Wisconsin's New Deferred Marital Property Election

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By Howard S. Erlanger

roperty for each spouse. upon the death of a spouse, marital property converts into tenancy in common between surviving spouse and successor to decedent's interest property.² Community property systems also recognize that some property - that is, separate or individual property - is not a product of the marriage because it was brought to the marriage or - the income or "fruits" of separate property are generally shared.⁵)

A major wrinkle in community or marital property systems is the treatment of property acquired by spouses during a period when they were not subject to community property rules. In Wisconsin, property of spouses acquired when the Wisconsin Marital Property Act (WMPA) did not apply to the marriage - that is, before the Act's effective date or while at least one spouse was domiciled outside of the state⁶ - is unclassified. Some of this property would have been marital property if the WMPA had applied when the property was acquired; some of it would have been individual property. If this property was acquired under a common law property system, such as existed in Wisconsin before the effective date of WMPA, then all interest in the property was vested in the acquiring spouse, regardless of whether the property would have been marital property under Chapter 766 of the Wisconsin Statutes.

In part to avoid questions of unconstitutional "takings," under WMPA neither adoption of the Act nor spouses' change of domicile from a common law property state to Wisconsin causes property to be classified under the marital property system. Instead, all unclassified property is treated as individual property during the marriage.⁷

As a result, the surviving spouse does not have a vested interest in unclassified property at the death of the spouse who acquired the property. This is acceptable for property that would have been the decedent's individual property. But for property that would have been marital property, the result is to deny the surviving spouse the ownership benefits of the property, while also failing to provide him or her the protection of the spousal election available in common law property regimes. Therefore, unclassified property that would have been marital property - termed deferred marital property in Wisconsin - requires a special rule to prevent disinheritance of the surviving spouse.

One way to determine whether property is deferred marital property is to use what might be called the "language gambit": One simply tells the story of the property's acquisition, in relation to the Marital Property Act.

Example: Facts: A and B were married as Indiana domiciliaries in 1992 and established a Wisconsin domicile in 1996. In 1993, A purchased a spittoon using funds that cannot be traced. The spittoon is unclassified property because it was acquired before the Act applied to A and B's marriage. But had the Act applied, the spittoon would have been marital property under the presumption that all property is marital property.⁸ Thus, the spittoon is deferred marital property.

The analysis would be identical for a Wisconsin couple married before Jan. 1, 1986, who became subject to the Marital Property Act on that date and had previously acquired property.

The Wisconsin deferred marital property elections under prior law

Under the law in effect through 1998, deferred marital property was subject to two elections, which derived partly from Wisconsin's old common law "elective share" and partly from the UPC's augmented estate election provisions that applied when the Wisconsin provisions were enacted.⁹ One of these elections - which was subject to a bar - related to probate property; the other - which was subject to a "cutback" - related to nonprobate property. These elections were difficult to administer and included several idiosyncratic elements that could lead to inequitable results. The new probate code replaces these elections with a single election that is less complex and more consistent with the partnership theory of marriage.

Wisconsin's new deferred marital property election

The new election, which became effective on Jan. 1, 1999, is modeled on the elective share provisions for common law property states under the 1990 UPC.¹⁰The major changes from Wisconsin's prior deferred marital property elections are these:

• The election is based on the total amount of all deferred marital property in the marriage, not just that owned by the decedent. The surviving spouse is entitled to half that total, rather than half the deferred marital property owned by the decedent.
• There no longer are separate elections for probate and nonprobate deferred marital property.
• The new statute eliminates the "all or nothing" bar in the prior election regarding probate deferred marital property. The resulting system is somewhat similar to the "cut back" in the prior election regarding nonprobate deferred marital property. The cut back includes any deferred marital property already held by the surviving spouse.
• The election is for a pecuniary amount, rather than for an item-by-item interest, in contrast to the prior probate election.
• All nonprobate deferred marital property is subject to the election, in contrast to the prior election, which limited covered nonprobate property to transfers made on or after April 4, 1984.

The new election only applies to deferred marital property. Under the new Code, as under previous law, the surviving spouse has no right of election against the decedent spouse's marital property, individual property, or deferred individual property.

The basics of the election.¹¹ 1) Who is covered? The deferred marital property election is available to the surviving spouse¹²of a decedent who was domiciled in Wisconsin at the time of death.¹³ There is no requirement that the surviving spouse be a Wisconsin domiciliary. If a decedent is not domiciled in Wisconsin but owns property here, the rights of the surviving spouse are governed by the laws of the state of the decedent's domicile.¹⁴ A special rule applies if the surviving spouse caused the decedent's death.¹⁵

2) What property is covered? The election applies to the "augmented deferred marital property estate," which is the total value¹⁶ of all the deferred marital property of both spouses, irrespective of where the property was acquired or where the property is located, including real property located in another jurisdiction.¹⁷ Wis. Stat. section 861.02(2)(b) summarizes the categories of deferred marital property included in the augmented deferred marital property estate:

• probate and nonprobate transfers of the decedent's deferred marital property, as detailed under Wis. Stat. sections 861.03(1) to (3);
• various gifts of deferred marital property made by the decedent during the two years before death, as detailed under Wis. Stat. section 861.03(4); and
• any deferred marital property held by (or attributed to) the surviving spouse that would have been included in the above two categories had the surviving spouse been the one who had died, as detailed under Wis. Stat. section 861.04.

3) Will the surviving spouse be entitled to the election? The purpose of the election is to ensure that the surviving spouse ends up with an amount equal to at least half the value of the augmented deferred marital property estate.¹⁸In the typical situation, the surviving spouse will already hold some deferred marital property, and the value of the transfers from the decedent spouse to the surviving spouse during life or at death will easily exceed the remaining amount. As noted above, in a marital property system the deferred marital property elective share is the only obligation that the decedent spouse has to the surviving spouse.¹⁹ Thus, in the context of the deferred marital property election, a transfer from any source - the decedent's interest in marital property, deferred marital property, individual property, or deferred individual property - counts towards satisfying the elective share amount.²⁰ To the extent that these transfers are not sufficient to satisfy the elective share amount, Wis. Stat. section 861.06 provides that the remainder is satisfied proportionally from the decedent's transfer of deferred marital property to third parties.²¹

4) Personal liability of "unentitled" recipients. Under Wis. Stat. section 861.07, the original recipient of the decedent's deferred marital property transferred to others is liable for his or her share, irrespective of whether the recipient still has the property or its proceeds. If an original recipient gratuitously transfers the property to another person, the subsequent donee also is personally liable for the share if the donee still has the property or its proceeds, or if the donee knew or should have known of the liability.²²

5) Protection of "innocent third parties." Under Wis. Stat. section 861.11, if a third party payor - such as an insurance company - does not have written notice of an actual or intended filing of the deferred marital property election, it can pay to the named beneficiary and take other actions in good faith without incurring any liability. However, if proper notice has been served, then this exemption from liability is removed for third party payors other than banks. At that point, the third party payor either may continue to hold the property pending instructions from the court, or discharge its obligation by turning the property over to the relevant probate court. Banks have the same options, but alternatively may distribute the property to the named beneficiary without liability.

Examples

Example 1. Facts: Assume that A and B were married in 1983, and that they were domiciled in Illinois until 1993, when they moved to Wisconsin. They remained domiciled in Wisconsin until A's death this year. At A's death, A's share of the couple's marital property was worth $40,000, and A held $60,000 of individual property, $100,000 of probate deferred marital property, and $50,000 of nonprobate deferred marital property. B's share of the marital property of course also was $40,000, and B held $20,000 of individual property and $30,000 of deferred marital property, $20,000 of which would pass under B's will and $10,000 of which would pass nonprobate if B were to die. A's will left $50,000 of individual property to B.

Analysis: The augmented deferred marital property estate would consist of both A's and B's deferred marital property, totaling $180,000. (Some is probate property and some is nonprobate, but that is irrelevant.) B's elective share amount would be one half of that total, or $90,000. B's elective share amount is then satisfied out of the $30,000 of deferred marital property that B already holds, and the $50,000 transfer under A's will. (The source of the transfer is individual property, but that is irrelevant.) This leaves $10,000 that B can elect from A's deferred marital property; B can enforce this right pro rata against A's estate and the recipients of A's nonprobate deferred marital property.²³  Had the order of deaths been reversed, A would have had no elective right. The amount subject to election would have been $90,000, calculated the same way as in the example. However, this amount would be satisfied by the $150,000 of deferred marital property that A already held. (See Chart)

The analysis just described would be identical for a couple who were married and domiciled in Wisconsin prior to Jan. 1, 1986, and continued to live here after that date until one spouse died.

Example 2. Facts: Spouses A and B had the following property upon A's death in 1999. To simplify the example, assume that all of the assets are deferred marital property. A's will leaves "all my property" to Child:

• car worth $20,000, titled in A's name alone. B selected the car under Wis. Stat. section 861.33(1)(a)2;
• stock worth $100,000, titled in A's name alone; purchased for $50,000;
• IRA worth $100,000, titled in A's name, payable to B; and
• term life insurance on B's life, $100,000 face amount, payable to A

Analysis: Since the car was selected by B in satisfaction of other rights, the statutes provide that it be dropped from the analysis.²⁴ The term life insurance on B's life is included in the augmented deferred marital property estate, but its valuation is to take into account the fact that A died first,²⁵ and may for our purposes be assumed to be valued at zero. Thus, the augmented deferred marital property estate is $200,000 - the value of the stocks and the IRA. The maximum deferred marital property elective share is half that total, or $100,000. B has received $100,000 from the IRA, and therefore the elective share is satisfied.²⁶On these facts, the IRA was deferred marital property, but as far as satisfaction is concerned, the result would have been the same if the IRA had been marital, individual, or deferred individual property. (See Chart)

Conclusion

Many spouses leave all or substantially all of their property to the surviving spouse. Most of the rest leave a significant amount of property to the survivor, either outright or in trust. Thus, the deferred marital property election applies to only a minority of marriages. But when it does apply, it is important that it operate in an equitable manner and be relatively easy to administer. The deferred marital property election in the new probate code makes significant strides toward achieving those goals.

Endnotes

¹ 1997 Wis. Act 188. Many of the changes in the Code are reviewed in Howard S. Erlanger, "The New Wisconsin Probate Code," 71 Wisconsin Lawyer 6 (Oct. 1998).

²See Wis. Stat. § 861.01(1) and (2). For probate property, the successor in interest will be the decedent's estate, and eventually the takers of the estate under a will or intestacy. For nonprobate property, the successor in interest will usually be a designated beneficiary.

³ "Interitance" is used here in the colloquial sense to refer to any property received as a consequence of someone's death. As a technical matter, the term refers only to property received under the laws of intestacy, and not by any other means.

⁴See Wis. Stat. § 766.31(4).

⁵In Louisiana and Wisconsin, the spouse who owns the nonmarital property may execute a unilateral statement that reclassifies the income on that property as separate or individual property. See, e.g., Wis. Stat. § 766.59.

⁶See Wis. Stat. § 766.01(5) (defining determination date) and § 766.03(1) (applicability of Chapter 766).

⁷See Wis. Stat. §§ 766.31(8) and (9).

⁸ Wis. Stat. § 766.31(2). In addition, section 861.02(2)(a) provides a presumption that any property not classified as marital property is considered deferred marital property. This latter section is relocated from prior Wis. Stat. § 858.01(2) (1995-96).

⁹ For a detailed explanation of the prior deferred marital property elections in Wisconsin, see Howard S. Erlanger and June Miller Weisberger, New Probate and Nonprobate Property Elections Under Wisconsin's Marital Property Act (pts. 1 & 2), Wis. B. Bull. 25 (Oct. 1986), 13 (Nov. 1986).

¹⁰ For a detailed analysis of the relationship between the new Wisconsin elective share in deferred marital property and the UPC elective share in common law property jurisdictions, see Erlanger and Monday, The Surviving Spouse's Right to Quasi-Community Property: A Proposal Based on the Uniform Probate Code, 30 Idaho L. Rev. 671-95 (1994).

¹¹ The basics of the deferred marital property election are covered in Wis. Stat. section 861.02.

¹² Surviving spouse is defined in new Wis. Stat. section 851.30. The surviving spouse must be living for the election to be filed, but other parties are authorized to file on behalf of the spouse. Wis. Stat. § 861.09. The rights of the surviving spouse can be waived under Wis. Stat. section 861.10.

¹³ Wis. Stat. § 861.02(7).

¹⁴ Wis. Stat. § 861.20.

¹⁵ Wis. Stat. § 861.02(8).

¹⁶ Valuation of the property is determined under Wis. Stat. section 861.05(2).

¹⁷ Wis. Stat. § 861.02(2)(b). While Wisconsin cannot on its own control the disposition of real property located in another jurisdiction, many states will defer to this provision under their own conflict of laws rules.

¹⁸ Wis. Stat. § 861.02(1).

¹⁹The surviving spouse already owns a half interest in each item of marital property, and the decedent has no obligation to share individual or deferred individual property. Of course, the surviving spouse also has selection, exemption, and allowance rights under sections 861.31-.41, and a limited homestead protection under section 861.21.

²⁰ Wis. Stat. § 861.06(2)(b).

²¹ Wis. Stat. §§ 861.06(3), (4) and (5). Proceedings for implementing the election are detailed in sections 861.08 and 861.09.

²² Wis. Stat. § 861.07(2)(b). It is possible that federal law will preempt the enforcement of the deferred marital property election against some assets. Wis. Stat. section 861.07(4) attempts to offset these effects, by treating the recipient dictated by federal law as an "unentitled" recipient. If the attempt to overcome federal preemption is unsuccessful, the shares of other recipients may, under limited circumstances, be adjusted.

²³ Wis. Stat. § 861.06(3).

²⁴ See Wis. Stat. §§ 861.05(1), 861.06(2)(b)1.

²⁵ See Wis. Stat. § 861.04(2).

²⁶ Arguably, B is at a disadvantage because distributions from the IRA are likely to be fully taxable at ordinary-income rates while the stock received new basis. However, the satisfaction statute has no adjustment for this factor.

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