This legislation, adopted on May 20, 2009, is a comprehensive rewriting of the law regulating renunciations. It makes conforming amendments to the Chapter 36C, North Carolina Uniform Trust Code, Chapter 32A governing powers of attorney and Chapter 28A governing estate administration. The changes addresses many unanswered questions concerning the effect of a renunciation under various situations such as, the effect of a renunciation not timely made. It also will make more clear what it takes to make an effective renunciation and adds new provisions who can make an effective one under various fact patterns as well as who must join in the case of a married individual or a minor pour-over distributee. Unchanged is the requirement for when real property or an interest therein is renounced. A copy of the renunciation must also be filed for recording in the office of the register of deeds of all counties where any renounced property is located. New Sections 31B-1.1 and 31B-1.2, deal extensively with the right of a fiduciary to renounce fiduciary powers and provide a procedural structure for doing so.
A common issue with renunciations of intestate property is the situation where the adult children of a surviving spouse wish for that parent to inherit the entire interest in certain property of the decedent (often the marital home), but for various reason may not wish to deed it. If the adult children have children of their own, such property would have gone to those children upon renunciation under the provisions of the prior statute. Rewritten G.S. 31B-1(d) offers a solution in that it provides that a "parent of a minor for whom no general guardian or guardian of the estate has been appointed may renounce, in whole or in part, an interest in or power over property (including a power of appointment) that would have passed to the minor as the result of that parent's renunciation. The parent may renounce the interest or power even if its creator imposed a spendthrift provision or similar restriction on transfer or a restriction or limitation on the right to renounce."
N.C.G.S. Section 31B-2 provides the time restrictions on renunciations. To be a qualified disclaimer for federal and state inheritance, estate, and gift tax purposes, a renunciation of a present interest of renunciation must be filed as required under the applicable federal statute for an effective disclaimer for federal estate and gift tax purposes. Absent any relevant federal statute, it must be filed no later than nine months after the date the transfer of the renounced interest for the purpose of such taxes. A renunciation of a future interest must be made within six months after it vests, and the recipient is entitled to possession even if the renunciation is not recognized as a disclaimer for federal estate tax purposes.
Another common concern is whether the spouse of a married renouncer must join in the renunciation. The bill provides that when a renunciation of any interest in real property is made within the time period required under subsection (a) of N.C.G.S. Section 31B-2, the spouse of the person whose property or interest is being renounced is not required to join in the execution of the instrument of renunciation, and as provided in N.C. Gen. Stat. § 31B-3(a)(1), the spouse has no statutory dower, inchoate marital rights, elective share, or any other marital interest in the real property or real property interest renounced.
The bill provides that failure to file or register the instrument of renunciation does not affect the effectiveness of the renunciation as between the person whose property or interest is being renounced and persons to whom the property interest or power passes by reason of the renunciation; however, record title to a renounced interest in real property does not pass to persons receiving the renounced interest by reason of the renunciation until the instrument of renunciation is properly registered.
There is a new N.C.G.S. Section 31B-2.1 setting forth certain requirements for delivery of the renunciation by the person renouncing to certain persons. The provisions are extensive and vary depending on the status of the renouncer and the nature of the interest. The failure to deliver a copy of the instrument of renunciation as required by this section does not affect the validity of the renunciation even though, the renunciation may, as a result, not be recognized as a valid disclaimer for federal estate tax purposes.
The bill would add new N.C. Gen. Stat. § 31B-4.1 to provide that a renunciation is effective if it has the effect under the Internal Revenue Code of preventing the transfer of property to the renouncer, even if not in otherwise compliance with GS Chapter 31B, making it effective for inheritance or gift tax purposes.
N.C.G.S. Section 31B-3 dealing with the effect of renunciation on how the interest devolves has been extensively rewritten. Unless the instrument creating the interest provides otherwise, the property or interest renounced devolves as provided in this section. If the renunciation is filed within the time period for an effective tax disclaimer, the property devolves as if the renouncer had predeceased the date of the transfer of the renounced interest to the renouncer. If the renunciation is not filed within the time period described in G.S. 31B-2(a), the transfer of the property takes effect as if the renouncer had died on the date the renunciation is filed. Any future interest that takes effect after the termination of the estate renounced, takes effect as if the renouncer died on the date determined above and upon the filing of the renunciation, the persons in existence as of that date will immediately become entitled to possession.
There is a form of anti-lapse protection. If the property renounced was created by the will of a decedent, the devolution of the property is to be governed by N.C.G.S. Section 31-42(a). In the event that the decedent dies intestate or the title is to be determined as though a decedent had died intestate, and the renouncer has living issue who would have been entitled to the property if they had predeceased the decedent, then the property renounced shall be distributed to them per stirpes. Otherwise, the property is distributed as though the renouncer had predeceased the decedent.
If the interest renounced was created by an inter vivos trust, the devolution of the interest is governed by N.C.G.S. Section 36C-6-605 (e). If a trustee files a timely renunciation, the interest does not become trust property. If a trustee's renunciation is not timely filed, the interest passes as if the trust had never existed as of the date of the renunciation.
N.C.G.S. Section 31B-3(g) is poorly drafted as it states: "Unless otherwise provided in the instrument of renunciation, the interest in property being renounced by a surviving tenant by the entireties upon the death of the other tenant is deemed to be a one-half interest in the former entirety property, and title to that one-half interest passes as if the deceased tenant survived the tenant renouncing." Presumably, the intent of the statute is to facilitate tax planning in estate administration. Since there is no such thing as a ½ interest in a tenancy by the entireties, we believe the effect that was intended is to renounce only a ½ undivided interest in the whole, leaving the renouncing survivor spouse with a ½ undivided interest. As the entire property may be renounced due to the unique nature of a tenancy by the entireties, attorneys drafting renunciations of entireties interest should take great care in drafting them in order to achieve the desired result.
N.C.G.S. Section 31B-3 (h) is much more straightforward, and provides "the interest in property being renounced by a surviving joint tenant with right of survivorship is deemed to be the fractional interest of the deceased joint tenant to which the surviving joint tenant would have been entitled by right of survivorship, and title to that fractional interest passes as if the tenant renouncing predeceased the deceased joint tenant" unless otherwise provided in the renunciation.
N.C.G.S. Section 31B-4 deals with acts that waive or bar the right to renounce.
"(1) An assignment, conveyance, encumbrance, pledge, or transfer of the property or interest, or a contract therefor by the person authorized to renounce,
(2) A written waiver of the right to renounce, or
(3) Repealed by Session Laws 1998-148, s. 4.
(4) A sale of the property or interest under judicial sale made before the renunciation is effected.
(b) The renunciation or the written waiver of an instrument waiving or barring the right to renounce is binding upon the renouncer or person waiving the right to renounce or the person barred from renouncing and all persons claiming through or under him that person.
(c) A fiduciary's application for appointment or assumption of duties as fiduciary does not waive or bar the fiduciary's right to renounce a right, power, privilege, or immunity.
(d) No person shall be liable for distributing or disposing of property in reliance upon the terms of a renunciation that is invalid for the reason that the right of renunciation has been waived or barred, if the distribution or disposition is otherwise proper, and the person has no actual knowledge or record notice of the facts that constitute a waiver or bar to the right of renunciation.
(e) The right to renounce property or an interest in property pursuant to this Chapter is not barred by an acceptance of the property, interest, or benefit thereunder; provided, however, an acceptance of the property, interest, or benefit thereunder may preclude such renunciation from being a qualified renunciation for federal and State inheritance, estate, and gift tax purposes.
(f) An instrument waiving or barring the right to renounce an interest in real property is not effective as to persons protected under G.S. 47-18 or G.S. 47-20 until either (i) registered as provided in those sections or (ii) registered pursuant to a judicial sale proceeding as described in subdivision (4) of subsection (a) of this section in which the person renouncing is a party.
The instrument of waiver or bar shall be indexed in the grantor's index under (i) the name of the transferor of the property or interest in the property or creator of the power or holder of the power and (ii) the name of the person whose renunciation is waived or barred."
N.C.G.S. Section 32A-14.2 has been amended to govern a renunciation by an attorney-in-fact acting under power of attorney. If the power of attorney broadly authorizes the attorney-in-fact to handle the principal's affairs or deal with the principal's property, but does not expressly authorize the attorney-in-fact to renounce an interest in or power over property, the attorney-in-fact does not have authority to renounce the principal's interest under Chapter 31B. Even if there is an express grant of general authority to renounce in the power of attorney, the attorney-in-fact may not renounce in favor or for the benefit of the attorney-in-fact, unless the power of attorney expressly authorizes a renunciation that benefits the attorney-in-fact or the estate, creditors, or the creditors of the estate of the attorney-in-fact, or an individual to whom the attorney-in-fact owes a legal obligation of support or unless the attorney-in-fact is an ancestor, spouse, or descendant of the principal. There are new conforming provisions in the statutory Short Form Power Of Attorney to make provision for this limitation and also new conforming provisions in the list of N.C.G.S. Section 32A-2 powers.
The North Carolina Uniform Trust Code has been conformed by adding N.C.G.S. Section 36C-1-105(b)(12) which section reads as rewritten:
"(b) The terms of a trust prevail over any provision of this Chapter except:
(12) The power of a trustee to renounce an interest in or power over property under G.S. 36C-8-816(32)."
N.C.G.S. Section 36C-8-816 reads as rewritten:
"§ 36C-8-816. Specific powers of trustee.
Without limiting the authority conferred by G.S. 36C-8-815, a trustee may:
(30) Request an order from the court for the sale of real or personal property under Article 29A of Chapter 1 of the General Statutes, or for the exchange, partition, or other disposition or change in the character of, or for the grant of options or other rights in or to, such property; and property;
(31) Distribute the assets of an inoperative trust consistent with the authority granted under G.S. 28A-22-10.G.S. 28A-22-110; and
(32) Renounce, in accordance with Chapter 31B of the General Statutes, an interest in or power over property, including property that is or may be burdened with liability for violation of environmental law."
This act becomes effective October 1, 2009, and applies to renunciations and powers of attorney executed on or after that date. Full text of the bill can be found at:
This month's edition of Tales from the Dirt examines the risk in certifying title with uncanceled deeds of trust.
Commander James T. Kirk had recently retired after a career of military service. He moved back to his hometown, and with his pension and some money he had inherited, he decided to try his hand at real estate development. He found a nice tract of land to buy and subdivide, which he decided to call Enterprise Acres.
The title examination revealed only one problem, an uncanceled deed of trust to Federation Savings Bank. Kirk's attorney contacted the attorney who had closed the previous sale. He was assured that the deed of trust was paid, and he produced a closing statement which showed the deed of trust was to be paid at closing. The closing attorney also offered to give an affidavit that he had tendered payment in full. Kirk's attorney was confident he would be able to get title insurance coverage over the uncanceled mortgage based on this proof and advised Kirk to close as scheduled.
Kirk went forward with the closing, and a couple of weeks later he began implementing his development plans. Nine months later, the property had been subdivided, a plat recorded and roads constructed. Kirk was now ready to begin offering lots for sale. He listed the first section of lots with Sulu Realty, who specialized in subdivision sales. The first phase sold out quickly, and Kirk listed the remainder of the lots for sale. A year later, the trustee of the deed of trust to Federation Savings Bank posted a notice of foreclosure on the land.
As it turned out, the deed of trust had not been paid. The prior closing attorney, Romulus, had embezzled the payoff proceeds and had continued making the monthly payments on the debt. Romulus' expensive lifestyle eventually caught up with him. He could no longer make the payments on all the deeds of trust that he had stolen the payoffs. Kirk confronted his attorney and asked how in the world something like this could happen. "Dang it Jim, I'm an attorney, not a detective!" his attorney exclaimed.
Is there anything Kirk's attorney could have done differently which would have prevented this problem? First, anytime there is an expensive tract of land that does not have a debt on it, a red flag should be raised. In the case at hand, where there was, in fact, an unpaid deed of trust, the attorney should require proof of the payoff with evidence of a canceled check. Even then, there is risk involved because even if the bank cashed the check, they may have not canceled the lien, because there may be other late charges, interest, fees or penalties outstanding. The better practice is to pursue cancelation of the uncanceled instrument. This is also important, because North Carolina is a quasi-title state where beneficial title vests in the trustee. Consider this, if the debt is never discharged from the record, does not title remain vested in the trustee? This presents a separate issue that goes to marketability of title that the seller would be unable to deliver at closing.