We often see situations where one spouse dies and the surviving spouse changes his or her will to benefit different persons than were contemplated by the first spouse. A prime example would be a couple where the man had four children by his first marriage and five with his second wife. Husband and wife make wills leaving everything to each other and if there is no spouse surviving to the nine children in equal shares.
That is exactly what happened in the York County case of the Estate of Charlotte M. Bankert. But Mr. and Mrs. Bankert did something more, they signed an Irrevocable Will Agreement when they signed their wills. In it, they agreed not to change their wills without the consent of the other, and after the death of one spouse, the survivor agreed not to change his or her will at all. There was no specific language in the contract barring life-time transfers to anyone. Their lawyer pointed out that the survivor could circumvent the agreement by making gifts to some but not all of their children, but the husband insisted there be no discussion of gifts in the contract.
Then what happened? Mr. Bankert passed away. Some time after he died Mrs. Bankert started making gifts to her five children. A couple of months before she died, she made large transfers to her five children. When she passed, the estate was significantly diminished and the 1/9 shares to be distributed to the four stepchildren from Mr. Bankert’s first marriage were much smaller (about $800) than they would have been otherwise (about $25,000).
The four stepchildren who got reduced inheritances because of the gifts made by Mrs. Bankert to her own children objected, saying that the transfers during her life violated the Irrevocable Will Agreement. They said that it was clear from the documents that Mr. and Mrs. Bankert agreed to treat all nine children the same, and the transfers violated the agreement. The five children who got the life-time gifts from their mother said the contract was not breached because it did not specifically say that their mother could not make life-time transfers to them.
Here we have the intersection of the two worlds: wills and contracts. What happens when two people make a contract not to revoke a will that has prescribed distributions, and the survivor makes lifetime gifts not in keeping with the will intent?
In general, the law of wills is based on the premise that a testator can always change his or her mind and make a codicil or an entire new will at any time. The will doesn’t become irrevocable until the testator dies.
The laws of contracts is based on the premise that an agreement between two parties intended to create a legal obligation is binding. It can be enforced in court. There are penalties for breach of contract, both standard and any that are written into the contract. A party injured by a breach of contract has the right receive damages.
The Bankert case in York County is a case of first impression we learned about in a blog post by Attorney Paul Minnich, attorney for the five children. See www.palitigationblog.com Nov, 9, 2011.
The court held that the objecting four stepchildren were entitled to a hearing on the facts to determine whether or not the agreement was breached. The court said that in order to prevail in the absence of a specific restriction on lifetime transfers in the contract , the stepchildren would have to prove (1) that the transfer were made to "evade performance"of the contract, (2) violated the deceased spouse’s contract rights (3) the gifts were (a) unreasonable in amount or represented a significant part of the surviving spouse’s estate, or substantial gifts made to only some of the surviving spouse’s beneficiaries and (b) were received without cost or consideration, and (c) received by beneficiaries who knew the terms of the will agreement.
For those not keeping score, that adds up to five requirements, the third one being an either/or requirement. The first two require proof of state of mind (evasion and fraud), tough nuts to crack. The last one requires proof that the favored children knew the terms of the will contract, another difficult task.
The action went from Orphans’ Court to Civil Court back to Orphans’ Court where the Judge was asked to make a declaratory judgment and adopt the standards listed above as a standard in Pennsylvania.
Enough ambiguity about intent regarding gifts in the contract existed to justify the judge’s hearing testimony from the lawyer who wrote the wills and the contract. She testified that she explained that the surviving spouse could make lifetime gifts to just some of the beneficiaries, thus defeating the intent to treat all children alike. Mr. Bankert refused to write any restrictions on gifts into the contract.
On appeal, the five children prevailed. The Court held "that Mrs. Bankert had an unqualified right to dispose of her property through inter vivos gifts because it did not evade performance, and it was the intent of the parties not to limit such actions. The lack of any express provisions in the Agreement that clearly and unambiguously manifest an intent to limit the surviving spouse’s right to freely transfer the property during her lifetime, along with the testimony that clearly shows it was the intent of Mr. Bankert to exclude such a provision in the Agreement, the Court must find that Mrs. Bankert was not acting in fraud, against the Agreement, or against the wishes of Mr. Bankert."
How to avoid this mess? Listen to the lawyer when a gift clause is recommended, or forget a contract and put the assets in trust and have the trustee (a neutral party, not the wife or the children) distribute the assets during the surviving spouse’s lifetime and at the death of the surviving spouse. Of course a trustee needs to be paid, but you can pay now, or….