Lifetime Asset Transfers Voided Based on Agreement to Make Will

MAY 7, 2012 VOLUME 19 NUMBER 18
We have written about contracts to make (or not to revoke) a will before. The question comes up infrequently, and usually only in a handful of ways: can you and your spouse make an enforceable agreement that you will leave your respective estates to, say, your children no matter what? Yes, you can — at least in Arizona.

For John and Martha Lindford (not their real names), the question came up during their divorce proceedings. Martha wanted to make sure that the couple’s two children, John, Jr. and Paula, would receive at least a share of John’s estate when he died. When the couple negotiated a property division as part of the divorce, it included a provision that required each of them to “execute a Will leaving fifty percent (50%) of their respective estates in equal shares to the children and twenty-five percent (25%) to each other.”

Eleven years after the divorce was final they both agreed that it was time to modify their first arrangement. John and Martha both signed an amendment that eliminated the requirement that any share of each estate be left to the other, and instead provided that 75% of each ex-spouse’s estate would go to the two children. Six months after that modification, John remarried.

Five years after the second marriage John was diagnosed with cancer, and he began to seriously plan his estate. He amended signed a new will and modified his existing living trust; the new documents specifically left several business entities to his new wife, and provided that she would also receive an additional amount to bring her share of his estate up to 25% if it did not already amount to that much.

In the months after his cancer diagnosis, John also transferred several assets — the family home, several bank accounts and one of the businesses — to his second wife outright. When he died eighteen months after diagnosis, the effect had been to leave his second wife substantially more than one-quarter of his entire estate — although she had gotten a large part of that share by lifetime gifts, not in his will or the trust.

John, Jr., and Paula and first wife Martha filed a claim against John’s estate. They argued that the effect of his gifts and the terms of his will and trust violated the marital property agreement as it had been amended. His second wife acknowledged that she had gotten more than one-quarter of John’s assets, but argued that the agreement only required him to have a will leaving 75% to his children — and that lifetime transfers were not prohibited by the agreement.

After a two-day trial, an Arizona probate judge ruled that John’s actions violated the property settlement agreement with his first wife. The second wife was ordered to return all the assets she had received from John, so that a new division could be made and her share could be capped at 25%. She appealed the ruling.

The Arizona Court of Appeals agreed with the probate judge, and upheld his ruling. The appellate judges calculated that John had given about $2.5 million — amounting to more than one-third of his entire estate — to his second wife, and that he had done so in an attempt to defeat the agreement he had signed with his first wife. Estate of Lockett, April 26, 2012.

Should John’s and Martha’s original agreement, signed in the course of a divorce nearly two decades before John’s eventual death, effectively tie John’s hands indefinitely, and despite his later marriage, growth of his estate and changes in his family relationships? That question is larger than the legal question posed by his probate case. For good or ill, John and Martha had signed an agreement that compelled them each to leave three-quarters of their respective estates to their two children. That agreement might have turned out to have been unwise or constraining, but it was their agreement.

What formalities are required for such an agreement to be effective, and to bind the parties? Arizona law (and other states may have different provisions, so be careful about generalizing from Arizona’s example) requires a contract to make a will — or not to modify or revoke a will — to meet only very basic formal requirements. Paradoxically, it would seem that a contract which does not satisfy basic will formalities (e.g.: unwitnessed and not in the decedent’s handwriting) might qualify as an enforceable contract, thereby effectively creating a will.

What landmines and roadblocks might people considering such a contract (e.g.: the lawyers representing a couple in a divorce proceeding) reflect upon before signing? Well, the opinion in John’s probate case turned, among other things, on a letter he wrote before the agreement was signed. In that letter John reported that he intended to leave 75% of his “entire estate” to his first wife and children. When the second wife later argued that the agreement necessarily only covered his will and his probate estate (and therefore should exclude property he gave away before his death), both the probate judge and the appellate court pointed to his letter as proof that he meant the contract to include his entire estate. If that is true, it certainly would have been a good idea for the agreement to spell that out in more detail, and to cover the possibility of living trusts, lifetime transfers, creation of limited liability companies or family limited partnerships, and other arrangements.

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4 Responses

  1. Mark Rubin

     /  May 6, 2012

    Interesting issue! Thanks for sharing. Assume people of lesser means: Does this mean the former spouse can’t take a trip to Europe with his new wife, before he dies, because it will leave the children with a de minimis estate? Bad facts make bad law, and it seems like we have bad facts here, for anyone who knows s/he will die can control the size of his/her estate, and the principles of this case seem to suggest that any transfers/expenditures in that situation may be reviewed.

  2. Interesting comment and question, Mark — as I would expect. (For those not in the know, Mark Rubin is an excellent estate planning/probate lawyer in Tucson, and a friend.)

    Recognizing that we’re just hypothesizing between colleagues, I had wondered about the same question. If the decedent had spent lavishly on his second wife during his life, could his children have pursued a claim against her to recover anything in excess of the remainder after the share he had committed to leave to the children? And who gets to define “lavish” in such an action?

    To be clear, there is no the slightest indication in reported case that there was any suggestion of what I am calling lavish spending. But thinking about it does help mark out the confines of the case as it actually developed. And I, for one, don’t know the answer to our hypothetical question.

    Robert Fleming
    Fleming & Curti, PLC

  3. RNI

     /  November 3, 2016

    That would be a tough call, wouldn’t it! I agree that dear old Dad’s transfer of assets before he died was done in an effort to give his 2nd bride as much as he could, knowing he was likely to die soon from cancer. It appears that he made a purposeful effort to defeat the terms of his contract with the children’s mother. Before he remarried, I hope he clued in his bride as to his promise to give his 2 children ¾ of his wealth. It is possible that he could have tried to negotiate a new contract since his circumstances changed. Maybe he did try and the answer was, “Not on your life.” So he defiantly breached the contract.
    At any rate, the intent of the contract was crystal clear and did not include any provision to limit how he spent his money during his lifetime. My guess is that the money a person spends on trips is their call. However, the assets and other transfers to his new wife were obviously done to frustrate the purpose of the contract. I wholeheartedly agree with the Az decisions. His assets had to be divided the way it was agreed upon and written in the contract.

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