As estate planning attorneys, rarely a month goes by where we do not hear from people who want to retitle their real estate to others for various reasons. Often these people believe that they will save on probate fees or taxes by retitling the asset, or that they will protect assets from Medical Assistance or creditors. But a recent case from the Pennsylvania Superior Court highlights just one of the dangers inherent in making such transfers without legal counsel.
In a non-precedential decision, Irish v. Warnshuis, 1124 WDA 2012 (October 10, 2013), the Superior Court affirmed the lower court, which passed the real estate owned by Mrs. Irish to her children after she passed away. At first blush, this does not sound like a strange result. However, Mr. Irish disagreed.
Mr. and Mrs. Irish were married in 1982; it was the second marriage of each. Mrs. Irish had children by a prior marriage. Mr. and Mrs. Irish purchased a property together in 1987, but in 1990 Mr. Irish transferred his interest in the property to Mrs. Irish to protect the property from the potential claim of creditors of his aircraft business. Mrs. Irish wrote a Will in 2003, which left $20,000 to Mr. Irish and the balance of her estate to her children from her prior marriage. When Mrs. Irish passed away, Mr. Irish objected to the transfer of his property to his step-children, arguing to the court that he never intended to gift the property to his wife.
Mr. Irish asked the court to impose a constructive trust on the property, making him the beneficiary of the trust. The children asked the court for sanctions against Mr. Irish, arguing that Mr. Irish was improperly obstructing their rights to the property.
The court agreed with the children, and disallowed the constructive trust. The court found that Mr. Irish had ignored the advice of his attorney to purchase adequate liability insurance, and that the jointly-owned property would not be subject to the attachment of his creditors. The court also found that Mrs. Irish had been told by her attorney that the effect of her Will would be to transfer her property to her children. Mr. Irish appealed.
As mentioned above, Superior Court affirmed the lower court. In doing so, it confirmed the law of constructive trusts: generally, a “constructive trust” is defined as a relationship with respect to property subjecting the person by whom the title to the property is held to an equitable duty to convey it to another on the ground that his acquisition or retention of the property is wrongful and that he would be unjustly enriched if he were permitted to retain the property. The court recognized that a constructive trust could be created if (a) the transfer was procured by fraud, duress, undue influence or mistake, or (b) the transferee at the time of the transfer was in a confidential relation to the transferor, or (c) the transfer was made as security for an indebtedness of the transferor. The court further noted that “[u]nder our case law, the marital relationship is not confidential as a matter of law. [Whether a confidential relationship exists in a marital union] is a question of fact and arises when one party places confidence in the other with a resulting superiority and influence on the other side” and that “where, as here, the parties are husband and wife, a presumption arises that a transfer [of property] between them was a gift.”
Finally, the court noted that the presumption of a gift of a transfer of property between husband and wife may be rebutted only with “clear, explicit and unequivocal — though not necessarily uncontradicted — evidence” that the transfer was not intended as a gift.
In the end, Mr. Irish got what he bargained for — the property went to his stepchildren. The important takeaway from this story is that anyone considering a transfer of property should carefully consider all of the potential consequences, and should memorialize the transactions with written agreements. Titles to property and beneficiary designations should be checked frequently. Consultation with an experienced estate planning attorney is highly recommended to ensure that the transfers do not have unintended consequences. And once you have the consultation and have heard the lawyer’s advice, consider following it.