This article will discuss a surviving spouse’s Elective Share in North Carolina after the death of a deceased spouse.
North Carolina law gives a surviving spouse a guaranteed share of their deceased spouse’s net assets, which a surviving spouse can elect to receive if the election results in a larger share of a deceased spouse’s assets than he or she would otherwise have received under the deceased spouse’s will or – if there is no will – under the state inheritance laws.
The Elective Share statute is intended to protect a surviving spouse from being disinherited or left too small a share of a deceased spouse’s assets, by requiring a minimum percentage of the deceased spouse’s net assets to pass to or for the benefit of the surviving spouse. The minimum percentages are determined by the length of the marriage.
NC Gen. Stat. Section 30-3.1 gives a surviving spouse the right to take an Elective Share, which is a certain percentage of a deceased spouse’s “net assets,” (a) if the deceased spouse’s will leaves the surviving spouse less than his or her Elective Share, (b) if the surviving spouse’s share under the N.C. Intestate Succession Act (applicable when the deceased spouse has no will) is less than the surviving spouse’s Elective Share, or (c) if part of the deceased spouse’s assets pass under the will and other assets pass outside the will, In the last case, the surviving spouse would receive a guaranteed share of the combined value of the assets passing under the will and the assets passing outside the will.
If you find it odd that a spouse’s Elective Share might be larger than their share under the Intestate Succession Act, please note that a spouse’s “net assets,” which are taken into consideration in determining an Elective Share, include assets which are not part of a deceased spouse’s probate estate, i. e. the assets to which the Intestate Succession Act applies. We discuss this comparison in more detail below, under the heading, “Intestate Share vs. Elective Share.”
Elective Share issues often arise when a spouse has children from a prior marriage, to whom the parent wants to leave assets, in which case the parent often struggles to find a balance between providing for the surviving spouse and simultaneously making provision for the children. Fortunately, the use of Marital Trusts for the surviving spouse during his or her lifetime, followed by distributions (or further trusts) for the children and their families after the death of the spouse, can count as part of the surviving spouse’s Elective Share. Thus, a Marital Trust can address both a desire to provide for the surviving spouse and a desire to provide for the children and their families. See the topic below, titled “Use of Marital Trust to Satisfy Elective Share.”
A Pre-Nuptial Agreement (also sometimes called a Premarital Agreement or Pre-Marriage Agreement), signed by both parties to a marriage, can address these issues prior to the marriage, or a Post-Nuptial Agreement executed after the marriage, can address these issues, with input from both spouses. See topic below titled “Waiver of Elective Share.”
Comparison of Intestate Share with Elective Share in North Carolina
The percentages applicable to an Elective Share and to a surviving spouse’s share under the North Carolina Intestate Succession Act are completely different, and a comparison of those shares might be helpful.
We have another Article on our law firm’s Blog, titled “What Happens if You Die Without a Will?” to which you might refer for a longer, more detailed description of a surviving spouse’s share under the Intestate Succession Act, but for this article, let us just say:
Where there is a spouse and no children, the surviving spouse receives all the deceased spouse’s estate, if neither parent of the deceased spouse is surviving.
However, if one or both parents are then living, then the surviving spouse receives (i) the first $100,000 in personal property (assets other than real property), (ii) one-half of the remaining assets (i.e., personal property in excess of $100,000 in value, if any, and real property) are allocated to the surviving spouse, and the remainder to the parents.
With a spouse and one child surviving, nothing goes to the parents and the surviving spouse receives the first $60,000 in personal property; everything else is divided one-half to the spouse and one-half to the child. If the child is a minor, the child’s share goes to the guardian of his or her property, for the child’s benefit. The surviving parent is often the guardian.
With a spouse and two or more children surviving, the spouse receives the first $60,000 in personal property and one-third of the remainder. The remaining two-thirds share is divided equally among the children.
The Elective Share, on the other hand, is determined strictly by the length of the marriage. If the surviving spouse was married to the deceased spouse for less than 5 years, his or her Elective Share is 15% of the deceased spouse’s “net assets.” If married between 5 years and 10 years, the surviving spouse’s share is 25%. If married between 10 and 15 years, the surviving spouse’s share is 33%, and if married for more than 15 years, the share is 50%.
Just as important – or perhaps even more important – than the applicable percentages, is the distinction between the assets counted and against which any percentage is applied. The Intestate Succession Share includes only real property and probate property owned by a decedent at death, which does not automatically pass to someone else at death, and does not include certain assets described below, which are not part of the probate estate, but which are taken into consideration in determining an Elective Share.
In determining an Elective Share, the following assets are included, in addition to assets in the probate estate:
Assets held in a revocable trust created by the deceased spouse;
Assets over which the decedent had an unlimited power of withdrawal;
Depository accounts owned by the decedent, but payable on death to a beneficiary or beneficiaries named by the decedent;
Securities owned by the decedent (either in certificate form or in an account) which are transferable at death to a named individual or individuals.
Life insurance owned by the decedent, over which the decedent had the power to designate beneficiaries;
IRAs, pension or profit-sharing plans, or deferred compensation payable to a beneficiary;
Private orgovernment retirement plans.
Since assets under these types of ownership are not part of a decedent’s probate estate, those types of ownership, or powers to designate beneficiaries, are often used to avoid court administration of a decedent’s probate estate, to which the Intestate Succession laws are applicable, so the Elective Share Statute includes many more assets than are included in the deceased spoue’s probate estate.
Use of Marital Trust to Satisfy Elective Share
If you do not want to satisfy the Elective Share by leaving property outright to the surviving spouse, a Marital Trust (as described in NCGS Sections 30-3.2(3c)g and 30-3.3A) satisfies the Elective Share requirement. The Marital Trust must be for the exclusive benefit of the surviving spouse during his or her lifetime. That is, there may not be any other beneficiaries during that time, even discretionary ones. The following terms are applicable:
The surviving spouse must generally receive all the trust’s income, but the Trustee may be given the power to make discretionary distributions ofincome to the spouse, subject to a legally-enforceable “ascertainable standard,” for health, education, maintenance and support, in which case the unneeded income must be retained in the trust and cannot be distributed to others.
The Trustee may also have the discretionary power to distribute trust principal for the spouse’s health, support and maintenance.
In exercising the Trustee’s discretion, the Trustee may be allowed or required to take into consideration the surviving spouse’s other means of support.
The Trustee must be a “non-adverse” Trustee as defined under NCGS Section 30-3.2(3)
Please note that no distributions – not even distributions based on need – may be made to anyone other than the spouse, including children or other descendants of the deceased spouse. If a parent wants to make provision for distributions to descendants based on need, the parent needs to make such provision for them in his or her other estate planning documents other than the marital share and not as part of the Marital Trust, which is intended to count towards the Elective Share of the surviving spouse.
A tax benefit of using a Marital Trust to comply with the above requirements is that the entire value of the trust assets will qualify for the Estate Tax Marital Deduction in determining the deceased spouse’s federal estate tax, if any, but if used to qualify for the marital deduction for the deceased spouse’s estate taxes, those assets would be considered as part of the surviving spouse’s taxable estate (and could utilize the surviving spouse’s estate tax exclusion, if applicable, to minimize federal estate tax at that time.
Waiver of Elective Share
A spouse or prospective spouse may waive his or her right to an Elective Share by Pre-Nuptial or Post-Nuptial Agreement.
NCGS Section 30-3.6 provides that a surviving spouse may waive his or her right to an Elective Share, in writing, either wholly or partially, with or without consideration, either before the marriage or afterwards.
Such a waiver is often included in Pre-Nuptial Agreements, particularly when one or both spouses have children from their prior marriages. Although the waiver is often a full waiver, frequently a partial waiver is more appropriate, and provides that the surviving spouse will get a specific dollar amount or percentage of the deceased spouse’s assets, instead of waiving all their rights to receive any portion of the decedent’s assets. The waiver often provides that the deceased spouse can make provision for a larger inheritance for the surviving spouse, in which case the waiver will not preclude the deceased spouse from making larger provision for the surviving spouse, and will not prevent the surviving spouse from receiving the larger amount.
Post-Nuptial Agreements can be executed, whereby a surviving spouse waives, partially or completely, his or her Elective Share rights. Practically, however, there is often little incentive for a spouse to execute such a document after the marriage.
A written waiver may not be enforceable if the surviving spouse can prove that he or she did not receive a fair disclosure of the other spouse’s financial information prior to executing the waiver document, even though a party to the waiver agreement specifically waives the right to a disclosure. See NCGS Section 30.36(c). We have heard that Ivana Trump was presented with a Pre-Nuptial Agreement and signed it, literally at the church and with the organ playing the Wedding March. When she was later divorced, the Pre-Nuptial Agreement was set aside. We also understand that Jackie Kennedy signed a waiver without a full financial disclosure from Aristotle Onassis. After his death, she was awarded a much larger amount that was provided in the waiver document, even though it was common knowledge by everyone, including Jackie Kennedy, that he was extremely wealthy.
Consequently, it is very important that the parties be represented by separate counsel in the negotiation of a Pre-Nuptial or Post-Nuptial Agreement which waives the right to an Elective Share. It is recommended that a party be represented by an attorney or attorneys with expertise in both domestic relations law and estate planning law, to ensure that the procedures are strictly followed, to avoid a later challenge by the surviving spouse after the deceased spouse’s death.
Review of Old Waiver Documents
North Carolina’s current Elective Share Act was adopted effective October 1, 2013, which significantly changed our statutory law and increased the Elective Share of a surviving spouse. If you have a Pre-Nuptial or Post-Nuptial Agreement which was executed before that date, or if your estate planning documents are at least partially based on that Agreement, we suggest that you have your document reviewed by a knowledgeable attorney or attorneys. Unless the document provides otherwise, the surviving spouse may be entitled to a larger percentage or amount than provided in your documents. If you were made aware of that possibility, you may be able to up-date your estate plan to address your concerns more effectively.
If you want to discuss a surviving spouse’s Elective Share under North Carolina law, please contact our law firm at (336) 725-2900.
What is a “Trust Protector” and what is the purpose of a Trust Protector?
A Trust Protector is someone other than a Trustee who is appointed to oversee the administration of a trust, to ensure that unanticipated changes of law or changes in circumstance do not adversely affect the trust beneficiaries.
There can be a number of reasons for appointing a Trust Protector. Irrevocable trusts cannot be changed by the Trust Grantor (i.e., the Settlor) after the trust has been created. In North Carolina, an irrevocable trust may be modified during the lifetime of the Grantor by a Court without beneficiary consent, or by all the beneficiaries with the consent of the Grantor, but not by the Grantor alone. Such a modification, if allowed, may be expensive to accomplish.
After the death of the Grantor, it is necessary to have Court involvement, even if all the beneficiaries agree.
On the other hand, a Trust Protector can be given the power in a trust agreement to make changes in the terms of the trust – for example to adapt to factual changes or changes in the law which occur after the trust has been created, such as an unexpected death or a divorce or remarriage. This can be especially important in a long-term trust which is likely to last for many years or even decades. Also, a beneficiary may develop a personal problem, such as dependency of drugs, which was not originally anticipated.
A Trust Protector may be given broad powers over a trust, such as:
Removing or replacing a Trustee;
Directing, consenting to, or vetoing investment decisions;
Amending a Trust Agreement to reflect changes in state law or the tax laws;
Resolving disputes between Co-Trustees, if applicable, or between Trustees and Beneficiaries;
Changing distributive provisions of a trust to reflect changing needs of a Beneficiary;
Creating a power of appointment, whereby a new beneficiaries or beneficiaries can be added, even including as persons born or adopted years after the Trust was originally created; or
Changing the state, the laws of which are the governing laws for the trust.
A Trust Grantor should be careful in setting out the powers of a Trust Protector in a trust agreement. The more specific the powers of the Trust Protector are, the more likely that the Grantor’s wishes will be carried out.
Article 8A of N.C. Gen. Stat. Chapter 36C describes the powers, duties and liability of power holders other than trustees, and that of trustees of trusts for which there are outside power holders, see G.S. Sec. 36C-8A-1 et seq.
The selection of a Trust Protector is very important. Sometimes a Trust Grantor may wish to select someone with special skills or experience, or who is familiar with the family or with beneficiaries. Sometimes it may be preferable to appoint a committee to serve as Trust Protector. Anyone named by the Trust Grantor can be a Trust Protector, but it is generally better to have someone outside the family to serve in that capacity, who may be more objective than a family member. Often an accountant or attorney, or even a corporate fiduciary which provides trust protector services, is named as the Trust Protector. If you have questions about using a Trust Protector, please contact an attorney with our firm who practices in trust and estate planning or trust administration. Please contact our firm at (336) 725-2900.
As a general rule, parents of minor children are legally responsible for the “necessary expenses” of those children, including medical expenses, under the “Doctrine of Necessaries” (sometimes called the Doctrine of Necessities). Also, a spouse may be responsible for medical and certain other expenses of the other spouse.
Please note that, as a general rule, a spouse is not generally responsible for the debts of his or her spouse, and a surviving spouse is not responsible for the debts and expenses of a deceased spouse – unless they have co-signed or expressly guaranteed those debts. Instead, the estate of the deceased spouse is responsible for paying those debts out of the assets of the deceased spouse’s estate, and the decedent’s spouse and family are not responsible.
However, there is an exception to that rule, which is an outgrowth of the old common law Doctrine of Necessaries, under which a husband was responsible for the debts and expenses of his wife. Not surprisingly, that law has become outdated (and gender-neutral) for some time. Current North Carolina law and the laws of many other states include somewhat similar rules, applicable to both spouses and limited to medical and other necessaries, such as nursing home care and funeral or cremation expenses.
This issue can arise while both spouses are living, such as when one spouse seeks to discharge his or her medical bills through bankruptcy but finds that both spouses are responsible for each other’s medical bills. Perhaps more often, a surviving spouse may be personally liable for medical and funeral and burial expenses of a deceased spouse, if the deceased spouse’s estate does not have sufficient funds with which to pay those bills.
There is an exception to the current Doctrine of Necessaries when a married couple are legally separated, but only (1) if the spouses were legally separated at the time the services were rendered, and (2) the provider of medical services had actual notice of the separation at the time the services were provided.
Prenuptial agreements and postnuptial agreements can provide that one spouse shall not be liable for the debts of the other spouse, but those provisions would not necessarily provide protection from liability under the Doctrine of Necessaries, because medical providers are not parties to such an agreement and therefore the agreement would not be binding against a medical provider.
If you are anticipating a second marriage and are concerned about becoming liable for the debts and expenses of your second spouse, you can get a limited amount of protection through the use of such legal devices as irrevocable trusts, and you can address other such liabilities through life insurance, medical insurance and long-term care insurance. If you are in need of legal advice concerning a spouse’s medical and burial expenses or other necessary expenses, please contact our law firm at (336) 725-2900.
This article will not go into the ABCs of Charitable Remainder Trusts (CRT’s). We will assume that the readers are already somewhat familiar with CRTs, and the pros and cons of using CRTs in their personal planning.
Most of the time CRTs are created for an individual or married couple to make planned gifts to charitable organizations, whereby the trusts terminate upon the death of the Trust’s Settlor or Grantor (hereinafter called the “Grantor”) and/or, if applicable, the Grantor’s spouse. The immediate benefits to the Grantor include (1) a charitable deduction for income tax purposes in the year of the gift to the CRT, (2) the assets can be diversified and reinvested by the trust without immediate income tax consequences on all the capital gains realized if the assets are sold, and (3) there is no gift or estate tax consequence for a gift to the Grantor’s spouse, because of the gift and estate tax marital deduction.
Any charitable deduction would not be for the full value of the assets transferred to the CRT, but would be reduced by the likely value of the retained life interest of the Grantor (and the spouse, if applicable), using federal actuarial tables to determine their life expectancies along with other factors, such as prevailing interest rates (Applicable Federal Rate or AFR), the percentage payout during their lifetimes, and the frequency of distributions – whether monthly, quarterly, semi-annually or annually.
The ages of the life beneficiaries and the applicable payout percentage set forth in the trust agreement (it must be at least 5%), in addition to the value of the assets transferred to the trust, are the primary factors in determining the value of the charitable remainder, i.e., the amount of the Grantor’s charitable deduction upon the transfer of assets to the CRT,
Although not done often, it is also possible to name others (other than the Grantor and the Grantor’s spouse) as CRT beneficiaries prior to the ultimate charitable distribution, but there are a specific set of rules which must be strictly complied with, if the trust is to qualify as a CRT, most notably “The 10% Test,” which requires that the actuarial value of the charitable remainder be at least 10% at the time when the trust is created.
That is, the Grantor will not get the tax benefits described above if the CRT does not meet The 10% Test.
If a grandparent wanted to name a 5-year-old grandchild as a successor life beneficiary after the death of the Grantor and Grantor’s spouse, the trust would not pass The 10% Test, because that grandchild would have a 70-plus year life expectancy, and a CRT is generally required to distribute at least 5% per year to the individual beneficiaries prior to the termination of the CRT. Taking those factors into consideration, the trust would not pass The 10% Test. Consequently, it is not possible to use a 5-year-old grandchild as a measuring life for the term of a CRT.
The 10% Test prevents many people from using the lifetimes of their children and/or grandchildren as measuring lives for the term of a CRT. At the time this article is written, the Applicable Federal Rate (AFR) is still low by historical standards, but with inflation surging, the AFR is likely to go up as a percentage, which will affect the actuarial value of a charitable remainder interest. In May 2022, a new CRT for a married couple and their three children, using their five lives to measure the term of the CRT, would not meet the 10% Test unless the children were in their mid-forties, or older.
If someone wants to create a CRT for beneficiaries who are much younger than the Grantor, a CRT could possibly be created for a term of 20 years or less, instead of being created for the lifetimes of the young beneficiaries. In that case, a CRT for a term for a maximum of 20 years could meet The 10% Test.
Another possibility would be to create a CRT which used the lifetimes of older individuals as the measuring lives for the CRT term, but which named younger beneficiaries to receive the distributions. An example would be to create a CRT for a term ending with the death of the Grantors’ last living child, assuming that such trust term would satisfy the 10% Test, but would name the Grantors’ grandchildren as beneficiaries or successor beneficiariues during the lifetimes of the children whose lives were the measuring lives for the CRT. That way, the grandchildren might receive distributions for perhaps 20 or 30 years, but not for their lifetimes.
A good practical example of how a trust could benefit grandchildren would be: Suppose the Grantor had two children and created a CRT for the joint lifetimes of the Grantor and the two children, to terminate upon the last death of the three of them – and suppose that the Grantor and one child died, but that the surviving child lived for a number of additional years. The CRT could continue in effect until the second child’s death, but during the remaining trust term, the trust agreement could provide that the trust distributions would be one-half to the surviving child and one-half to the Grantor’s grandchildren by the deceased child. That way, the deceased child’s children would continue to receive distributions until the death of the Grantor’s second child.
Even when The 10% Test is met, there are other tax drawbacks to naming younger beneficiaries as non-spousal beneficiaries of a CRT: (i) the charitable deduction would be smaller at the time the trust is created; and (ii) the gift tax value of any individual beneficiaries other than the spouse, would use up part of the Grantors’ lifetime gift tax exemption or exemptions, and later, the estate tax exemption at the Grantors’ deaths. Notwithstanding those tax drawbacks, it might be worthwhile for someone to consider such a CRT. If you would like to consider the possibility of creating a CRT including other beneficiaries than you and your spouse prior to termination of the trust, please call our firm at (336) 725-2900 to arrange a planning conference with one of our attorneys.
