The $75,000 Question
Posted on Jun 30, 2011
The Supreme Court’s 2005 decision in Estate of Mainolfi, 178 Vt. 588, illustrates the antiquated nature of Vermont’s probate laws and the need for reform efforts to instill certainty in the results of modern estate planning methods. Specifically, Mainolfi deals with the transfer of a home for estate planning purposes and the resulting implications of the statutory homestead interest for the surviving spouse. Neither the facts nor the law of the case are very clear from this 2-page decision, but the ruling casts uncertainty over any conceivable estate plan that involves the transfer of a home.
As set forth in the Supreme Court decision, Sara and Frank Mainolfi owned a home together in Rutland. In 1993 they executed a quitclaim deed in favor of two nephews, but reserved a life estate for themselves. According to the Court’s opinion, Frank Mainolfi and his two nephews later executed a second quitclaim deed in 1995 in favor of Sara and retained a life estate for Frank. The Court held that this second quitclaim deed “served only to transfer to Sara the fee interest in the home that she had previously conveyed to the nephews by the first quitclaim deed, together with any interest held by Frank at that time.” The Court then held that when Sara died, a $75,000 homestead interest vested in her husband, as provided in 27 V.S.A. § 105. The Court ruled that the homestead interest did not arise prior to the death of a spouse, and therefore there was no way that Frank could waive his inchoate homestead interest by quitclaim deed or any other means.
When Frank died, Frank’s intention as expressed in his conveyance of the remainder interest to Sara (or to her heirs) was defeated. We reviewed the probate file in the underlying case, and judging from the decree of final distribution, the takers of Frank’s intestate estate were one brother and a plethora of nieces and nephews (children of Frank’s predeceased brothers and sisters). In other words, the answer to who benefited from Frank’s homestead exemption (the “$75,000 question”) is not Frank himself (who the statute was intended to benefit), but rather remote relatives at least one of whom had not had any contact with Frank (to judge from an affidavit in the file) for many years.
Many plans for larger estates require dividing property between spouses, and thus transferring the home, in order to take advantage of the current estate tax exemption of $2 million per person. There are a number of ways that this might be done. One spouse could, for example, grant a life estate to the other and reserve a remainder interest for their children. Or, more commonly, the home may be transferred to the wife as trustee of her lifetime revocable trust. If, in either situation, the spouse with the interest in the property should die first, the surviving spouse could claim that Mainolfi affords him or her a right to claim a homestead interest at the expense of the remaindermen or other intended beneficiaries. The ability to control the distribution of property is particularly important in blended families where each spouse would like to provide for separate children. An individual may also wish to ensure that all property is eventually transferred to joint children rather than to children from a first marriage or of a second spouse. The homestead interest inhibits the ability to plan for these contingencies because there is currently no way to transfer or waive the interest before it vests upon the death of a spouse.
Vermont’s law is out of date in this regard. For most Americans personal wealth is no longer centered on the ownership of real property. Larger estates in particular are more likely to be dominated by investment portfolios containing stocks and bonds. A law that focuses on protecting an interest in real property merely hampers the ability to conduct more efficient planning.
The Uniform Probate Code (UPC) has dealt with this issue by allowing for the prospective, binding waiver of the homestead as well as other interests. Section 2-213(a) of the Code provides that “The right of election of a surviving spouse and the rights of the surviving spouse to homestead allowance, exempt property, and family allowance, or any of them, may be waived, wholly or partially, before or after marriage, by a written contract, agreement, or waiver signed by the surviving spouse.” This waiver would not be enforceable if it is shown to be involuntary or unconscionable. A waiver could be unconscionable if the waiving spouse did not have adequate knowledge and did not receive or waive disclosure with regard to the property or financial obligations of the decedent. These are the same sorts of protections that are provided when drafting an antenuptial agreement.
The ability to waive the homestead interest allows one spouse to retain sole ownership of the home and ensure that its entire value is distributed in accordance with the estate plan rather than risking the possibility that a portion will be carved out in favor of a future spouse or the separate children of the surviving spouse. Reform in this area of probate law would be a solid first step in modernizing Vermont law, which has not kept pace with modern planning techniques.