By Katherine Saunders
Estate Planning Prior to, During and After Marital Dissolution
Consider the fact pattern below:
H and W separate and eventually agree that dissolution of the marriage is the only solution. W hires you as the family law attorney. Unfortunately, before a petition for divorce is filed, W is in a tragic car accident and hovers on the brink of life and death. It is not known whether she will live or even wake up. H has power of attorney over W’s health and finances, is the beneficiary of a life insurance policy, the beneficiary of W’s 401(k) plan, will, and a trust she created and funded with assets inherited from her father. If W dies before the divorce is final, H will take everything.
To make matters complicated, H gets a call from one of the members of a business venture in which he has an ownership interest reminding him that the buyout clause in a buy/sell agreement is triggered by the filing of a petition for divorce. The buyout terms would be unfavorable considering the growth potential of the business. Worse, while going to W’s apartment to check her mail H discovers that W has taken a large bank account in her own name with assets accumulated from a business venture of her own she entered after marriage, and she placed her children from a separate marriage as payable on death beneficiaries. Moreover, property tax assessments arrive in the mail, including one for a piece of real property W has bought in Colorado with someone else. A bank statement on a joint account verifies that a large part of the purchase came from joint funds through checks paid to a Colorado title company.
Dynamics such as these highlight the fragile framework to which divorcing clients are exposed. This article on estate planning and marital dissolution addresses how the legal structure of asset ownership within an estate-planning context interplays with potential dissolution of marriage and untimely death. It also highlights the effect of spouses having authority of fiduciary for each other as well as the effect of, restrictions on and vulnerability to asset transfers.
The dissolution of a marriage unravels numerous strands that weave through people’s lives like veins. More than the family home, bank accounts and children are implicated. Estate planning develops its own strands, including asset transfer, care of surviving spouses upon death and granting spouses fiduciary control upon disability. Most estate planning incorporates control over health, life and death decision-making and management of assets by the other spouse. Some of these issues can become actual conflicts of interest when the marital relationship unravels.
Estate planning usually includes a last will and testament and/or trust. A last will and testament transfers property through the court system in a probate procedure, while a trust is not subject to probate and creates an entity separate from a person transferring property according to its own terms. Other methods that also transfer property outside of probate include the automatic transfer to the survivor in joint tenancy with right of survivorship, properties which have beneficiary designations such as payable-on-death bank accounts, and beneficiary designations on IRAs and life insurance.
During the estate planning process, most individuals also execute documents which anticipate a time of disability, incapacity or life support in life and death instances, such as powers of attorney and advance health care directives. Most spouses name each other as their agent and frequently the authority is immediately effective.
PRIOR TO MARRIAGE
Before thinking about end-life decisions, some planning opportunities are only available before marriage. One is a prenuptial (antenuptial) agreement which can protect separate assets from later claims. These agreements are enforceable in Oklahoma1 subject to a showing of fraud, duress, coercion and overreaching in their execution.2
Usually a prenuptial agreement describes separate property and dictates its continuing characterization as separate in the event of marital dissolution or death. Other important elements might include:
- An agreement not to assert a right to inherit
- An agreement to provide life insurance on the other in lieu of an inheritance
- Rights of a widower to use separately owned residence at death (waiver of the surviving spouse’s homestead right)
- Agreement to a division of share at death into a trust which provides for restrictive distribution terms during the life of the surviving spouse and leaves the remainder at his or her death to beneficiaries of the deceased spouse’s choosing3
- Agreement to participate in estate tax planning4
A potential tool to protect a gift coming from wealthy parents to a son or daughter anticipating marriage is a trust estate unreachable upon demand by the child and thereafter, the child’s creditors or spouse, thus protecting those assets from later dissipation in the event of an unstable marriage or other life events. While in Oklahoma a trust cannot be created for oneself with one’s own assets with the goal of avoiding creditors,5 a completed gift of property to a beneficiary — whether outright or in a trust format, which is not reachable upon demand by the beneficiary and is property where the grantor has relinquished control — is protected by both the grantor’s and the beneficiary’s creditors (including a divorce action).
ESTATE PLANNING DURING MARRIAGE AND PRIOR TO FILING A PETITION
Prior to the initiation of divorce proceedings, the legal relationships created between spouses should be reviewed to determine how to safeguard financial and health care positions. Fiduciary relationships reflect an area where one spouse holds great power to alter the financial and sometimes health position of the other.
Powers of Attorney — One fiduciary role is typically granted to the other spouse through a power of attorney, which grants the power to another to make decisions which the individual himself could make.6
Havoc could result from misuse of this power by shifting and depleting assets, unsupportive medical decisions or commitment into medical facilities.
While an individual has mental capacity, the power of attorney may always be revoked. Revoking a power of attorney, however, does not remove the ability for the other to act on one’s behalf, as third parties are entitled to rely on the legitimacy of the power unless there is actual knowledge of its revocation.7 In order to effectively revoke the power, the revocation must be delivered to all parties who have possession of the granting instrument.
In the exercise of the fiduciary power, an attorney-in-fact is bound “by standards of conduct and liability applicable to other fiduciaries.” Oklahoma statutes do not describe the particular remedy for violation of that duty, but courts have held that at least a constructive trust is imposed due to the fraudulent misuse of a power of attorney with respect to property.8
In the earlier example of H and W, early replacement of the appointment of the other spouse as attorney-in-fact could avoid that control being an issue at a vulnerable time, such as by H changing the payable on death beneficiary on W’s bank account. The replacement of a spouse as an attorney-in-fact is not a change that requires the other spouse’s permission or even knowledge, as it is personal to each individual.
Advance Health Care Directive — An advance directive is a document which provides that in the event a person is terminally ill, in a permanent coma or otherwise alive only by virtue of life support and in a condition of severe and permanent deterioration, life sustaining treatment and/or food and water may be withheld.9
The decision to withhold life sustaining treatment and food and water can be left to a proxy, who is usually the spouse. In the H and W scenario referenced at the beginning of this article, the spouse might sustain or end the life of the other for a more favorable property division to the spouse having the power, by prolonging the use of a power of attorney to transfer funds (as it becomes void at death) or to hasten death to maintain the marital status until death.10
Do Not Resuscitate — A “do not resuscitate” (DNR) order refutes the presumption that a person would choose the administration of cardiopulmonary resuscitation in the event of cardiac or respiratory arrest. It can be executed by a person, by a power of attorney for health care decisions or by a proxy appointed in an advance directive.11
This document does not require that a person have dim hopes of a recovery, unlike an advance directive, and is therefore potentially dangerous in an arrest situation, as a hospital will likely follow it. Again, revocation of a “do not resuscitate,” power of attorney and advance health directive with distribution to appropriate medical files might be wise.
Trustee Designations — Where a husband and wife have separate trusts, each is usually trustee of his or her own trust with the other named as successor upon disability or death. Appointing a new successor trustee would avoid an uncomfortable situation of the spouse being trustee over the separate property of the other. Again, for a separate trust, this revocation does not require the spouse’s knowledge or consent.
Spousal Rights in Property Upon Death of the Other
Divorcing clients should be aware of not only the results of passing away with and without an estate plan in place, but also the survivor’s rights in the marital and separate properties of the deceased spouse.
Disinheritance v. Intestacy — Upon realization that a marriage is failing a spouse may wish to disinherit the other or avoid instigating a plan to provide for the other. In either instance, if an individual dies prior to dissolution of the marriage, Oklahoma law allows the survivor certain rights.
If a spouse dies without a will, assets which are in the person’s name at death (and not subject to joint tenancy, beneficiary designations or in trust) pass by “intestate succession.” Intestate succession is a statutory framework that creates a default last will by defining rights of others, including a surviving spouse, in the estate of a decedent.12
In the event there is no will and there are no children, parents or siblings, the surviving spouse receives all of an individual’s assets, even if the assets were accumulated before marriage.13 Where there are children from a prior marriage, parents or siblings, the surviving spouse receives either an equal share with each child;14 or in the event there are no children (but there are parents and/or siblings), spouses receive one-third of the estate.15 Additionally, the surviving spouse receives half of assets accumulated during marriage.
If a person assertively disinherits the other by will to avoid the statutory inheritance format and dies prior to or during pendency of the divorce, the surviving spouse may assert rights through a forced share of the estate; i.e. the “marital election.” The survivor has a right to “elect” an interest in the deceased spouse’s estate instead of taking under the provisions of the will.
In Oklahoma, pursuant to 84 O.S. 2011, §44, B, 1, the surviving spouse receives an undivided half of the interest in property acquired by joint industry during a marriage. The right to elect favors spouses with long marriages who have acquired abundant property during the marriage. This right is in lieu of all legacies in the last will and must be affirmatively made by written election, filed in the district court in which the decedent’s estate is being administered on or before the final date for hearing the petition for final distribution of the estate, or the right is barred forever.16
Separate v. Jointly Acquired — The ability to transfer assets during marriage in avoidance of division by divorce, or the right of a surviving spouse to elect against an estate of the decedent and the share allowed by intestate succession, depends on the characterization of the ownership as separate or by “joint industry.”
During marriage, a husband and wife may generally convey separate property from the reach of each other subject to limitations described in 43 O.S. 2011, §202.17 Property that is transferred which was accumulated by joint industry during marriage is more suspect.
Separate Property — The courts will generally uphold the transfer of separate property unless it appears intended to defraud, or the transfer is illusory.18
Separate property has been construed to mean 1) property owned prior to marriage, which retained its separate status during marriage 2) gifts to one spouse from a third party during marriage 3) gifts from spouse to spouse 4) property inherited by one spouse from a third party 5) an exchange of separate property from other separate property 6) a purchase of separate property from separate property.19 Therefore, in the opening scenario, if W had changed the beneficiary designation on the trust funded with assets inherited from her father, H would not have any rights when W passed away if she maintained the separate character of the assets.
Joint Industry Property — Transfer of property acquired during marriage as joint industry property is more problematic. While not a per se violation of marital rights, a transfer is analyzed to determine motive and intent.20
The definition of “joint industry property” and property acquired “during coverture” is more limited than all property acquired during marriage. However, there is a rebuttable presumption that property acquired during marriage is through the joint efforts of husband and wife.21 This may be true even if property is acquired or earned by, or in the separate name of, one spouse.22
Revocable Trusts — Assets in a revocable trust are brought back into the decedent’s estate for purposes of the marital election upon death, as a revocable trust is considered an incomplete gift, whether funded with property that is separate or jointly owned. Nevertheless, a determination will still be made to assess whether the property is jointly acquired within the definition of the marital election.23
Exceptions to Separate Property Protection — Upon death of a spouse, the residence of a person is available to the survivor as a homestead even if separate property, by virtue of a statutory life estate, unless abandoned.24 This right is not available for joint tenancy property owned with third parties.
Additionally, in the court’s discretion, a financial allowance for the surviving spouse and/or children may be carved out of the entire probate estate during the pendency of the probate.25
Transfers of Property from the Estate —Effect of Death of a Spouse
Various forms of asset ownership and transfer might be beyond the reach of the marital election by the surviving spouse upon death of the other.
Irrevocable Gifts — Within a marriage, husbands and wives often make gifts of property through irrevocable trusts in order to accomplish estate tax and asset protection planning goals.26
A situation can be imagined where some of the assets of a wealthy spouse accumulated by him or her during marriage could be placed into an irrevocable trust for the benefit of the wealthy spouse’s children by a previous marriage, thereby depleting the share of the transferor’s estate for purposes of property division upon divorce.27 This is a different scenario than one where assets are transferred to a child with the unspoken understanding that they will become available to the transferring parent following divorce.28
Other jurisdictions have addressed issues relating to unilateral gifts of marital assets, defining the following factors in determining whether a transfer violates marital rights.29
- The proximity of the gift to the parties’ separation.
- Whether the gift was typical of those made prior to the breakdown of the marriage.
- Whether the gift benefitted the joint marital enterprise or benefitted one spouse to the exclusion of the other.
- The need for, or amount of, the gift.
Wealth Preservation Trust — A wealth preservation trust, defined by 31 O.S. 2011, §11, et seq. is an exception to the rule regarding protection of one’s own assets from creditors and potential continued use and the reachability of a revocable trust. In this case, a trust may be created by a grantor and funded up to $1,000,000 for the benefit of beneficiaries, such as children. If a grantor desires access to principal he or she may revoke a part of the trust without the whole considered accessible for purposes of creditor protection, and it is not reachable by the divorcing spouse except as to the portion revoked.30
The only exception to the protection of the assets from creditors of the grantor are payments under a child support judgment, and existing mortgage or security interests.31 Assets transferred to a wealth preservation trust would also be subject to the same scrutiny with respect to unconscionability and fraud, in the event of marital dissolution.
Change of Beneficiary Designation — In the event a spouse dies during marriage and has assets which name beneficiaries other than the spouse, those assets will pass to the named beneficiaries absent clear intent to defraud the marital estate or federal law issues such as the Employee Retirement Income Security Act.32
In the Matter of Estate of Wellshear33 upholds the transfer of IRA assets to children of the deceased, defeating the marital election.34
During an owner’s lifetime, the asset is fully vested only in the owner, and therefore subject to marital claims.
Payable on Death Clauses — A payable on death clause is one that allows an owner of certain assets, such as bank accounts, to designate a trust, person or persons to receive the assets in the account upon the death of the owner.35
Therefore, absent fraud or other valid claims, a payable on death asset will pass to the named beneficiary upon death of the owner, thereby defeating the marital election. However, as is generally true with beneficiary designations, during an owner’s lifetime the asset is fully vested only in the owner, and therefore subject to property division upon divorce.
Joint Tenancy Property — Assets in joint tenancy with an owner other than the spouse will pass outside the marital election. Joint tenancy property is ownership that “establishes a present estate in which both joint tenants are seized of the whole.”36 There is no interest that passes to the survivor since, “title of the joint tenant who dies first terminates at death and vests eo instant in the survivor.” Additionally, “[The] survivor takes the entire estate to the exclusion of heirs of the deceased.”37
Nevertheless, a transfer of an interest into a joint tenancy relationship is subject to claims of fraud, and in that event a constructive trust will be imposed on the property.38
While death extinguishes the interest of the first to die, joint tenancy property is also subject to severance during life and therefore reachable to the extent of a person’s interest. Additionally, any joint tenancy arrangement can be severed by the transfer — by either party — of their undivided percentages in the whole, which has the effect of creating a tenancy in common. The effect as between spouses would be that the decedent’s estate has an undivided interest subject to the surviving spouse’s marital rights or intestate succession.39
Therefore, in the earlier example, W’s transfer of funds from a joint account to purchase joint tenancy property with another will be analyzed to determine whether fraud applies to set aside the purchase.
Common Joint Estate Planning Affected
Asset Splitting — Traditionally, to use each spouses’ unified credit (the amount each person can transfer at death without the imposition of the estate tax), some assets from a wealthier spouse were re-titled in the name of the less wealthy spouse to use that person’s unified credit in the event he or she died first. The assets in the amount of the credit then funded a trust either for children, or with restrictive use by the survivor to avoid inclusion in his or her estate. Most likely, a transfer of separate property would not have been made in contemplation of divorce, so the issue becomes whether the wealthier spouse has made a gift of that separate property, thereby erasing its separate character.
It has been held that where marital assets were transferred to separate revocable trusts expressly for estate planning purposes, they remained marital property for the purposes of division in case of divorce.40 If there is evidence supporting joint use and management during continued marital relations after creation of the trust, the assets may be marital property for division in divorce.41
Presumably, the same would be true for separate property, absent commingling but for the transfer for the purpose of planning.
Marital and Credit Shelter Trusts — In tandem with asset splitting, the effective operation of the “bypass trust” described above might be less than desirable in the event of divorce, except that death arrives before the final decree. For example, a deceased spouse (who died in 2012) funded a bypass trust at death to the extent of the unified credit ($5,120,000), which left everything to his or her children by a separate marriage. The choice for the survivor, of course, is election against the will. However, the will and/or trust might also transfer everything to the surviving spouse and in the event of death prior to divorce, the spouse will receive much more than through the marital election.
Shareholder/Buy-Sell Agreements – Family Partnerships — Wealthy families often create entities like family partnerships or limited liability companies to consolidate family assets and provide a gifting mechanism to younger generations. Divorce may upset the plan if a spouse is involved. Many shareholder and buy-sell agreements include provisions that, upon the filing a petition for divorce, the other owners have the option of purchasing the divorcing owner’s interest. These agreements should be analyzed to determine the effect of a divorce proceeding on rights to stay involved with the entity and the particular buy-out terms.
Again, back to the earlier example, it can also be imagined that the unfavorable buyout terms of the buy/sell agreement that H is subject to could encourage unscrupulous use of the advance directive to hasten death, if W otherwise meets the criteria.
Positioning clients to retain the status quo with respect to assets as a divorce progresses, educating about legal relationships of asset ownership and control, and possible impediments to planning after a divorce is filed should be as much a part of the divorce-planning process as analyzing assets from an accounting perspective. These issues all involve some aspects which a family law and estate planning attorney, working together, should address at an early stage in contemplation of the process (before the accident).
- Review prenuptial agreements
- Review or create spendthrift trusts for others (by parents)
- Review fiduciary and dispositive provisions of documents
- Do not commingle separate assets
- Review wills and trusts
- Review asset ownership
- Review beneficiary designations.
- Review partnership buy/sell agreements
1. Freeman v. Freeman, 1977 OK 110, 565 P.2d 365. Early Oklahoma courts disfavored prenuptial agreements as “…wicked device[s] to evade the laws applicable to marriage relations, property rights, and divorces” which were “clearly against public policy and decency,” an attempt by the husband to “legalize prostitution, under the name of marriage.” Burgess’ Estate, Matter of, 1982 OK CIV APP 22, ¶¶ 10, 12 646 P.2d 623 (OK APP. 1982), quoting Estate of Duncan, 87 Colo. 149, 285 P. 757 (1930). The court in Burgess disagreed, “Well-intentioned though this chivalrous attitude may have been in the past, times have changed. It will no longer do for courts to look on women who are about to be married as if they were insensible ninnies.”
2. Burgess, at ¶17, 646 P.2d 623. The following are defined by Burgess as factors supporting sustaining an agreement: that it is fair; with reasonable provision made for the other party; a full, fair and frank disclosure of each other’s worth. Id. at ¶16. Additionally, it must be in writing, and the other party should have sufficient opportunity to consider its provisions. Representation of each party by their own counsel and full written disclosure of assets should protect each party’s interest.
3. One such trust is called a Qualified Terminal Interest in Property Trust (“QTIP”), which provides for income and perhaps limited principal to a surviving spouse upon death of the trustor, but will pass the remainder to beneficiaries the other party chooses who could be children by a prior marriage from the wealthier spouse. It also qualifies for the marital deduction, which is a right to inherit by each spouse without incurring estate tax, but the property in the end does not rest in his or her estate. In this case, the QTIP might also provide for a lesser amount transferred to the spouse than realized by a claim through the marital election.
4. Such as gift splitting, which is a tax provision that allows one spouse to attribute funds of his or her own to the other in gifting to a third party, taking advantage of the $13,000 annual exclusion (in 2012) or lifetime gift amount allowed each person of $5,120,000 million (in 2012). The spouse does not actually receive the funds or have an option to direct their use.
5. See, 60 O.S. 2001, §299.15. Section 299.15 states that a reservation of a power to revoke a transfer characterizes the asset as owned by the grantor, for purposes of creditor rights.
6. Powers of attorney are dictated by 58 O.S. 2011, §1071 et seq. It is a written document whereby a person appoints another as his “attorney-in-fact.” An “attorney-in-fact,” who is a person authorized to act in one’s place and stead, either for some particular purpose, as to do a particular act, or for the transaction of business in general. The power may be limited or it may be general, encompassing all that an individual could do. Excepted from the power of attorney is creating an advance health care directive or other document giving power over life sustaining treatment as well as making life sustaining decisions, unless the power of attorney contains the statutory language required by statute in those documents. Id. At §1072.1.
7. Id at §1076.
8. See, Robertson v. Robertson, 1982 OK 108, 654 P.2d 600.
9. 60 O.S. 2011, §3101.3.
10. 60 O.S. 2001, §3101.11, C provides that a person “who willfully conceals, cancels, defaces, alters, or obliterates the advance directive of another without the declarant’s consent, or who falsifies or forges a revocation of the advance directive of another shall be, upon conviction, guilty of a felony.” Paragraph D provides that a person who falsifies or forges the advance directive of another, or conceals knowledge of its revocation, is guilty of a felony. Paragraph E provides that a person who coerces or fraudulently induces another to execute a directive shall be guilty of a felony.
11. Generally, a “do not resuscitate” is a document that would not be carried everywhere out of concern that it will be literally followed, when a long and happy life could have been a possibility following recovery from a cardiac arrest. There should be caution in using this document, since it does not always apply to end-life conditions.
12. 84 O.S.2011, §213.
13. 84 O.S. 2001, §213, B, 1, a.
14. 84 O.S. 2001, §213, B, 1, d, 2.
15. 84 O.S. 2001, §213, B, 1, b, 2.
16. 84 O.S. 2001, §44, B, 2 and 3.
17. 43 O.S. 2001, §203 states that “Except as mentioned in [43 O.S. 2001, §202], neither husband nor wife has any interest in the separate property of the other….” 43 O.S. 2001, §202 states that a husband must support himself and wife out of the community property or separate property or by his labor. A wife must support the husband (if he has not deserted her) out of the community property, or out of her separate property when he has no community or separate property and he is infirm.
18. See, Irvin v. Thompson, 1972 OK 99, ¶9, 500 P.2d 283, where the court upheld a transfer of separate property where it was not for the purpose of defrauding creditors (stating that the surviving spouse was not a “creditor”). Courts v. Aldridge, 1941 OK 405, ¶¶ 1, 6; 120 P.2d 362 (husband continued to take rents from land, pay taxes, remaining in possession and control).
19. Estate of Hardaway, 1994 OK 30, ¶9, 872 P.2d 395 (Oklahoma 1994).
20. The courts in Oklahoma have held that “…if one spouse ‘gave away [the parties’] jointly acquired property with an intent to defraud [the other spouse] of…marital rights to this property upon [the giving spouse’s] death then the law should be just as responsive in protecting [the defrauded spouse’s] interest as in instances …where the gift is made anticipatory to a divorce, or whether it is given incomplete with an attempt to defeat the [the spouse’s] interest…’” In the Matter of Estate of Wellshear, 2006 OK CIV APP 90, ¶15, 142 P.3d 994, quoting Sanditen v. Sanditen, 1972 OK 39, 496 P.2d 365. In Sanditen, the court said that a spouse cannot transfer jointly acquired property without the consent and knowledge of the other “where the transfer is in fraud of the wife’s marital rights.” However, the interest of a spouse in property acquired during joint coverture is not vested, the court said, until the occurrence of a “statutorily enacted contingency such as divorce, separation, inability to support, homestead and death, all of which emanate from the marriage relationship.” In that case, a spouse cannot “make a disposition of the property anticipatory to a divorce proceeding to defeat a division of jointly acquired property.” Id. At ¶¶3 and 8.
21. Manhart v. Manhart, 1986 OK 12, ¶38725 P.2d 1234.
22. See, In re Estate of Stone, 206 P. 246 (Oklahoma 1922), which refuted the contention that: “We do not think that mere housekeeping, the importance of which, when well done, cannot be overestimated, falls within the definition of industry, so as to make the wife, who does nothing else but keep house, engaged in joint industry with her husband, who may be engaged in banking, merchandising, manufacturing.” The court disagreed, saying that the industry of a husband and wife, each in his or her own sphere of marital activity, is adequate to be joint, and the labor doesn’t have to be identical and in the same course of employment. Id. at ¶¶6 and 7.
23. See, Thomas v. Bank of Oklahoma, N.A., 1984 OK 41, 684 P.2d 553, which held that the revocability of a trust by a testator created an incomplete gift, and therefore, the trust was an asset of the estate for purposes of the marital election. In this case, the assets that funded the trust were the separate inherited assets of the spouse, and although brought back into the estate for marital election purposes and reachable, might not be accessible to the survivor by marital election today. 84 O.S. §44(B)(2) was amended in 1984 and applied to estates of decedents who died after July 1, 1985. Prior to then and at the time of the decision in Thomas, the election applied to ½ of non-joint industry property and existed as a right, rather than by election. 84 O.S. §44 (A)
24. Pursuant to 58 O.S. 2011, §311, a surviving spouse may continue to occupy the residence of the decedent for his or her lifetime. This right is not an estate in land but, a “mere personal right or privilege or individual right, distinct from the interest which the surviving spouse takes in the land…and that it is merely a right to continue to possess and occupy the property as a home, which may be lost by abandonment or terminated by any one of many different ways.” Kemp v. Turnbull, 1946 OK 277, 174 P.2d 384, ¶8.
25. 58 O.S. 2001, §314. However, while a marital election may apply to a revocable trust of the deceased, presumably a spousal allowance would not since the court does not have jurisdiction over a trust, which is a non-probate asset.
26. Estate tax savings come into play when a couple’s taxable estate exceeds the amount which can be passed onto the next generation without the imposition of the estate tax, which is $5,120,000 in 2012, slated to return to $1 million in 2012. Only in 2012, each person also has the right to gift away the same amount. The benefit is that once gifted, the appreciation can occur in the next generation, not subject to the claims of a decedent’s creditors or added into the estate for tax purposes. Additionally, as this historic gift figure is slated to expire, this is a year when the greatest gain can be made from a large gift. Asset protection is created by the transfer of assets out of a person’s estate. If the transfer is not made with the intention to defraud creditors, the assets are protected from that person’s creditors. If the transfer is made through an irrevocable trust that contains restrictive language in terms of distributions, the assets also will not be subject to the beneficiary’s creditors.
27. See Sanditen v. Sanditen, 1972 OK 39, 496 P.2d 365, ¶ 8, which stated that one spouse “cannot complain of reasonable gifts by the [other] to ... children by a former marriage.”
28. See, Sanditen :“[I]t is only when the gift has sinister elements of fraud of the marital rights that the law protects the [spouse from the gifts by the other]”. Id. at ¶9.
29. See, Kothari v. Kothari, 255 N.J. Super. 500 (App. Div. 1992).
30. Pursuant to 31 O.S. 2011, §12: “Notwithstanding Section 3 of this title and Section 299.15 of Title 60 of the Oklahoma Statutes, the corpus and income of a preservation trust shall be exempt from attachment or execution and every other species of forced sale and no judgment, decree, or execution can be a lien on the trust for the payment of debts of a grantor…”
31. Id. at 12.
32. Note, where a change in beneficiary would result in a minor child receiving the asset, creating a trust for the child to receive it instead would not only avoid the Uniform Transfers to Minors Act, but also provide distribution provisions and protection of the funds for the child. 20 O.S. 2001, §1201 et seq.
33. In the Matter of Estate of Wellshear, 2006 OK CIV APP 90, ¶12, 142 P.3d 994
34. The wife contended that the beneficiary designation of the husband’s IRA which named children by a prior marriage as beneficiaries was invalid. She claimed that the IRA was a testamentary disposition, not executed with statutory formality, or alternatively was subject to the marital election. The court held that federal law governed the right to designate beneficiaries of IRAs, and where “the dispersion of accrued benefits on the premature death of a member was clearly the secondary consideration in the contractual agreement creating the membership”… it “would not extend the definition of the term ‘will’ to such instruments.” (quoting Pepper v. Peacher, 1987 OK 1, 742 P.2d 21). The court further disallowed the application of the marital election to the IRA as the terms of 84 O.S. 2001, §44(b)(1) which state that no spouse shall “bequeath or devise away from the other so much of the estate of the testator that the other spouse would receive less in value than an undivided one-half interest in property acquired by the joint industry…,” did not apply, holding that a beneficiary designation is not a bequest or devise.
35. Under Oklahoma law, 18 O.S. 2011, §381.39a, B,1 states that when a deposit is made “in any association” using the terms “payable on death” or “POD,” the deposited funds shall be paid at death to a trust or individual or individuals named as beneficiary, “notwithstanding any provision to the contrary contained in Sections 41 through 57 of Title 84” (encompassing the marital election provision of Section 44). Prior to the passage of 18 O.S. 2001, §381.39a, case law suggested that payable on death clauses were “in the nature of testamentary dispositions” and therefore, required the statutory formality of will execution for a transfer to the intended beneficiary to be valid. Waitman v. Waitman, 1972 OK 157, 505 P.2d 171. However, the passage of Section 381.39a dismissed this theory. Section 381.39a, C applies the statute to “all forms of deposit accounts, including, but not limited to, transaction accounts, savings accounts, certificates of deposits, negotiable order of withdrawal accounts and money market deposit accounts.
36. Clovis v. Clovis, 460 P.2d 878, 881-882.
37. Draughon v. Wright, 200 Okl. 198 191. P.2d 821 (1948).
38. Alexander v. Alexander, 538 P.2d 200 (1975). “If one obtains the legal title to property by fraud or by violation of confidence or fiduciary relationship, or in any other unconscientious manner so that he cannot equitably retain the property which really belongs to another, equity…[imposes] a constructive trust upon the property in favor of the one who in good conscience is entitled to it….” Peyton v. McCaslin, 1966 OK 4, 417 P.2d 316, ¶15, quoting Powell v. Chastin, 318 P.2d 859.
39. See, Shackelton v. Sherrard, 1963 OK 193, 385 P.2d 898.
40. See, Dorn v. Heritage Trust Co., 2011 OK CIV APP 64, 24 P.3d 886.
41. ¶¶15, 16 Kelln v. Kelln, 30 Va. App. 113, 515 S.E.2d 789 (1999).
ABOUT THE AUTHOR
Katherine Saunders is of counsel to the Tulsa law firm of Eller & Detrich PC, practicing law in the fields of trusts and estates, business succession, asset protection and structuring, business formation, tax-exempt organizations, probate and guardianship, with a J.D. from the University of Tulsa, and an M.B.A. and B.A. from Trinity University. She is a frequent speaker in CLE programs.
Originally published in the Oklahoma Bar Journal -- Aug. 11, 2012 -- Vol.83, No. 20