30-3.6, a surviving spouse may waive, either wholly or partially, his or her elective share rights, with or without consideration, either before or after the marriage. The waiver must be in writing.
Typically, this waiver will be included in most standard pre-marital agreements and can be an important consideration for clients who are entering into second (or successive) marriages and who want to ensure that their assets are distributed at death to their children from their prior marriage. This waiver also should be considered for clients who are entering into a first marriage and have significant personal or inherited wealth that is desired to be protected from the elective share rights of the spouse. Usually, the waiver of elective share rights will be complete; however, in some situations, especially where the parties to the marriage are younger or one party to the marriage has significantly more wealth than the other, the waiver will be partial, and the waiver will be contingent upon the deceased spouse leaving at death to the surviving spouse some amount of assets from the deceased spouse’s estate (generally either a fixed dollar amount or a percentage share of the deceased spouse’s estate). The pre-marital agreement generally, however, will also state that despite the waiver, either spouse can voluntarily provide for an inheritance for the surviving spouse under the deceased spouse’s Will (or other estate plan documents) and the waiver will not prevent the surviving spouse from receiving this inheritance if so provided.
Less common is a waiver of elective share rights after the marriage by a written post-marital agreement. As stated above, North Carolina law allows for a husband and wife to completely or partially waive his or her elective share rights in the other’s estate after the parties have married. Realistically, there is little incentive for a spouse to agree to a complete waiver of elective share rights after the marriage has been entered into, and most waivers executed after the marriage will be a partial waiver. In light of the larger percentage share now due a spouse under the new North Carolina Elective Share Act and the fact this share can be satisfied fully by a marital trust, a husband or wife who is uncomfortable with the restrictions of a marital trust may now be more willing to agree to a post-marital partial waiver of elective share rights in exchange for a guaranteed amount or percentage of the deceased spouse’s estate in outright form.
Whether the written waiver is executed before or after the marriage, the waiver will not be enforceable if the surviving spouse can prove that he or she did not execute the waiver voluntarily or was not provided, prior to the execution of the waiver, a fair and reasonable disclosure of the decedent’s property and financial obligations, unless the surviving spouse waived in writing, the right to that disclosure. N.C.G.S. Section 30-3.6(c). Consequently, it is critical that each party be separately represented by legal counsel in the negotiation of the pre-marital or post-marital agreement, and unless the parties are waiving the right to disclosure of the other’s assets and liabilities, the disclosures of each spouse’s assets and liabilities to the other must be as complete and accurate as possible. Estate planning attorneys involved in the implementation of these pre-marital and post-marital agreements by their clients must ensure that these procedures are strictly followed in order to avoid a later challenge to the elective share waiver by the surviving spouse at the decedent’s death.
North Carolina’s recent changes to its Elective Share Statute have created another issue that must be considered and addressed by estate planning attorneys in advising their clients on their estate plans. However, attorneys can use one or more of the planning options discussed above to achieve the client’s objectives.