In North Carolina, estate planning can be difficult with the high divorce rate. Most who are estate planning want the property to go where it is intended. The gift tax annual exclusion for 2015 is $14,000 per donor per donee. This means a married couple can, together, give $28,000 to a son. If they also make a gift to the daughter-in- law, that means $28,000 times two or $56,000 can be transferred from a married couple to a son and his wife, for example. Great estate planning, but what happens when the donees get a divorce.
Let’s take a Greensboro, North Carolina couple age 65 with a commercial building with equity of $56,000. There is debt, but the rents, if the building is correctly managed, services the debt. The son of the couple manages the building. The son is married. Therefore, to utilize the maximum gift tax annual exclusion, the sixty-five-year- old couple must give the building to both their son and his wife–a noble estate planning goal, but…
Not so fast, in North Carolina. Without consideration of the effects of a divorce by son and his wife, the goals of the sixty-five-year-old couple may be thwarted. This is a gift planning problem, and needs to be handled with great care in North Carolina because of our divorce laws. I have been faced with this scenario, after the fact, on many occasions and you need to both understand the law AND make sure the documents reflect your intent very clearly.
Harvey Lynwood Montague, Jr. v. Teresa Montague, from the North Carolina Court of Appeals gives us a nice framework. In that case, the husband’s parents gave the couple a commercial building in an LLC (which is a common form of ownership of commercial property in North Carolina) that the husband subsequently managed. Luckily, the trial judge recognized the bargain purchase nature of the gift and recognized Mr. Montague’s parents’ estate planning intent. Smart trial judge in Wake County. It was undisputed in Montague that neither party to the divorce proceeding made “equity” contributions to the LLC. The trial court, however, treated the property as marital property, but gave the husband an unequal division because of his parents’ transfer of the LLC to the now, divorcing couple. The wife appealed to the North Carolina Court of Appeals wanting her “half” of the LLC. Luckily, the trial judge in Wake County made lots of findings of fact, and the wife lost.
So, from a planning point of view, please do not rely on what might happen in litigation or what happened in Montague. It might not happen in your case if your son and his wife get a divorce. Here’s what I would do if I wanted to insure the result. I would require the couple (your son and his wife) to execute a post martial agreement concerning what happens to the LLC in the event of a divorce of you son and his wife. You may also want to consider what your intent is with regard to where the property goes if your son predeceases your daughter-in-law. After all, this is your gift and you can do what you please with your property.
Your son’s wife will have to have an attorney go over the document with her, or the document may not hold up; this is very important. Your son will need an attorney to go over it with him, as well. Your son and his wife should not use the same attorney. If they will not do the post marital agreement, you need to look at other options for the transfer of the property that achieves your intended result. There may be a trust option available.
By Carolyn J. Woodruff, North Carolina Family Law Specialist, CPA, CVA