Spousal Elective Rights – Time for a Change?

Take-Away: A surviving spouse has available under Michigan’s Estates and Protected Individuals Code (EPIC) the right to elect against his or her deceased spouse’s Will and take an elective share of the decedent-spouse’s probate estate. However, the Michigan statute that confers an elective right on the surviving spouse only extends to the deceased spouse’s probate estate, and nothing more, like a funded revocable Trust. If there is no probate estate because the decedent relied upon a funded revocable Trust to transfer assets at the time of his or her death, then the surviving spouse’s elective right is essentially worthless.

Background: Back when Michigan adopted EPIC I 2000, which is based in large part on the Uniform Probate Court, it had a choice. It could have adopted a spousal elective right that applied to what is called an augmented estate, which includes all assets owned or controlled by the decedent, including revocable trusts and beneficiary designated assets, or adopt what it ultimately did, which was a restrictive elective right that is limited to the deceased spouse’s probate estate. Over the ensuing years many of the states that had adopted the Uniform Probate Code that initially followed the ‘probate-estate-only’ version of a surviving spouse’s elective right, have reversed themselves and have now adopted the augmented estate approach to describe a surviving spouse’s right to elect against the deceased spouse’s estate. For example, effective October 1, Maryland converted from a probate-estate-only spousal elective right to a sweeping augmented estate approach to its spousal elective right statute.

Michigan Elective Right Statute: “The surviving spouse of a decedent who was domiciled in this state and who dies testate may file with the court an election in writing that the spouse elects 1 of the following: (a) that the spouse will abide by the terms of the will; (b) that the spouse will take ½ of the sum or share that would have passed to the spouse had the testate or dies intestate reduced by ½ of the value of all property derived by the spouse from the decedent by any means other than testate or intestate succession upon the decedent’s death. [MCL 700.2202(2).]

50% of Intestate Share: Therefore, a surviving spouse’s elective share under Michigan’s statutes starts out with the gross amount equal to 50% of the surviving spouse’s intestate succession share had the deceased spouse died without a Will.
Reduced by One- Half of the Property Derived by the Spouse: The phrase property derived by the spouse from the decedent includes all of the following transfers: (i) a transfer of property within 2 years before the decedent’s death, to the extent that the transfer is subject to federal gift or estate taxes; (ii) a transfer made before the date of death subject to a power retained by the decedent that would make the property, or a portion of the property, subject to federal estate tax; and (iii) a transfer effectuated by the decedent’s death through joint ownership, tenancy by the entireties, insurance beneficiary, or similar means. [MCL 700.2202(7).]For example, if decedent had created a QTIP trust or a SLAT for the surviving spouse, with income or assets payable to the survivor over time, then the reduced present value of the income or annuity stream would be determined, and one-half of its value would then be subtracted to determine the survivor’s elective share
One Choice: The surviving spouse is limited to one choice: either abide by what the decedent’s Will provides for him or her, or take his or her statutory elective right. [MCL 700.2202(3).]
Duration of the Marriage is Irrelevant: There is no minimum period during which the spouses must have been married before the survivor to be able to exercise his or her elective right.
Waiver of Elective Right: An elective share can be waived by a spouse after fair disclosure. [MCL 700.2205.] The waiver can be executed both before and after the marriage. A waiver of spousal elective rights is often found in a prenuptial agreement. Less clear is if the waiver of spousal elective right is contained in a post-marital agreement which agreements Michigan courts have often found to be contrary to Michigan public policy. Wright v Wright, 279 Mich App 291 (2008.)
Notice of Election: The surviving spouse must be served notice of this right of election, with proof of service filed with the probate court. [MCL 700.2202(4) and MCL 700.3705(5).] The election by the surviving spouse is filed with the probate court and if an election is so filed, then the need for service and proof of service is obviated.
Allowances not Reduced: A surviving spouse’s elective share is in addition to the survivor’s right to a homestead allowance [MCL 700.2402] a family allowance [MCL 2403] and to the exempt property allowance [MCL 700.2404.]
Tax-Free: The surviving spouse’s elective share is not reduced by the federal estate tax. Michigan’s tax apportionment statute relieves the surviving spouse’s elective share of any federal estate tax liability, i.e. it qualifies for the unlimited federal estate tax marital deduction. [MCL 700.3921(2).]
Court Must Exercise: If the surviving spouse is a legally incapacitated person, the election can be exercised only by an order of the probate court where that spouse’s property is pending; the court must first find that the exercise of the election is “necessary to provide adequate support for the legally incapacitated person during that person’s life expectancy.” [MCL 700.2202(5).] A conservator need not be formally appointed for the legally incapacitated surviving spouse. The probate judge is authorized to exercise a surviving spouse’s elective right either acting directly or by appointing a conservator to make the election. [MCL 700.5407(2).]
Decease’s Debts Reduce Size of the Estate (and Elective Right): The statute provides for the surviving spouse to take ½ of what he or she would have received had the deceased spouse died without a Will, i.e. intestate. The decedent’s intestate estate is, however, reduced by any outstanding debts owed by the decedent, expense of estate administration, any exemptions and allowances paid.
Example: In a second marriage situation where there are no children of the second marriage, but the decedent Rosanne leaves two children from a prior marriage, the surviving spouse Dan’s intestate succession share, (before debts, administrative expenses, and exemptions are subtracted) is $159,000 plus 50% of the estate. Rosanne’s Will leaves everything to her two children. If Rosanne died with a probate estate of $160,000 after expenses of administration and debts are paid, Dan would take $80,000 if he elects against Rosanne’s Will (and her estate.)
Example: Bert dies with an estate, net of debts, administration expenses, and allowances, of $600,000. Bert is survived by his second wife Earnestine. Bert has two living children from his first marriage. Bert dies intestate. Earnestine’s share of Bert’s intestate estate is $159,000 + 220,500 = $379,500, with each of Bert’s children receiving $110,250. If Bert had left a Will leaving all of his assets ($600,000) to his two children and nothing to Earnestine, Earnestine would be able to elect against Bert’s Will (she would, as she receives nothing) and take her elective share. The elective share claimed against Bert’s estate would provide to Earnestine $189,750, with each of Bert’s children receiving $205,125.

Judicial Interpretations: Since Michigan’s elective share statute can be easily frustrated through a funded revocable trust that is designed to avoid probate of its assets, and through transfer-on-death beneficiary designations and joint ownership arrangements, Michigan courts seem to look for ways to expand a surviving spouse’s access to the decedent’s assets.

Joint Will: A surviving spouse was held to possess an elective right against all assets subject to a joint will that was signed by the deceased spouse with a prior spouse, by simply ignoring whether the joint will had conferred contractual or vested rights on its beneficiaries at the time of the first spouse’s death. In re Estate of Vacek, No. 253150 (Michigan Court of Appeals, July 14, 2005.)
Pretermitted Spouse: A surviving spouse was held to possess an elective right against the deceased spouse’s estate, in addition to the intestate share that is available to her as a pretermitted spouse who married the deceased spouse after the decedent had signed the will. A pretermitted spouse is the legal fiction employed that the testator forgot he/she had a spouse or child, so the forgotten person is entitled to a full intestate share of the decedent. [MCL 700.2301(1) and (4). In re Estate of Sprenkle-Hill, 265 Mich App 254 (2005).

Random Thoughts and Questions: The purpose of the spousal elective share is to prevent the impoverishment of the surviving spouse so that he or she does not become a ward of the state.

Since it is so easy these days to avoid a probate estate through revocable trusts, TOD and POD arrangements, and with so much wealth held in IRA that pass at death by beneficiary designation, one has to wonder as to the continuing utility of maintaining the current narrow EPIC spousal elective share

Michigan is in the minority when it restricts a surviving spouse’s elective rights solely to the deceased spouse’s probate estate. What do those other states know that Michigan does not know?

If so many in our state are concerned about its growing welfare rolls, why does Michigan continue to permit a spouse to effectively disinherit their survivor? Yes, the common law is built on the notion of testamentary freedom, but in a world of entitlements, why should one be entitled to take when in need, and yet still be free to give as he or she sees fit?

I have often thought of a fairer approach to address the potential economic hardship caused by a useless elective right that is tied solely to the decedent’s probate estate is a ‘stepped’ augmented estate approach now followed by other states, (although even those other states that follow the augmented estate approach to define spousal elective rights still make distinctions between what is, and what is not, in that augmented estate, and most follow an ‘all-or-nothing’ approach as to the amount.)

For example, Michigan could adopt the augmented estate approach, but rather than make it an all-or-nothing award to the surviving spouse, instead phase in the elective right award tied to the number of years of marriage. If the spouses were married less than 5 years, the survivor only receives 10% of their intestate share had the deceased spouse died without a will. If the marriage ranged between 5 and 15 years before one spouse’s death, the surviving spouse would vest in 10% of the full augmented estate amount each year, so that after 15 years of marriage, if the surviving spouse finds himself or herself as being disinherited, they could elect to take their entire augmented estate share, which might amount to 50% to 75% of the deceased spouse’s augmented estate. If this stepped approach to the spousal elective share is considered to be too much by one or both of the spouses, they could ask for a waiver of some, or all, of the elective right benefit from their spouse.

With the current rage in estate planning in anticipation of a change in Presidential administrations with ensuing tax law changes, including GRATs, CLATs, SLATs, and sales to grantor trusts for spouses, some thought needs to be given to the impact of those estate planning strategies on spousal elective rights. Consider a second marriage, with children from a prior marriage. If the surviving spouse elects against the decedent’s estate, that means that assets that might have passed to the decedent’s children from his or her first marriage, will now be taken away by their step parent, probably adding to tension that may already exist between the children and their step-parent.

More thought needs to be given to minimizing the likelihood of a surviving spouse exercising a spousal elective right, since its exercise can disrupt the decedent’s estate plan, and as noted, anger those who will inherit less simply by virtue of the election.

Example: Spouses have funded non-reciprocal SLATs on the premise that the income from both SLATs would be available to them as a married couple. The survivor will be denied indirect access to the income and assets of the SLAT that they created for their now-deceased spouse. Both SLATs might be drafted so that the death of a spouse (who thus no longer has indirect access to the SLAT that was created for that deceased spouse and its income) causes the right to distributions from the existing SLAT to change. Example: I create a non-reciprocal SLAT for my wife. That SLAT says. “Pay to my wife all of the income from this Trust as a matter of right.” The SLAT then provides: “In the event that I die before my wife [and she no longer has indirect access to or use of any income or assets to which I was entitled while I was alive], then in addition to my wife’s right to all of the income from this Trust, my wife shall also possess the right to withdraw 5% of the assets of this trust, determined on December 31 of each calendar year, and exercisable by my wife in writing delivered to the trustee, between December 1 and December 15 of the next following calendar year.”

Conclusion: It is time for Michigan to abandon its old and out-of-date elective share statute and adopt some form of the augmented estate for purposes of that election.