Court Refuses to Use Merger to Disinherit Former Spouse. What is the doctrine of a merger?
The doctrine of merger is set forth in the Restatement of (Third) Trusts §69, which provides that if the legal title to the trust property and the entire beneficial interest become united in one person, the trust terminates. The comments to this section of the Restatement also states that if by inter vivos transfer, will, or operation of law the entire beneficial interest in trust property passes to the trustee, the trust terminates and the trustee holds the property free of trust.
Thus, if the sole beneficiary of a trust dies intestate and his interest passes to the trustee as his heir, a merger occurs and the trust terminates. Similarly, if the trustee is also the life beneficiary of the trust, and if the sole remainder beneficiary, holding an indefeasibly vested remainder interest in the trust, assigns her interest to the trustee or dies and leaves her interest to the trustee, the trust terminates.
What happens when there is a divorce? Does a divorce, by operation of law, sever the entire beneficial interest in a trust? This very question was raised and answered by the Florida Second District Appellate Court in Hansen v. Bothe, 34 Fla.L.Weekly D816a (April 22, 2009).
The Bothe Family Revocable Trust Agreement was executed by Andreas Bothe (the decedent) and his wife, Pamela Hansen, during their marriage. Both the decedent and Hansen were named as trustees of the trust. The decedent also executed a will during their marriage, which named Hansen as the sole heir and included a pour-over clause bequeathing all of the decedent’s estate to the trust in the event that Pamela Hansen predeceased the decedent.
The decedent and Hansen subsequently divorced, and the decedent died seven days later making the bequest to Hansen in the will void pursuant to the Florida Probate Code section 732.507(2) which provides that “[a]ny provision of a will executed by a married person that affects the spouse of that person shall become void upon the divorce of that person or upon the dissolution or annulment of the marriage. After the dissolution, divorce, or annulment, the will shall be administered and construed as if the former spouse had died at the time of the dissolution, divorce, or annulment of the marriage unless the will or the dissolution or divorce judgment expressly provides otherwise.”
As expected, the decedent’s mother, E. Marie Bothe, filed suit to terminate or revoke the trust arguing that full trust ownership vested in Andreas Bothe by operation of law under the doctrine of merger. Therefore, under the mother’s theory, Ms. Bothe would become Andreas Bothe’s sole intestate heir, and nine remainder beneficiaries lost any rights they had under the trust. Hansen, on the other hand, argued that the trust remained valid notwithstanding the marital settlement agreement and divorce and that the doctrine of a merger has no application.
The Second District observed that Andreas Bothe and Ms. Hansen were the trust’s grantors and trustees. Their marital settlement agreement contained no language addressing legal title to trust property. After the divorce, Andreas Bothe, alone, could amend or terminate the trust, claim legal ownership to the remaining assets, or claim any rights as a testamentary beneficiary. He made no changes; he left his estate plan intact.
The Court refused to apply the merger doctrine under the circumstances of this case. “The rationale behind the merger doctrine holds that when the trustee is the only beneficiary, the trust is no longer needed to carry out the intention of the settlor… A merger is inapplicable here. To the extent that Andreas Bothe became the sole grantor/trustee upon divorce, he held sole legal title; his intended remainder beneficiaries, however, retained an equitable interest.
The lesson to be learned here is to remember the importance of reviewing estate planning instruments immediately upon the prospect of any life-changing event, including a marriage, legal separation, or divorce.