Ethics in Estate Planning for a Married Couple
By Stephen J. Dunn
In 1990, in Lawrence Brody’s estate planning seminar in the LL.M. program at Washington University in St. Louis School of Law, Professor Brody mentioned a husband and wife retaining separate estate planning counsel. At the time separate estate planning counsel for spouses struck me as a bit much.
I have since come to realize that separate estate planning counsel can indeed be advisable for spouses. I recall a certain physician client in 1991. He owned a condominium in his name alone, that his wife didn’t know about. Due to the wife’s dower right, the physician could not convey the condo to a trust or sell it without the wife’s signature. The physician could have avoided this problem by taking title to the condo in the name of an LLC or corporation.
I have seen many situations where a husband wanted the bulk of the couple’s property transferred to his revocable trust. Often this includes the husband’s interest in a closely-held business.
If a conflict of interest arises in fact between the spouses, their estate planning attorney should withdraw and advise the spouses to retain separate counsel. Having represented both of the spouses, the attorney may not thereafter represent one of them against the other, even if they consent.
An attorney should also avoid the appearance of impropriety. When I communicate with the spouses about their estate plans, I talk with both of them in person in my office, over the telephone with both of them on the line, or in an email to both of them. Usually one spouse would not mind if I communicate ex parte with the other spouse. But I don’t want to give them the opportunity to mind. I avoid the appearance of impropriety.
Frank and Jamie McCourt were married in 1979. They resided in Massachusetts. In 2004, they bought the Los Angeles Dodgers baseball club, and planned to move to California. Their estate planning attorney drafted a postnuptial agreement which purported to “transmute” the Dodgers into Frank’s separate property. In the McCourts’ divorce proceedings, the Los Angeles Superior Court set aside the postnuptial agreement, due in no small part to the drafting attorney’s conflict of interest in procuring it. In my post on this case, I suggested that Jamie McCourt had a malpractice claim against the drafting attorney for the attorney fees she incurred in having the postnuptial agreement set aside.
Spouses need to transfer their property to revocable trusts to avoid probate. Probate is the process of changing title to an individual’s property at their death. The persons entitled to succeed to a decedent’s property are the beneficiaries identified in the decedent’s last will and testament or, if the decedent did not leave a will, the decedent’s heirs at law identified in the statute of intestacy for the state in the decedent’s domiciliary state.
Probate is expensive. The simplest estate can cost $5,000 in attorney fees and costs to probate. Large, complex estates can cost $100,000 or more to probate.
And probate is a public proceeding. Creditors are invited to assert claims against the estate’s property. Claims can require litigation.
Probate delays distribution of a decedent’s property for at least six months, and in some cases for years.
To avoid probate, each spouse should have a revocable trust, and the spouses should transfer their property to the revocable trusts. A spouse can amend or revoke his trust during his lifetime. Upon the spouse’s death, the trust becomes irrevocable, and the successor trustee administers the trust property according to the trust’s governing instrument. As the decedent owns no property at his death, there is no need for probate.
Each spouse’s revocable trust should be funded with (1) that spouse’s separate property, and (2) approximately half of the marital property by value. Marital property is property earned by the spouses or either of them during the marriage. Separate property is property which either spouse brought to the marriage, or received by gift or inheritance during the marriage. Separate property becomes marital property if it is commingled with marital property.
The spouses have equitable (equal) claims to marital property. In two states, Maryland and Illinois, there is a gift in fraud of marital rights theory prohibiting a spouse from gifting or bequeathing more than his equitable share of marital property.
There are situations in which spouses may decide against equal funding of their revocable trusts. For example, if husband is in a high-risk profession, such as a surgeon, the couple may decide to fund all of their marital property into wife’s trust, leaving only husband’s interests in qualified retirement plans in his name. The Employee Retirement Income Security Act of 1974 (“ERISA”), 29 USC § 1056(d)(1), exempts qualified retirement plan interests from state-law claims such as malpractice judgments. Property held in a revocable trust is subject to claims against the creator of the trust (the “settlor”). If there is such an unequal funding of the spouses’ trusts, it should be because the spouses, fully informed of the facts and the law, agree that unequal funding is in their best interests, not because the attorney worked surreptitiously with one spouse against the interests of the other spouse.
There is also a tax reason for equal funding of marital property between the spouses’ revocable trusts—that is the subject of part two of this series.