Using Constructive & Resulting Trusts Saves Spouse from Estranged Heirs and Takes a Large Chunk Out of the Estate Tax Liability

Husband and wife are citizens of Foreign County but lawful permanent residents of the U.S, residing in the South Bay. They have no existing estate plan and no children. Husband is estranged from his parents and siblings, all of whom are still living abroad. Husband dies unexpectedly from a heart attack at age 60. Until the time of his death, Husband had handled all of the finances for the couple. Following his death, Wife discovers for the first time that all of the important stock, which constituted 80% of their wealth, had been held in Husband’s name alone. The stock had been acquired over a 10-year period through the exercise of employer-granted stock options from Husband’s employer. The funds used to exercise the stock options came from the couples’ joint account, while Husband and Wife were living together but before they were legally married. Husband and Wife, unfamiliar with California laws, thought they had a common law marriage prior to their civil marriage in California. To Wife’s surprise, after Husband’s passing, Wife learns from us that California does not recognize the concept of common law marriage.

Without an estate plan, the separate property of Husband would ordinarily be distributed under the California rules of intestate succession 50% to Wife and 50% to Husband’s parents. This is directly contrary to Husband’s stated desire and belief that Wife would receive everything.

Wife engages us to assist her in carrying out her Husband’s intent. Through fact gathering, we are able to piece together enough evidence to prove that the funds used to purchase the stock options came from the couples’ joint earnings before marriage. With Wife’s help, we also obtain documents establishing Wife’s position that Husband and Wife had both intended to leave each other all of their respective assets. In this case, important evidence included the joint tenancy deed to their home purchased before marriage and beneficiary designation forms with past employers.

Over the objections of Husband’s estranged parents, we the concept of a “resulting trust” to successfully argue that half of the stock belonged to Wife before Husband’s death, since the stock was purchased with money the joint account where the pooled their pre-marital salaries. [Martin v. Kehl (1983) 145 Cal.App.3d 228] Of the remaining 50% belonging to Husband, 25% of it passed by operation of law under the California rules of intestate succession to Wife as the surviving spouse. [Probate Code 6401(c)(2)(B)] As for the final 25% of stock, the court found enough proof to hold that Husband and Wife had entered into a valid oral agreement to leave each other all of their assets, which oral agreement they had both relied upon and executed in full. Based on such oral agreement, Wife was entitled the remaining 25% under the concept of a “constructive trust.” [Probate Code 21700; Byrne v. Laura (1997) 52 Cal.App.4th 1054; Marvin v. Marvin (1976) 18 Cal.3d 660; Alderson v. Alderson (1986) 180 Cal.app.3d 450]

In this case, Wife ended up with all of the assets as intended by Husband. Of almost equal importance was the manner in which the assets were conveyed to Wife. By successfully arguing that 50% of the stock was in fact Wife’s to begin with, we were able to reduce the value of Husband’s estate by 50% of the stock for federal estate tax purposes. Had all 100% of the stock been included in Husband’s estate for federal estate tax purposes, then Husband’s estate would have exceeded the federal estate tax applicable exclusion amount. Because Wife was not a United States citizen, these excess assets passing from Husband to Wife would not have qualified for the federal estate tax marital deduction and Wife would have paid a federal estate tax of 45% on those assets. By successfully arguing that Wife owned the assets from inception, we were able to reduce the size of Husband’s estate and entirely eliminate the federal estate taxes.