Spousal Elective Rights: Why Are Creditors More Important than a Surviving Spouse

Take-Away: A decedent’s creditor are treated more favorably than the decedent’s surviving spouse under Michigan’s probate laws.

Context: A law that has always puzzled me has been Michigan’s probate Code’s description of a surviving spouse’s elective rights. Michigan took a minority position when it adopted its version of the Uniform Probate Code with regard to identifying what portion of the deceased spouse’s estate could be elected against by their surviving spouse. Unlike the general provision afforded under the Uniform Probate Code which calculates the surviving spouse’s elective share based on the deceased spouse’s augmented estate (meaning all assets owned or controlled by the decedent at the time of death) Michigan’s statute limits the scope of the survivor’s elective rights solely to the decedent’s probate estate. Accordingly, any funded revocable Trust settled by the deceased spouse is excluded from their survivor’s exercise of his/her Michigan’s elective rights. Yet at the same time the decedent’s creditors will have access to the same funded revocable Trust’s assets to satisfy their claims. [MCL 700.7611; MCL 700.7612]

Practical Effect: A funded revocable Trust can be used to intentionally defeat a surviving spouse’s elective rights, but the funded Trust cannot be used to defeat deceased spouse’s creditor’s claims

Law: The elective share statute provides that the surviving spouse of the deceased spouse who died testate [with a Will] in Michigan can elect one of three [actually, now only two] options. The statute’s three express choices available to the surviving spouse are either:

Abide by the terms of the deceased spouse’s Will; or
Take one-half of the sum or share that would have passed to the surviving spouse had the deceased spouse died intestate (i.e. without a Will) reduced by one-half of the value of all property derived by the survivor from the deceased spouse by any means other than testate or intestate succession on the deceased spouse’s death; or
A widow can elect to take her dower rights as defined by statute. [MCL 700.2202(2)]

But Michigan abolished a widow’s dower rights last year [2016 PA 489] which means either that the surviving spouse can elect to take what was bequeathed to them under their deceased spouse’s Will, or they can take the formula driven one-half of the sum…….

The elective right must be exercised by the surviving spouse within 63 days after Notice of Claims against the estate are published, or the survivor’s receipt of the estate’s Inventory, calculated from whichever date is later.

Key Point #1: The elective right given to a surviving spouse may be exercised only against the decedent’s probate estate. Thus, if there is no probate estate, there is nothing against which the elective right can apply. Consequently, all of the non-probate transfer devices that are so popular these days as part of a comprehensive estate plan, such as life insurance beneficiary designations, IRA beneficiary designations, transfer-on-death and payable-on-death beneficiary designations, joint ownership held with third parties [think ladybird deeds] or most importantly the long-standing funded revocable grantor Trust, all remove the decedent’s assets from exposure to their surviving spouse’s elective rights under Michigan’s statute.

Key Point #2: The reduced by one-half portion of the elective share formula derived amount, i.e. the property derived by the spouse from the decedent by any means other than testate or intestate succession, includes all of the same non-probate transfer devices that remove assets from exposure to the elective rights of a surviving spouse.

Practical Issues:

Waiver: A spouse can waive his/her right to exercise an elective share right in a separate written instrument, with one caveat. The Michigan statute provides that ‘the rights of a surviving spouse to share under intestate succession. [or]. election, ..may be waived, wholly or partially, before or after marriage by a written contract, agreement, or waiver, signed by the party waiving after fair disclosure.’ [MCL 700.2205] Often the waiver of an elective right is contained in a prenuptial agreement. As a generalization, for a court to find a prenuptial agreement enforceable, there must be full disclosure of all of the parties’ assets, debts, and income, and the absence of any fraud, duress, undue influence or unconscionable terms.
Waiver’s Standard of Enforcement: The fair disclosure standard that is applied to a waiver of elective rights does not rise even close to the level that courts use in connection with the full disclosure standard applied to the enforcement of prenuptial agreements. One wonders if a prenuptial agreement that contains an elective right waiver is later challenged at the time of one spouse’s death, if the court will apply the weaker fair disclosure standard or the more onerous full disclosure (and its related limitations as to fraud, duress, undue influence, or unconscionable terms) to test the prenuptial agreement’s legal effect. The cynic in me, based on the Court of Appeal’s recent attacks on prenuptial agreements, suggests that a court will ignore EPIC’s lukewarm fair disclosure standard in favor of the more rigorous full disclosure test applied to prenuptial agreements.
Trust as Prenuptial Surrogate: When practicing law, I used to call the funded revocable Trust the coward’s prenuptial agreement. More frequently than you might suspect, I was visited by a man who had just exited from an ugly divorce who planned on remarriage. Usually the visit was about one week before he and his intended fiancée were scheduled to fly to Las Vegas for their wedding. I invariably suggested that they sign a prenuptial agreement that addressed the assets that he retained after the divorce as his separate property, and also that his fiancé waive any rights that she might have by law as his surviving spouse to elect against his estate and claim a portion of his separate property. That advice was usually rejected, the pretexual reason being that the ‘wedding was too close at hand to have time to prepare the agreement’, when the real reason was that he did not have the courage to ask his fiancée for a prenuptial agreement where her surviving spouse elective rights against his estate would be waived. In that situation I suggested that he create and fund a revocable grantor Trust before his wedding. Using the Trust to hold his post-divorce assets acted as a mechanism to segregate his post-divorce separate property assets from those assets that are accumulated during his second marriage, which would prevent any commingling of those assets; commingling is a sure-fire way to lose any protection a prenuptial agreement is intended to achieve with regard to separate property assets. And, as noted earlier, if the husband died, his new wife would not possess elective rights that would extended to his funded revocable grantor Trust.
Caution Ambulatory Clients: I would also caution the husband in the prior example that Michigan takes a minority position with regard to how elective rights are quantified (not pursuing the augmented estate approach) and that a future move to a different state other than Michigan could expose his funded Trust to a surviving spouse’s elective rights.
Common Law Exceptions: Even with Michigan’s fairly clear law that a surviving spouse’s elective rights are limited to the deceased spouse’s probate estate, some court have found common law equities to ignore the use of a funded Trust to limit those elective rights. The seminal case usually cited for this judicial exercise of equitable powers is Newman v Dore, 275 N.Y. 371 (1937) where the court found the decedent’s funded Trust to be either an illusory transfer or a contrivance on the rights of the surviving spouse, to subject the assets held in the decedent’s Trust to the surviving spouse’s elective rights.