The Michigan Court of Appeals decided an interesting case this week, for publication, that should provide a heads up for lawyers preparing what are often called "pour-over Wills" and "simple trusts" for their clients. There are some traps for the unwary, lawyers and laypersons alike. The case, In Re Estate of Leix, makes those clear.
Sometimes folks want to do what they call "simple estate planning." They may make a contract / agreement to make mutual wills. Ultimately these people intend that their mutual promise to devise real estate, bank accounts, and other property to particular people--generally their children--is carried out after the first of the couple passes away. In Re Estate of Leix points out how easy it is to defeat this plan after the death of a spouse.
Are the beneficiaries protected against transfers of property? The COA in Leix, held that an agreement to make mutual wills, or the execution of wills pursuant to an agreement, does not bind the testators to keep the property covered by the wills for the intended beneficiaries under the wills. The agreement does not even prevent them from making such other disposition of it, either inter vivos [during their lifetime, for non-lawyers] or by will, as they may desire and mutually agree, while both or all still live. The Leix panel held that upon the death of one of the parties, the agreement underlying the will becomes irrevocable and a right of action to enforce it is vested in the beneficiaries. Does this mean that the beneficiaries are ensured the intended inheritance? Well, no, as it turns out.
How may the intended beneficiaries protect themselves? Unless the intended beneficiaries take action to protect their inchoate rights under the contract after the death of the first parent, they may, in fact, lose those rights. [For readers who are non-lawyers, "inchoate" refers to something that has begun but has not been completed, or a decision or idea that has been only partially considered, such as a contract that has not been formalized--here in the sense of having not being completed in a manner that will protect the intentions of the parties to the contract]. See law.dictionary.com
What does a beneficiary of the contract to make mutual wills have to do to protect his or her interests? As the Leix panel pointed out, it is not that difficult, but it does require taking legal action to protect the rights, which may make for some hard feelings among family members.
What is required? An injunction preventing transfer. The Leix panel held that when an agreement to make mutual wills provides for the disposition of specific real property to a particular party, that party may obtain an injunction to prevent a surviving spouse from disposing of the specified property in a manner contrary to the agreement.
Why doesn't the simple plan protect the intended beneficiaries? Property owned jointly by the contracting parties is subject to disposition as agreed in the mutual wills agreement. However, that agreement is not, according to this COA decision, enforceable when the contract to make the wills is contained in the wills themselves and the property is owned with rights of survivorship. Whenever property is owned with rights of survivorship, it passes immediately upon death of one of the owners to the other. For example, a bank account held in the names of both husband and wife as joint tenants with rights of survivorship ["JTWROS"] will automatically become the property of the surviving spouse and is not an asset of the estate. The same is true of real estate that is titled "JTWROS" or, as real estate is formally legally held in a special form by married couples, "tenants by the entireties."
In the Leix case, the decedent and his wife executed an agreement to make mutual wills in 1962. They also executed a revocable trust agreement, and identical wills. The documents established a trust for the benefit of one granddaughter for life, with the remainder to the issue of the decedent and his wife.
Mrs. Leix died in 1983. Subsequently, over a period of years, Mr. Leix withdrew money from bank accounts, purchased annuities for this granddaughter, added the granddaughter as a joint owner of a bank account, and conveyed real estate to himself, the granddaughter, and the granddaughter’s mother as joint tenants with rights of survivorship.
When Mr. Leix died in 2008, nearly all of the assets that had been owned when Mrs. Leix died in 1983 had been titled jointly with the granddaughter or placed with the granddaughter as the named beneficiary. Mr. Leix's son, an intended beneficiary of the remainder, filed a lawsuit and sought to impose a constructive trust on certain of the assets. He claimed that the senior Mr. Leix's transfers of the assets violated the agreement to execute mutual wills.
The trial court's decision: According to the trial court, Mr. and Mrs. Leix's agreement to execute mutual wills was valid. However, nothing in the agreement restricted the ability of the survivor to dispose of the assets. The trial court held that Mr. Leix's transfer of assets during his life and his amendment of a trust did not breach the agreement. Accordingly, the trial court granted summary disposition for the respondents. The petitioner appealed.
The appeal: The COA considered the contract to make mutual wills according to the usual rules of construction, holding the purpose of contract interpretation is to enforce the parties' intent, and where a document's language is clear, interpretation is limited to the actual words used, parol evidence is inadmissible to prove a different intent, and a clear contract must be enforced according to its terms.
Additionally, the COA found the contract didn't violate law or public policy and recognized that people are free to make any contract they wish. Nevertheless, a court won't reform or rewrite a contract to insert words clarifying what some believe to be the reasonable expectations of the people making the contract.
The surviving beneficiary claimed that his father had breached an implied covenant of good faith and fair dealing, arguing that for this reason, the transfers should be set aside. However, the COA held that where, as here, there was no express limitation in the agreement to make mutual wills that prevented the survivor from disposing of assets subject to the mutual wills, the surviving testator may dispose of the assets during his life contrary in any manner he chooses, even though the transfer is contrary to the anticipated disposition of assets through the mutual wills.
So holding, the COA affirmed the trial court.
Final comment: This case illustrates the ease with which the survivor of a married couple may defeat the intentions expressed in a written agreement to make mutual wills. The issue often arises as people entering into second (or third) marriages attempt to protect premarital assets so that they will eventually be inherited by their biological children.
It has been pointed out to me that a transfer in title will often "lift the cap" on real estate taxes. Certain transfers (as between one spouse to himself or herself jointly with the other spouse, creating a joint tenancy) may not lift the cap, but I believe that transfer to a Trust will lift the cap. Since it's easy to make a revocable trust irrevocable immediately upon the death of one of the parties, it seems one means of protecting the intended beneficiaries would be to transfer the assets that are meant to be protected to the Trust. Many people are unwilling to do that where it will result in prohibitively high real estate taxes.
Could Mr. and Mrs. Leix have put a clause in their agreement to make mutual wills stating that upon the death of the first of them, the other was prohibited from transferring the assets meant to be protected? What about the rule of law stating that agreements forbidding alienation of property are unenforceable? I invite you to leave your comments below on these questions.
Where the agreement to make mutual wills doesn't restrict transfers, this leaves intended beneficiaries vulnerable to the kind of transfers that occurred in Leix, with the only means of protection a suit for an injunction to prevent transfers and to enforce the agreement to make mutual wills. This is not a happy solution, and is guaranteed to create rifts in families.
Of course, many of us have seen that nothing brings out the worst in people like having an estate to divide. I had such an issue at trial this week. Nothing about that case was pleasant, and the moniker chosen by the personal representative of the decedent's estate, who sought (unsuccessfully) to terminate the paltry $250/month permanent (but modifiable) spousal support seems apt. She called herself "the greediest kid." After the hearing, I sat with my client for a while. When this adult child walked over and tried to justify her behavior by saying "You know I had a fiduciary duty . . . " and then threw her arms around her mother's neck saying "I love you, Mom," I wanted to throw up. Instead, I turned away in disgust.
You may read In Re Estate of Leix here.
Comments