We don’t often get the question, “Can I disinherit my spouse?” but the subject has been fraught with consternation for Maryland estate planners for many (many, many) years; we used to have to answer it with “it depends.” We will soon have greater certainty—for decedents dying on or after October 1, 2020, it’s going to be harder to disinherit a surviving spouse entirely in Maryland. It will be easier, however, to design an estate plan that pre-funds the spouse’s share, balancing competing interests without disrupting the family business or forcing the sale of illiquid assets.
A Little History
To understand the impending (and extremely complicated) new rules, it helps to explain how the old rules worked and why they stopped working. Under old law (still in effect until October 1, 2020), a surviving spouse who was dissatisfied with what s/he would receive under a predeceasing spouse’s last will and testament could elect instead to take a fixed portion of the “net estate” (referring to the probate estate) of the predeceasing spouse either one-third or one-half, depending on whether or not
the predeceasing spouse had any surviving children, grandchildren, or more remote descendants. At a time when all (or at least the lion’s share of) a person’s assets could reliably be expected to pass through probate, this system worked as intended, to balance the interests of the surviving spouse (not wanting to be disinherited), the State (not wanting to support too many impoverished surviving spouses), and the decedent (not wanting his/her testamentary freedom curtailed).
Then two things happened over time: people started amassing assets in retirement plans (sometimes the largest single asset a person holds at death), which do not pass through probate; and trust law improvements made it more inviting for people to use revocable living trusts as a probate avoidance tool. What did that mean for the surviving spouse’s right to take a share of the net estate? It meant s/he would probably get either too much or too little!
Let’s illustrate by considering television’s best known blended family: the Brady Bunch.
Mike Brady wants his assets to be split between his wife, Carol, and his sons when he dies. He has an IRA of $250,000 and names Carol as beneficiary. They have joint checking and savings accounts totaling $50,000. Mike has a life insurance policy of $300,000 and names Carol as beneficiary. He holds title to a $300,000 residence, an investment account worth $100,000 and business interests worth $200,000, and he keeps those assets titled in his own name. He names his sons as beneficiaries under his will. Here’s how that $1.2 million actually shakes out when Mike dies:
- The IRA and life insurance go where he directs them (outside of probate): to Carol. $550,000.
- The joint checking and savings accounts go to Carol by operation of law (outside of probate). $50,000.
- The residence, investment account, and business interests are all probate assets, $600,000 total, and Mike’s will directs them to his sons.
- However, Carol can claim an elective share of the probate assets ($200,000).
- This means that, if Carol files an election, Carol gets all of the non-probate property ($600,000) AND one-third of the probate property ($200,000); Mike’s sons get only $400,000. Carol gets two-thirds of the whole, which is more than the one-half Mike intended her to get. Mike’s sons have no recourse under current law. To make matters worse, Carol’s claim is applied pro rata against all of the probate assets, meaning she will take one-third of the residence, one-third of the investment account, and one-third of the business interests. That could potentially force a sale of the residence or business; at a minimum, it may be very disruptive to the business.
Now imagine the same family and the same assets but Mike titles things differently. Before he married Carol, Mike did his estate planning and he placed the residence, the investment account, and the business interests in a revocable trust. He named his sons as beneficiaries of his IRA and life insurance. He doesn’t update these arrangements after he marries Carol. Yes, they set up joint checking and savings accounts of $50,000, and those will go to Carol, but there’s no probate estate at all when Mike dies. Mike’s sons get the other $1,150,000 via non-probate arrangements. Carol ends up with about 4% of the total assets. She has been largely disinherited. Although there is case law that could potentially help her, we don’t really know her chances of success, so her attorney cannot confidently advise her.
Imagine the titling of assets in Mike’s revocable trust and the designation of his sons as beneficiaries of the IRA and life insurance were not the result of Mike neglecting to update his plan, but were done instead towards the end of Mike’s life while his health was failing, at the behest of his sons who had fallen out with Carol.
These stories—same family, same assets, different titling, different motivation—illustrate that the current statute is both too narrow and too broad. In each situation, it fails to achieve its purpose—to balance the competing public policy interests.
Hence, a New Statute
To address this problem, the General Assembly enacted sweeping reform legislation, effective October 1, 2020, that will pull all of Mike’s assets (both probate and non-probate, and even certain gifts he may have made to his boys before death) into the pot (the “augmented estate”) for consideration.
In our example (because only Mike’s share of the joint assets—and not Carol’s—are part of the augmented estate), the augmented estate would be $1,175,000 under the new statute, assuming Mike made no lifetime gifts. The calculated value of the augmented estate is then reduced by certain items it seems unsporting to keep in there (such as the cost of funeral expenses, enforceable claims, and any lifetime gifts to which Carol actually consented) to determine the “estate subject to election;” here, let’s assume reductions of $50,000 to make our math easier. Carol will be entitled to claim one-third of the estate subject to election because Mike has children (it would be one-half if he had none), so $1,125,000 ÷ 3 = $375,000. However, certain arrangements that provide a benefit to Carol (“spousal benefits”) will be credited against this $375,000, either in full or in part. Here, the IRA and life insurance totaling $550,000 exceed Carol’s elective share of $375,000, and Mike’s estate gets credit for that; as a result, Carol cannot claim any additional assets beyond what Mike has already arranged to give to her. This “spousal benefits” concept affords Mike greater testamentary freedom, as it allows him to structure his estate plan so as to satisfy Carol’s elective share claim through his non-probate arrangements, which means he can safely leave his business interests and other probate property to his boys.
How, then, do you disinherit your spouse in Maryland? It still depends.
If you expect to die before October 1, 2020:
- Arrange to have no probate estate—put assets in a revocable trust and other non-probate vehicles.
- Leave all non-probate assets to someone other than your spouse.
- Be careful about the 401(k): federal law requires you to leave this asset to your spouse unless s/he consents to your designation of someone else as beneficiary. If you are retiring, you could roll it into an IRA, which is not subject to the same rule (but may have other drawbacks).
- Keep in mind that your spouse, if s/he will have the means to hire counsel, could potentially seek judicial relief, especially if s/he can demonstrate that you made these arrangements deliberately to defeat his/her spousal rights.
- A better alternative: get a postmarital agreement wherein you and your spouse both waive elective share rights.
- Another alternative: move to Georgia; it has no elective share.
If you expect to survive to October 1, 2020:
- See your estate planner about restructuring your plan to create adequate “spousal benefits” that will offset the elective share. This could include creating a trust for your spouse, using life insurance, or carving off other assets that could flow to your spouse.
- Another alternative: get a postmarital agreement wherein you and your spouse both waive elective share rights.
- Another alternative: move to Georgia; it has no elective share.
The Maryland changes were enacted with a delayed effective date in part because they are so complicated; the intervening year gives Maryland attorneys time to learn the nuances of the new rules, alert their clients, and start to update affected estate plans.
Another tip: your power of attorney may need to be updated after the new law takes effect, to ensure that your agent has explicit authority to make an elective share claim on your behalf. This can be particularly important for nursing home residents who receive public benefits.
Virginia residents: Virginia also uses an “augmented estate” approach to the spousal elective share, but its statute is very different. It has a vesting schedule based on the length of the marriage, and it takes the spouse’s own assets into consideration in computing what s/he can claim from the deceased spouse’s assets.
DC residents: DC still uses the older system, based on the probate estate, but the DC City Council does pay attention to changes in MD and VA, so the fact that both of those jurisdictions have moved to the augmented estate regime may portend changes in DC before long.