In June the North Carolina General Assembly enacted and Governor McCrory signed into law a significant change to the North Carolina elective share, which affects the rights of a surviving spouse and will now be based solely on the length of the marriage between the decedent and the surviving spouse. The modification is applicable to the estate of a decedent dying on or after October 1, 2013, if the decedent was domiciled in North Carolina at the time of death.
The elective share statute (N.C.G.S. §30-3.1), which was originally enacted in 2000 to replace the right of a surviving spouse to dissent from a decedent's will, is designed to protect a surviving spouse from being completely "disinherited" by a deceased spouse. Before the enactment of the 2013 changes, the amount of the surviving spouse's elective share was based in part on the number of children of the decedent, whether such children were the product of the marriage with the surviving spouse, and whether the surviving spouse was the decedent's first spouse. As of October 1, however, such factors no longer affect the determination of the amount of the surviving spouse's elective share, which will now be based solely on the length of the marriage.
Background of the Elective Share
Before the 2013 changes a surviving spouse was granted an affirmative election to receive a designated percentage of the decedent's "Total Net Assets." If the surviving spouse did not receive property equal in value to the designated percentage of the decedent's Total Net Assets, the surviving spouse could have elected to receive the "shortfall." It is important to note that the statute was elective and not mandatory. Furthermore, the right to the elective share could have been waived by a valid premarital agreement.
A key factor in the operation of the elective share statute was the definition of the decedent's "Total Net Assets." Total Net Assets were defined to be essentially the gross estate of the decedent as determined for federal estate tax purposes, less the liabilities of the decedent and those estate administrative expenses that would be allowed as a deduction for federal estate tax purposes. For example, Total Net Assets included, but were not limited to, any property in which the decedent held title at the time of death, property over which the decedent had a general power of appointment, property jointly held by the decedent to the extent that such property would be included in the decedent's gross estate for federal estate tax purposes, benefits payable under life insurance policies, IRAs, and other retirement accounts to the extent that the decedent at the time of the decedent's death could have designated the beneficiary of such policies, plans or accounts, and property transferred by the decedent during his or her lifetime but over which the decedent retained possession or the right to enjoyment or income. In determining the deductions for the determination of Total Net Assets, transfers qualifying for the marital deduction or charitable deduction for federal estate tax purposes were not deducted.
Old Law
The designated percentage to which a surviving spouse had the right to make an election can be summarized as follows:
| Percentage of Decedent's Total Net
Assets To Which Surviving Spouse ("SS") was Entitled |
||
| SS was Decedent's First Spouse |
SS was Not
Decedent's First Spouse |
|
| If the decedent was survived by no descendants | 50% | 50% |
| If the decedent was survived by one child or one descendant of a deceased child who was a descendant of the SS | 50% | 50% |
| If the decedent was survived by one child or one descendant of a deceased child who was not a descendant of the SS | 50% | 25% |
| If the decedent was survived by two or more children or descendants of a deceased child who are descendants of the SS | 33 1/3% | 33 1/3% |
| If the decedent was survived by two or more children or descendants of a deceased child who are not descendants of the SS | 33 1/3% | 16 2/3% |
2013 Changes
In 2013 the definition of Total Net Assets was not changed, but the percentage to which the surviving spouse is entitled to make an election was changed and can be summarized as follows:
|
Percentage of Decedent's |
|
| Less than 5 years 15% | 15% |
| 5 years but less than 10 years 25% | 25% |
| 10 years but less than 15 years 33% | 33% |
| 15 years or more 50% | 50% |
As stated earlier, the surviving spouse's percentage is no longer affected by the number of the decedent's marriages or the number of the decedent's children. In addition, the surviving spouse's elective share can still be waived by a valid premarital agreement.
What Was Not Changed
The 2013 General Assembly did not change the North Carolina Intestate Succession Act (N.C.G.S. Chapter 29). This Intestate Succession Act provides for the disposition of the decedent's assets that are not otherwise disposed of by a will, trust agreement, beneficiary designation or similar provisions. If there is no controlling document, such as a will, and the decedent's spouse survives the decedent, the Act provides that the surviving spouse is entitled to a designated percentage of those assets that is similar, but not identical, to the formulaic percentages for the pre-October 1, 2013, elective share statute. Thus, the percentage of the decedent's intestate estate to which the surviving spouse is entitled is affected by the number of children of the decedent and whether either or both of decedent's parents survive the decedent. The Intestate Succession Act did not reduce the surviving spouse's percentage if the surviving spouse is not the first spouse of the decedent.
Thus, the 2013 changes to the North Carolina elective share statute in one sense move the surviving spouse's percentage of the decedent's assets under the elective share statute and the Intestate Succession Act closer together in that now neither percentage is affected by whether the surviving spouse is the decedent's first spouse. The determination of the surviving spouse's percentage interest, however, is now dramatically different under these two statutory provisions because the Intestate Succession Act includes no factor for the length of the marriage and the elective share statute includes no factor involving the decedent's children. This provides the decedent with the unusual planning opportunity of dying without a will if the decedent is determined to minimize the value of the assets passing to the surviving spouse.
For example, assume that H and W have been married for 42 years and they have one son, S, and one daughter, D, both of whom work in a closely held business with H. Assume further that at the time of H's death he owns the following:
|
Value |
|
| One-half of principal residence owned as tenants by the entirety with W | $500,000 |
| Marketable securities in H's sole name | 1,000,000 |
| Stock in closely held business | 2,000,000 |
| 401(k) retirement account with W as the beneficiary | 700,000 |
| Life insurance owned by H with S and D as the beneficiaries | 800,000 |
| Total | $5,000,000 |
If H were to die in November 2013, and H's will left all of his assets equally to S and D, under the elective share statute W would be entitled to receive a total of $2,500,000 by reason of the death of H, determined as follows:
| Total Net Assets | $5,000,000 |
| Surviving Spouse's Percentage | x 50% |
| $2,500,000 | |
| Consisting of: | |
| One-half of principal residence passing to W from H | $500,000 |
| 401(k) retirement account | 700,000 |
| Transfer from the estate of H | 1,300,000 |
| $2,500,000 | |
In contrast, if H were to die in November 2013 without a will, W would be entitled to only $2,220,000, determined as follows:
| One-half of principal residence passing to W from H | $500,000 |
| 401(k) retirement account | 700,000 |
| Personal property ($30,000 + 1/3 of
$2,970,000 of stock in the closely held business and marketable securities) |
1,020,000 |
| Total | $2,220,000 |
Conclusion
North Carolina modernized its elective share by basing the surviving spouse's elective share on the length of the marriage and not the fact of a previous marriage or the number of children of the decedent. The Uniform Probate Code as drafted by the National Conference of Commissioners on Uniform State Laws has long used the length of the marriage as the basis of its elective share. North Carolina did not adopt the Uniform Probate Code provision in its entirety, however, because North Carolina uses fewer percentages, and therefore its bands of years are broader that those in the Uniform Code.
Even though the Uniform Probate Code employs the sliding percentage scale, it is worth noting that only eight other states (Colorado, Hawaii, Minnesota, Montana, Oregon, South Dakota, Tennessee and West Virginia) have adopted this approach for their elective share statutes. In addition, Massachusetts is considering adopting the length-of-marriage structure, but it has not done so as yet. Thus, North Carolina joins a distinct minority of states with this aspect of its elective share law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
