October 2000

A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA

     

DECEDENT'S ESTATES - ELECTIVE SHARE ACT PASSES: A NEW ACT ALREADY IN NEED OF AMENDMENT

House Bill 979, entitled "An Act To Modify The Rights Of A Decedent's Spouse," was signed by the Governor on August 2, 2000. It becomes effective January 1, 2001. It applies to estates of decedents dying on or after that date. The act repeals Article 1 of Chapter 30 (G.S. 30-1 through G.S. 30-3) pertaining to dissent from a will. The act adds new Article 1A entitled, "Elective Share." These statutes are found at G.S. 30-3.1 through G.S. 30-3.6.

G.S. 30-3.1 sets forth the "right of elective share." G.S.30-3.1(a) is specified "elective share." It states that the surviving spouse of a decedent who dies domiciled in North Carolina has a right to claim an "elective share." "Elective share" means an amount equal to (1) the applicable share of the Total Net Assets, defined in G.S. 30-3.2(d), less (2) the value of Property Passing to Surviving Spouse, as defined in G.S. 30-3.3(a). "Applicable share" of the Total Net Assets is specified in G.S. 30-3.1(a) as follows: (1) If the decedent is not survived by any lineal descendants, one-half of the Total Net Assets. (2) If the decedent is survived by one child, or lineal descendants of one deceased child, one-half of the Total Net Assets. (3) If the decedent is survived by two or more children, or by one or more children and the lineal descendants of one or more deceased children, or by the lineal descendants of two or more deceased children, one-third of the Total Net Assets. G.S. 30-3.1(b) contains a rule of "reduction of applicable share" where the surviving spouse is a second or successive spouse and G.S. 30-3.1(c) contains a rule for taking into account "death taxes," defined in G.S. 30-3.2(b).

G.S. 30-3.4 sets out the procedure for determining the elective share. G.S. 30-3.4(a) provides that the surviving spouse's right to file a claim for an elective share must be filed during that spouse's lifetime. The surviving spouse or that spouse's agent under a power of attorney or guardian of that spouse's estate can exercise the election. However, once the election is filed, if a surviving spouse dies before the claim for an elective share has been settled, the surviving spouse's personal representative shall succeed to the surviving spouse's rights to an elective share. G.S. 30-3.4(a).

G.S. 30-3.4(b) states that a claim for an elective share must be made within six months after the issuance of letters testamentary or letters of administration by (1) filing a petition with the clerk of superior court of the county in which the primary administration of the decedent's estate lies, and (2) mailing or, delivering a copy of that petition to the personal representative of the decedent's estate. A surviving spouse's incapacity shall not toll the six-month period of limitations.

G.S. 30-3.4(c) provides that, once the petition is filed, unless waived by the personal representative and the surviving spouse, the clerk shall set the matter for hearing no earlier than two months and no later than six months after the filing of the petition. However, the clerk may extend the time of hearing as the clerk sees fit. The surviving spouse shall give notice of the hearing to the personal representative, and to any person described in G.S. 30-3.5 who may be required to contribute toward the satisfaction of the elective share. 

G.S. 30-3.4(d) contains a requirement for submission to the clerk of a proposed Form 706 federal estate tax return regardless of whether that form is required to be filed with the IRS. G.S. 30-3.4(e) contains lengthy provisions pertaining to "valuation" procedures.

G.S. 30-3.4(f) provides that after notice and hearing set as provided for by G.S. 30-3.4(b) and (c), the clerk shall determine whether or not the surviving spouse is entitled to an elective share, and if so, the clerk shall then determine the elective share and shall order the personal representative to transfer that amount to the surviving spouse. The clerk's order shall recite specific findings of fact and conclusions of law in arriving at the decedent's Total Net Assets, Property Passing to Surviving Spouse, and the elective share. Presumably, the elective share transferred can be actual property or, if necessary in whole or in part, a cash equivalent after a sale to make cash. See G.S. 30-3.5(c), discussed below. 

The decision of the clerk may be appealed to the superior court by any party in interest pursuant to G.S. 30-3.4(g). If an appeal is taken, that appeal shall have the effect of staying the judgment and order of the clerk until the cause is heard and determined by the superior court upon the appeal taken. Upon an appeal taken from the clerk to the superior court, the judge may review the findings of fact by the clerk and may find the facts or take other evidence, but the facts found by the judge shall be final and conclusive upon any appeal to the Appellate Division. G.S. 30- 3.4(g) does not specify within what period such an appeal to the superior court must be filed. However, G.S. 1-301.3 applies. The appeal period is 10 days within entry of the clerk's order. 

G.S. 30-3.5, entitled "Recovery of assets by personal representative," is problematical and makes one wistful for communication between estate attorneys and real property attorneys when such statutes are drafted. G.S. 30-3.5(a) is captioned, "Recovery of Assets" and is the primary offender of clarity. It provides that the personal representative is entitled to recover proportionately from all persons, other than the surviving spouse, receiving or in possession of, any of the decedent's Total Net Assets a sufficient amount to enable the personal representative to pay the elective share. (The apportionment shall be made in the proportion that the value of the interest of each person receiving or in possession of any of Total Net Assets bears to Total Net Assets, excluding any Property Passing to Surviving Spouse.) However, after saying "all" persons, the statute then provides as follows: "The only persons subject to contribution to make up the elective share are (i) original recipients of property comprising the decedent's Total Net Assets, and subsequent gratuitous inter vivos donees or persons claiming by testate or intestate succession to the extent those persons have the property or its proceeds on or after the date of decedent's death, and (ii) a fiduciary; as to the property under the fiduciary's control at or after the time a fiduciary receives notice that a surviving spouse has claimed an elective share." There is no definition of the phrase "original recipients of property."

If A, a devisee or heir, is the original recipient of real property and there is no sale of the real property by the personal representative pursuant to a statutory power or a power set forth in a will, A would be the original recipient under the statute. If A then conveys the property to B, a purchaser for value, or if A mortgages the property to M, B or M would not be subject to contribution and recovery under G.S. 30-3.5(a). Apparently, if B records his deed and subsequently makes a gratuitous transfer to C, a gratuitous donee, within the surviving spouse's election period, while G.S. 30-3.5(a) says a subsequent gratuitous donee is subject to contribution and recovery, it would seem that recovery against C would not be possible since, in order for contribution and recovery to be possible, the subsequent gratuitous inter vivos donee would have to be taking from an original recipient against whom contribution and recovery was possible (A) and not be taking from B. It does not seem that "subsequent gratuitous inter vivos donees" is refer- ring to C being subsequent to B. To allow recovery from C would impair B's freedom to dispose of the property. But if A is the original recipient and makes a gratuitous transfer to B and B makes a gratuitous transfer to C , all within the elective share period, recovery from C would be possible. The exact scope of who is a "subsequent gratuitous inter vivos donee" could be clarified. 

Sales, leases or mortgages of real property by heirs or devisees are subject to G.S. 28A-17-12, discussed in our June, 2000 newsletter. 

If X, a purchaser for value from PR, the personal representative selling under a power of sale or court order, is deemed the original recipient of the property, contribution and recovery against X would be possible if the period for the surviving spouse's election has not expired. If the surviving spouse has not made an election prior to the conveyance to X, should X be protected because no election was filed at the time of the conveyance or should X lose because X should know that the election period is unexpired? The latter would seem to be the answer. However, X might not have to answer that question, because an excellent argument can be made that X is not the original recipient. When the decedent dies, title vests in the heirs at law. G.S.28A-15-2(b). If a valid will is probated, title becomes vested in the devisees. G.S. 28A-15-2(b). It is noted that after title vests (1) in the heir in case of intestacy or (2) in the devisee in the event of a probated will, the fact that the P.R. sells land pursuant to authority to do so does not change the fact that title was previously vested in the heir or devisee. Linker v. Linker, 213 N.C. 351, 196 S.E. 329 (1938) (intestate estate); Wadford v. Davis, 192 N.C. 484,135 S.E. 353 (1926) (testate estate). If a P.R. obtains an order to sell intestate or testate property or if a P.R. exercises a power of sale to do so in a will, it would seem that the heirs or devisees, as the case might be, would still be the "original recipients" pursuant to G.S. 30-3.5(a). This would be true if vesting of title is synonymous with receipt of property under the statute. If this is true, a purchaser from the P.R. would not be a party against which contribution and recovery could be maintained, since a purchaser would be a subsequent recipient but not a subsequent gratuitous inter vivos donee under G.S. 30-3.5(a). It is our view that this is the proper interpretation of G.S. 30-3.5(a) for a court to adopt. This would also give priority to the P.R.'s desire to sell that could otherwise be thwarted by the surviving spouse's refusal to waive rights absent a court order to sell in a proceeding making the surviving spouse a party requiring the spouse to waive the spouse's rights or selling free and clear of those rights. It is also our view that G.S. 30-3.2 should be amended to add a subsection (e) to define the phrase "original recipients of property" consistent with this interpretation-particularly with respect to real property. (G.S. 30-3.5(a) refers to the P.R. being able to recover from a fiduciary. However, the way that G.S. 30-3.5(a) is structured, "fiduciary" does not appear to include the estate's P.R. in a way to enable the P.R. to take advantage of the receipt of notice from surviving spouse rule. )

However, it is possible that real property would not be deemed received by an heir or devisee while it is still subject to a P.R.'s power to sell it prior to "distribution" and "settlement." G.S. 28A-22-1 refers to distribution of assets. Subsequent sections of the article on distribution refer to distribution of real property. G.S. 28A-22-2; G.S. 28A-22-8. It is hoped that the court would deem either the heir or devisee on one hand or the P.R. on the other hand as the "original recipient" so that a purchaser for value (X) would not be the original recipient and would be protected as noted above. As mentioned above, a new definition would help.

One way to eliminate the potential problems with interpretation of G.S. 30-3.5(a) discussed in the preceding paragraphs is as follows. If the heir or devisee and/or the personal representative wants to convey the property under any scenario, the surviving spouse can join in the execution of the instrument for purposes of waiving the surviving spouse's right to claim an elective share under Chapter 30 and the right to disclosure, as permitted by G.S. 30-3.6(b) discussed below. (In the case of an intestate estate, the spouse would always be one of the heirs conveying. G.S. 29-14(a).) The waiver language would contain an affirmative statement that it was given voluntarily (see G.S. 30-3.6(b)(1)) and that third parties are entitled to rely on the waiver. Of course, the real problem will come when the surviving spouse refuses to do so and interpretative problems with G.S. 30-3.5(a) regarding who are or are not "original recipients of property" persist, as discussed above. Another way to eliminate such potential problems when the P.R. wants to sell property of an heir or devisee is to get an order to sell (even if the P.R. has the right to sell by express provision of the will) as a result of proceedings naming as parties the title holders under G.S. 28A-15-2(b) and the spouse with elective share rights. The order would decree a sale free and clear of elective share rights. See G.S. 28A-17-4 and G.S. 28A-17-6 regarding naming parties.

Sales by personal representatives are discussed in our April, 2000 newsletter. The rest of G.S. 30-3.5(a) deals with how the personal representative can withhold distribution of property and how the personal representative can recover deficiencies when otherwise recoverable. 

G.S. 30-3.5(b) states that after the filing of the petition demanding an elective share, either the personal representative or surviving spouse may request the clerk to issue an order that any recipients not dispose of any of the decedent's Total Net Assets pending the hearing. The decision to issue such an order shall be in the discretion of the clerk. 

G.S. 30-3.5(c) provides that a person receiving or in possession of any of the decedent's Total Net Assets may pay his proportionate elective share liability with respect to that property by any of the following methods: (1) conveyance of the property included in the decedent's Total Net Assets; (2) payment of the value of his liability in cash or, upon agreement of the surviving spouse, other property; or (3) partial conveyance and partial payment under subdivisions (1) and (2) of G.S. 30-3.5(c), provided the value conveyed and paid is equal to his liability.

G.S. 30-3.6, entitled "Waiver of rights," is quoted as follows:

"(a) The right of a surviving spouse to claim an elective share may be waived, wholly or partially, before or after marriage, with or without consideration, by a written waiver signed by the Surviving spouse.

(b) A waiver is not enforceable if the surviving spouse proves that:

(1)  The waiver was not executed voluntarily; or

(2) The surviving spouse was not provided a fair and reasonable disclosure of the property and financial obligations of the decedent, unless the surviving spouse waived, in writing, the right to that disclosure."

G.S. 30-3.6(a) does not make the waiver subject to G.S. 52-10's requirements as other statutes, such as G.S. 39-13.3 and G.S. 39-13.4, do. It would seem that a waiver signed only by the surviving spouse would be valid by virtue of the express terms of G.S. 30-3.6(a). There has been discussion of the fact that G.S. 30-3.6(b), in providing when a waiver is unenforceable, may impact adversely upon the rights of a purchaser for value-particularly a purchaser for value without knowledge of the reasons for un-enforceability under G.S. 30-3.6(b). If a specific waiver of the elective right or a broad waiver that includes such rights is set forth in an agreement evidenced of record pursuant to G.S. 39-13.4, a purchaser would be protected. Pursuant to that statute, the agreement or a memorandum thereof can be recorded. If the recorded document states that a husband or wife can convey property without joinder of the other spouse, a grantee from the husband or wife will take free of the interest of the other spouse unless an instrument of cancellation of the previously recorded instrument is recorded before the grantee records his deed. G.S. 39-13.4 can also be relied upon by lenders. It is important to note that G.S. 39-13.4 was designed to protect parties from what would otherwise be revocation of a separation agreement because of resumption of marital relations. It is probable that G.S. 39-13.4 would control over G.S. 30-3.6(b). G.S. 30-3.6 should be amended to clarify the rights of purchasers and lenders for value. Also, in any G.S. 30-3.6 waiver, in an attempt to overcome problems with G.S. 30-3.6(b), there should be recitals to the effect that (1) the waiver is being executed voluntarily and (2) the Surviving spouse has been provided a fair and reasonable disclosure under G.S. 30-3.6(b) or the surviving spouse waives such disclosure and (3) transferees of title for value can rely upon such recitals.

The elective share does not affect the following situation. A conveys land to H for value and H gives a deed of trust to secure purchase money to T, trustee for M. Pursuant to G.S. 29-30(g)(2), H's wife W need not join in such a deed of trust in order to waive G.S. 29-30 rights. Unlike G.S. 29-30 rights, the elective share right in the new act only applies to land that H died owning title to, when value is given by H for the property. G.S.30-3.2(d). (G.S. 30-3.3 is included to compute the share pursuant to G.S. 30-3.1.) Therefore, M's deed of trust will not be subject to W's elective share, although this could be clearer. Also, if, for example, H acquires title during his marriage to W, H delivers a deed to P, a purchaser for value, and P records, the fact that W does not join in the execution of the deed means that P's interest will be subject to G.S. 29-30 rights (absent a waiver by W) but not G.S. 30-3.1 rights. 

The act has made conforming changes to G.S. 29-30; G.S. 30-15; G.S. 31-5.3; G.S. 31C-3 and G.S. 84-5(2). G.S. 29-30 is the elective life estate interest statute. The conforming changes make reference to the appropriate new elective share sections. No significant changes in G.S. 29-30 have been made. 

As indicated above, the act is in need of clarification in several respects. THE TITLE COMPANY will be happy to assist you with your underwriting needs. Our offices throughout the state and staff, including our seven full-time attorneys, are here to help you! We appreciate your business.

INTERNAL REVENUE SERVICE ADOPTS IRC SEC. 1031 REVERSE EXCHANGE RULES

Revenue Procedure 2000-37 was released by the IRS on September 15. The procedure provides for "reverse exchanges," unlike previously issued regulations. Peter Baumgarten of the Office of Associate Chief Counsel (202-622-4950) was the main author of the ruling. We have been advised that a copy of the ruling can be obtained at http://www.irs.ustreas.gov/plain/bus_info/bullet.html.  The rule outlines a procedure for an "exchange accommodation title holder" or EATH to hold title as part of a reverse exchange called a "qualified exchange accommodation arrangement" or a QEAA. (Transactions that do not comply with the procedure do not automatically fail to qualify for tax deferred treatment but must be reviewed carefully on a case by case basis.) Sec. 4.02 sets out requirements. While a future article will explore the new rule in more detail, we can summarize the requirements. The EATH must hold legal title or other indicia of ownership (such as a contract for deed-but see the rule for details). When the EATH is transferred the qualified indicia of ownership, it must be the taxpayer's intent that the property represent, for example, the replacement property. Within 5 business days after the transfer, the taxpayer and the EATH must enter into a "qualified exchange accommodation agreement" pursuant to the rule. Within 45 days after the EATH's acquisition of indicia of ownership, the relinquished property must be properly identified. The acquisition of the relinquished property must be completed within 180 days after the EATH's acquisition of indicia of ownership of the replacement property. The taxpayer must acquire the title directly or indirectly through a qualified intermediary. (There are some alternatives in the rule.) The combined time that relinquished property and replacement property are held in a QEAA must not exceed 180 days. The procedure is effective for QEAAs entered into where the EATH acquires qualified property on or after September 15, 2000.    

PROPER SUPERVISION OF PARALEGALS IS CRITICAL  

Proper observation of Rules of Professional Conduct, Rules 5.3 (supervision of non-attorney assistants) and 5.5 (unauthorized practice of law) is critical. In case OODHC20 brought by the North Carolina State Bar, the attorney was found to allow non-lawyer employees to perform title searches and prepare opinions of title without personally reviewing them. The employees stamped the attorney's signature on such documentation. This conduct constitutes failure to properly and adequately supervise non-attorney employees in violation of the rules.

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