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Does Death Do You Part? Wills, Intestacy, and closely held businesses. Part 3 of 3.

13062458_1042739802458603_2436945721037467362_nBy: Dana M. Horlick, Attorney, Woodruff Family Law Group

 

Now let’s change the hypothetical of our Greensboro couple – Petunia and Rocky – in one respect. Recall that Petunia’s parents wanted her to have a premarital agreement regarding Home Grown Lawn Care, but Petunia and Rocky did not sign one. Maybe a few years into her marriage, Petunia realizes that she wants to keep Home Grown Lawn Care in the family and that Rocky and her parents just do not get along. So Petunia executes a will, leaving her shares of Home Grown Lawn Care to her parents and the remainder of her estate to Rocky.

Under this scenario, Petunia’s parents would receive her shares of Home Grown Lawn Care, valued at $125,000.00. Rocky would receive the 401(k) worth $15,000.00. Rocky may decide that he is entitled to a larger share of Petunia’s estate. He can then exercise the right to elective share, which is a two-step calculation. First, you have to determine what percentage of the total net assets the surviving spouse receives. Second, you have to determine the amount of the elective share, based on the percentage calculated in step one.

Let’s take this step-by-step. The North Carolina legislature has determined that the percentage of the total net assets should vary based on the length of the marriage. Thus, the longer the marriage, the higher the percentage of the total net assets. The below chart shows the percentages, based on the statutory language in N.C.G.S. §30-3.1:

 

Number of Years Married Share of the Total Net Assets
Less than five years 15%
At least five years, but less than ten years 25%
At least ten years, but less than 15 years 33%
15 years or more 50%

In this case, since Rocky and Petunia’s marriage lasted for at least five years, but less than ten years, Rocky is entitled to 25% of the total net assets.

Next, we need to calculate the amount of the elective share. The elective share equals the statutorily determined share of the total net assets minus the value of the net property that passes to Rocky under the will. In our hypothetical, the total net assets would be $140,000.00, and the value of the net property passing to Rocky under the will is $15,000.00 (the 401(k)). 25% of the total net assets equals $35,000.00. Then you have to subtract what Rocky receives under the will already ($15,000.00). Therefore, Rocky’s elective share equals $20,000.00. Thus, Rocky’s would receive enough shares of Home Grown Lawn Care to equal $20,000.00, along with the 401(k) that Petunia devised to him in her will. The remaining shares of Home Grown Lawn Care would pass to Petunia’s parents as indicated in her will.

When you take the same couple, with the same financial situation, and determine the outcome with a will and without a will, you obviously see a noticeable difference. Without a will, Rocky receives a total of $120,000.00 from Petunia’s estate, from both the 401(k) and the shares of Home Grown Law Care. However, when Petunia makes the decision that Rocky should not inherit the shares of the closely-held business, by implementing a will, he receives a lot less, for a total of $35,000.00, with $20,000.00 coming from the closely-held business.

Although the end results show that the terms of a will can have a clear effect on what the surviving spouse inherits, they also show that there are limits on how much you can cut your surviving spouse out of your will. The statutes provide for the right of elective share, to prevent a spouse from completely disinheriting the surviving spouse. As the hypothetical demonstrates, having a will allows Petunia to exercise more control over the distribution of her estate, but it does not provide her with the ability to determine, in its entirety, what Rocky will inherit. The statutory provisions limit her ability to cut Rocky out of inheriting any portion of her estate.

***Thanks to Erin Bailey of Tuggle Duggins, P.A. for her review and comments on this blog posts. She does estate planning and ERISA at Tuggle Duggins, P.A.***