The New Elective Share/Augmented Estate Legislation – What Clients Need to Know
By: Stephen R. Elville, J.D., LL.M. -- Principal
They say that if you simply hang around long enough you will likely see it all. This seems to be the case with one new law that was recently passed by the Maryland Legislature, the new elective share law (House Bill 99; Senate Bill 192), otherwise known among lawyers as the “augmented estate” or “new elective share” legislation. This legislation “hung around” for the past several years and finally will become law (effective October 2020). Here is a brief history.
Under present (still currently existing) Maryland law, a surviving spouse was entitled to elect against the will of his or her deceased spouse to receive one-third (1/3) if there was surviving issue of the decedent, or one-half (1/2) if there were no surviving issue of the decedent, of the “net estate” – basically the net amount of the probate estate. This meant that a spouse with bad intentions could disinherit the surviving spouse by up to two-thirds (2/3) and the surviving spouse could only exercise a right of election over the limited statutory amount of the net probate assets described above. Unfortunately for the aggrieved spouse, this also meant that he or she (likely she) had no right of election over assets owned by the deceased spouse that passed outside of probate (passed via non-probate transfer) such as joint accounts, transfer on death designations (TOD), payable on death designations (POD), beneficiary designations (IRAs, Qualified Plans, and life insurance), and real property passing by life estate deed. As a result, a spouse with bad intentions could disinherit a surviving spouse by sixty-six and two-thirds percent (66 2/3%) of the net probate assets, and one hundred percent (100%) of non-probate assets.
Then, beginning in 1990 and leading up to 2008, two cases Knell v. Price, 318 MD. 501; 569 A.2d 636 (1990), and Karsenty v. Schoukroun, 406 MD 469; 959 A.2d 1148 (2008) changed the status quo, but did not move the needle enough to give a surviving spouse meaningful rights to non-probate property to which they were arguably entitled. Although a full analysis of these cases is beyond the scope of this article, they stand for the proposition that a surviving spouse is entitled to an elective share over an estate broader than the probate estate – an augmented estate that includes not only the traditional net probate estate but also the non-probate assets of the decedent spouse. These cases, especially the latter, established certain tests, approaches, and factors by which a court could determine whether the nonprobate assets of the decedent would be subject to the elective share of the surviving spouse. Although these cases represented progress, an aggrieved surviving spouse nonetheless remained in a situation of great legal uncertainty and disadvantage, considering that more likely than not she would have to engage in costly and protracted litigation to prevail on the issue of electing against the augmented estate of the deceased spouse.
With the passage of the new elective share law, the Registers of Wills and the Courts will take a formulaic approach designed to bring sensibility and fairness to this complex issue, for both spousal and non-spousal beneficiaries. This will most likely be a difficult and arduous process for all parties involved, especially after implementation in 2020. Since most traditional couples – couples where the union was a first marriage and children from that first marriage exist – leave assets for the benefit of the surviving spouse either outright or in further trust, and the non-probate assets of the deceased spouse usually flow by beneficiary designation to the surviving spouse, the new elective share law will have little or no impact those couples. However, and there are many examples too broad in scope to discuss here, two main categories of surviving spouses will be impacted the most, as follows: (1) the second (or more) marriage surviving spouse with or without children of their own; and (2) the disabled surviving spouse.
The surviving spouse in a second, third, or more marriage who has been disinherited by their deceased spouse, usually because he or she has children of their own or other relatives to whom they intend to leave assets at their death (the death of the first spouse to die), will be impacted by the new law. Furthermore, it is important to note that even more impact will inure to the deceased spouse and his or her children because of the new law. The reason is simple – under the new elective share law, where an uninformed spouse in a second or more marriage who with or without the mutual agreement of their spouse leaves assets to their children or other relatives, a very common occurrence), the surviving spouse may thwart the estate plan of the deceased spouse by electing against the probate and non-probate assets of the decedent. This situation may only be legally avoided through the use of pre-nuptial or post-nuptial agreements that specify the waiver of the surviving spouse’s right to a spousal elective share.
Spouses who die leaving a disabled spouse will fare better, and the new elective share law allows for the placement of the surviving spouse’s elective share amount into a testamentary special needs trust (a common practice among elder law attorneys) without exposing that statutory elective share amount to the claims of Medical Assistance. This carve-out exception means that elder care planning for spouses where one spouse has an impairment or other disability can continue unabated – a happy result for the benefit of couples who wish to be proactive under circumstances where choices otherwise seem very limited and where long-term care costs continue to devastate family finances.
In summary, the new elective share law which had previously confounded lawmakers, the Registers of Wills, and others for several years is now the law in Maryland effective next fall (fall 2020). Those persons who plan to disinherit their spouses for bad-intentioned purposes (likely very few), or remarried spouses who plan to leave assets to their children from a prior marriage should they be the first spouse to die (in the new marriage), should take notice of this new game-changing law. Pre-nuptial and post-nuptial agreements, already important asset protection planning tools in and of themselves, will now take center stage as a first and preeminent step in estate planning for many couples, and an important point of client education for all.
