Beware of a Spousal Rights Trap That “May Be” in a Revocable Trust
By Doyle Sanders, ILS Advisor On Aug 2, 2024
For years, I have been counselling clients as to who should have a revocable trust without ever thinking of a serious trap for the unwary. But as can happen, even after many decades of practice, you encounter clients whose circumstances make you rethink what you thought you knew and re-evaluate the sufficiency of your checklists.
Like many practitioners, I recommend revocable trusts to clients for a variety of reasons: probate avoidance, continuity of care for loved ones, and incapacity planning. One of the most obvious candidates for a revocable trust is the client who has real estate in another state. One of the reasons to create a revocable trust is to avoid probate which is generally required if the decedent owned real estate. So, it is a no-brainer to create a revocable trust if the client has real estate in another state. Even if you don’t mind having an estate probated in your home state, there is no reason to probate in two states. I suspect that many, if not most, practitioners would recommend a revocable trust to clients with this particular set of circumstances without a second thought.
BUT WAIT. Is the obvious really so obvious? Let’s revisit that “obvious candidate scenario” again. For several months, I have been counseling the children of a deceased lady who was a resident of Iowa. At the time of her death, she was married to her second husband, not the father of her children. They each had their separate assets and separate estate plan, and no prenuptial agreement.
Decedent had been to an attorney who advised her, as I might have, that a revocable trust is a good idea and especially good because she had real estate in Missouri. By creating a revocable trust and titling the Missouri real estate in the trust, she will avoid probate in Missouri. Actually, the property in Missouri was a very nice vacation home that exceeded the value of the rest of her estate. So far, that seems to be the perfect solution to avoid probate. Right?
However, Iowa has a spousal rights statute (known as a “right of election” statute in some states) that allows the surviving spouse to elect to take against the will and trust of the deceased spouse. Specifically, if the surviving spouse does not receive assets equal to one-third of the value of the deceased spouse’s assets, the surviving spouse can elect to take up to one third of the value of any assets over which the survivor did not relinquish his or her spousal rights.
Let’s apply that statute to my clients’ situation. Decedent had Iowa assets valued at $200,000 and the Missouri vacation home worth $1,900,000 and all the assets were in the same revocable trust. Her surviving spouse had not relinquished rights to the Missouri property when it was transferred to the trust. Under Iowa law, he would be entitled to assets from her trust estate valued at $700,000 (1/3 of $2,100,000).
Maybe that is not so bad, because it is Missouri property and maybe Missouri has a better result with their spousal rights statute.
I recall as a kid, I was mocked because I used the word “maybe” a lot. I never really saw the problem with the word. I didn’t think I used it that much. And, “maybe” I was in training to be the lawyer that I always wanted to be. But in this case, there is a problem with “maybe.”
First, a quick call to a colleague in Missouri revealed that Missouri’s spousal rights statute does not yield a better result, because Missouri doesn’t have a spousal rights statute, she said.
Second, without questioning that advice or doing a deeper dive into Missouri law, I thought about the whole point of putting real estate in a trust. It is to make it “not real estate owned by the decedent at the time of death.” As such, it is not subject to probate regardless of where it is located. It is owned by a trust. In this case, with the trustee being in Iowa, it is not a Missouri trust. A review of the Iowa spousal rights statute does not help. The spousal rights attach to “one-third in value of property held in trust . . . .” That Missouri house has legally if not literally been moved to Iowa. This is NOT “maybe not so bad.”
Notwithstanding the fact that post-nuptial agreements are not enforceable in Iowa, the elective share statute allows the non-owner spouse to relinquish his elective right when the owner spouse transfers the real estate to the trust . . . but that requires magic words that the Iowa lawyer hopefully knows to put in the deed. Maybe that happened here. Nope. 1) The Iowa lawyer would not have and did not prepare the deed. 2) The Missouri attorney wouldn’t have known about that language or maybe not even the Iowa spousal rights statute. 3) Maybe the Iowa attorney thought that Missouri has a law that covers this situation and that the Missouri lawyer will deal with it in the deed. 4) Maybe no one would think of it. The latter seems to have been the case.
And finally, maybe the Iowa lawyer had an obligation to make sure that the magic language would be in the Missouri deed. That “maybe” starts to hit close to home if you are the Iowa lawyer who did not meet that obligation.
So, the moral of the story is not that you should avoid placing out-of-state property in a revocable trust. Not at all. The moral of the story is that you must think about the complications when you deed out-of-state real estate to your state’s revocable trust and the repercussions of not focusing on the simple details of a transaction that you would probably not forget but for the fact that an attorney in another state is helping you do something that you do every day. It is their obligation to prepare the deed and your obligation to make sure that the transaction is in conformance with your state’s applicable law and will yield a favorable result for your client. No “ifs,” “ands,” or “maybes” about it.
Author
Doyle D. Sanders is an attorney and shareholder with Bradshaw, Fowler, Proctor & Fairgrave, P.C., with offices in downtown Des Moines and an office in Johnston since 1985. He is licensed to practice law in the state of Iowa. He is a Fellow of the American College of Trust and Estate Counsel (ACTEC) and practices primarily in wills, trusts, estate planning and probate law. He has been selected for inclusion in Iowa Super Lawyers and Great Plains Super Lawyers.
Mr. Sanders is a native of Vinton, Iowa, and received his Bachelor of Arts degree in political science, his Masters of Business Administration, and his Doctor of Jurisprudence with Honors from Drake University.
He is a member and former chair of the Iowa State Bar Association Probate Section; and as a member of the legislative committee, he has drafted numerous legislative changes to the Iowa probate and trust codes.
He was elected to the American College of Trust Estate Counsel in 2004 and serves on the ACTEC Employee Benefits Committee and the Elder Law Committee. He is a member of the ABA Probate and Trust Law Section and the Mid-Iowa Estate and Financial Planners Club.
His interest in charitable giving and how it can be implemented in estate planning led him to assist in the founding of the Mid-Iowa Planned Giving Council, the Johnston School Community Foundation, the Valley UMC Foundation, and the Service Above Self Foundation of the Rotary Club of Northwest Des Moines and others. He has served as his Rotary Club’s Foundation chair for many years and is chair of the Rotary District 6000 Endowment Committee.