Ray, Vicki J.

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1997 Survey of Rhode Island Law: Cases: Workers\u27 Compensation

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Roger Williams University Law ReviewVolume 3 | Issue 2 Article 25Spring 19981997 Survey of Rhode Island Law: Cases: Workers'CompensationVicki J. RayRoger Williams University School of LawFollow this and additional works at: http://docs.rwu.edu/rwu_LRThis Survey of Rhode Island Law is brought to you for free and open access by the Journals at DOCS@RWU. It has been accepted for inclusion inRoger Williams University Law Review by an authorized administrator of DOCS@RWU. For more information, please contact mwu@rwu.edu.Recommended CitationRay, Vicki J. (1998) "1997 Survey of Rhode Island Law: Cases: Workers' Compensation," Roger Williams University Law Review: Vol. 3:Iss. 2, Article 25.Available at: http://docs.rwu.edu/rwu_LR/vol3/iss2/25570 ROGER WILLIAMS UNIVERSITY LAW REVIEW [Vol. 3:387Trusts. Pezza v. Pezza, 690 A.2d 345 (R.I. 1997). The illusory-transfer test is the proper test to determine if an inter-vivos trans-fer of real property to a trust is sufficient to defeat a survivingspouse's entitlement of a life estate in the real property createdunder section 33-25-2 of the Rhode Island General Laws.Pursuant to section 33-25-2 of the Rhode Island General Laws,a surviving spouse is entitled to a life estate in real property thatwas owned solely by the deceased spouse at the time of his or herdeath.1 In Pezza v. Pezza,2 the Rhode Island Supreme Courtadopted the illusory-transfer test to determine whether an inter-vivos transfer of real property in a trust can defeat the survivingspouse's statutory right to a life estate in such real property.3Under the illusory-transfer test, the court looks at the substance ofthe inter-vivos transfer and determines whether the deceasedspouse had, in good faith, divested himself or herself of ownershipof the property.4 In Pezza, the court held that a trust, which isirrevocable at the time of the transferor's death and divests thedecedent of all benefits of trust property ownership, is complete,real and not illusory; therefore, it is not subject to the statutoryinterest of the surviving spouse created under section 33-25-2.5FACTS AND CASE TRAVELAnthony (Anthony) and Olga (Olga) Pezza married in 1973.6They jointly owned a residence in Florida and several bank ac-counts. On December 29, 1983, Anthony created a revocable inter-vivos trust.7 He transferred into the trust four parcels of real es-1. R.I. Gen. Laws § 33-25-2 (1956) (1995 Reenactment). The statute states inpart:Whenever any person shall die leaving a husband or wife surviving, thereal estate owned by the decedent in fee simple at his or her death shalldescend and pass to the husband or wife for his or her natural life subject,however, to any encumbrances existing at death; provided that the liabil-ity, if any, of the decedent to discharge the encumbrance or encumbrancesshall not be impaired.Id.2. 690 A.2d 345 (R.I. 1997).3. See id. at 350.4. See Newman v. Dore, 9 N.E.2d 966, 969 (N.Y. 1937).5. Pezza, 690 A.2d at 350.6. See id. at 345.7. See id.SURVEY SECTIONtate he acquired prior to his marriage to Olga, along with shares ofstock in his garage door business.8 He named himself a trustee.9Anthony's intent in creating the trust was to ensure that childrenfrom his previous marriage would attain ownership of the propertyupon his death.10 After this conveyance, Anthony still occupiedone of the parcels of real estate, collected rents from the otherthree parcels and retained the power to revoke the trust and thepower to demand payment of the trust principal.1' Anthony's willwas executed simultaneously with the trust and contained a "pour-over" provision providing that any remaining assets of the estatebecame part of the trust upon his death.12On June 25, 1986, when Anthony and Olga were experiencingmarital difficulties, Anthony resigned as trustee, appointed hisson, Michael, his successor and waived his right to revoke thetrust.13 Olga commenced divorce proceedings on November 14,1986. On December 5, 1986, Anthony disclaimed his power to de-mand the trust principal effective June 25, 1986. Anthony died onAugust 18, 1990 with a valid will and his marriage to Olga stillintact. 14Olga filed a complaint seeking declaratory relief in the RhodeIsland Superior Court on January 17, 1991. She contended thatthe transfer of the real property was a fraudulent attempt to defeather statutory right to a life estate in the real property under sec-tion 33-25-2.15 She asked the court to declare the trust invalid andgive her a life estate in the real property deeded to the trust.16 Thetrial court considered the tests used by courts in other jurisdic-tions. The court concluded that, of the two tests most utilized, thefraudulent-transfer test' 7 and the illusory-transfer test,' 8 the lat-8. See id.9. See id.10. See id. at 346. This was to satisfy a deathbed promise he made to his firstwife. See id.11. See id.12. See id.13. See id. at 347.14. See id.15. See id.16. See id.17. See, e.g., Stoxen v. Stoxen, 285 N.E.2d 198 (Ill. App. Ct. 1972); Mushaw v.Mushaw, 39 A.2d 465 (Md. 1944); Riggio v. Southwest Bank of St. Louis, 815S.W.2d 51 (Mo. Ct. App. 1991); Hanke v. Hanke, 459 A.2d 246 (N.H. 1983); Sherrillv. Mallicote, 417 S.W.2d 798 (Tenn. Ct. App. 1967).1998] 571572 ROGER WILLIAMS UNIVERSITY LAW REVIEW [Vol. 3:387ter that was the fairest method of analysis. 19 The trial court held atransfer of property with intent to defeat a surviving spouse's stat-utory share alone was insufficient to invalidate an irrevocabletrust. This is because intent is not relevant when a transfer is ana-lyzed using the illusory-transfer test.20 The court found that at thetime of Anthony's death, the trust was real, valid and not illusorybecause Anthony had resigned as trustee and made the trust irrev-ocable. 21 Therefore, the trust property is not subject to the statu-tory life estate of the surviving spouse. 22 Olga appealed to theRhode Island Supreme Court.BACKGROUNDBecause the issue was one of first impression for the RhodeIsland Supreme Court, it looked to other jurisdictions for gui-dance. 23 Primarily, two tests are used when examining whetheran inter-vivos transfer can defeat a surviving spouse's statutoryinterest in property.24 The Supreme Court of New Hampshireadopted the fraudulent-intent test. This test looks to the transferand asks whether the transfer was made with the intent to deprivethe surviving spouse of his or her statutory share. 25 If the courtfinds that there was an intent to defeat the statute based on thecourt's evaluation of the circumstances surrounding the transfer,then the court will invalidate the transfer and the property will beavailable for distribution to the surviving spouse.26 This test hasbeen criticized because it casts doubt on the validity of all inter-vivos transfers of property when a spouse retains sole ownership ifthe transfer was made without the other spouse's knowledge.2718. See, e.g., Staples v. King, 433 A.2d 407 (Me. 1981); (N.Y. 1937); Newman v.Dore, 9 N.E.2d 966; Moore v. Jones, 261 S.E.2d 289 (N.C. Ct. App. 1980); Seifert v.Southern Nat'l Bank of South Carolina, 409 S.E.2d 337 (S.C. 1991).19. See Pezza, 690 A.2d at 348.20. See id. at 348. The intent to defeat the surviving spouse's statutory shareis relevant in the fraudulent-transfer test. Analysis under the fraudulent-transfertest would invalidate an inter-vivos trust that was specifically created to defeat aspouse's statutory share. See id.; see also Hanke v. Hanke, 459 A.2d 246 (N.H.1983).21. See Pezza, 690 A.2d at 350.22. See id. at 347-48.23. See id. at 348; see also supra notes 17-18.24. See id.25. See Hanke, 459 A.2d at 248.26. See Pezza, 690 A.2d at 348.27. See Newman v. Dore, 9 N.E.2d 966, 968 (N.Y. 1937).SURVEY SECTIONThe illusory-transfer test, by contrast, was adopted by theNew York Court of Appeals in Newman v. Dore.28 The illusory-transfer test focuses on the substance of the transfer rather thanthe intent of the transferor to defeat a statutory survival statute.29In Newman, the court held that the only relevant inquiry iswhether the transferor-spouse had "in good faith" divested owner-ship of the property to the transferee.30 Intent is relevant only tothe question of whether the transferor intended to fully divestownership of the property to a third party, rather than to defraudthe surviving spouse of a statutory share of the property.3 1 Underthe illusory-transfer test, a transferor has the right to transferownership of property as he sees fit as long as the transaction sub-stantively accomplishes its intended purpose. A transaction thatpurports to transfer ownership but in reality allows the transferorto retain substantial ownership rights is said to be illusory. InStaples v. King,32 the Supreme Judicial Court of Maine held that itwould be irrational to allow a deceased spouse to defeat the surviv-ing spouse's statutory share by executing trusts to deplete his es-tate while reserving the benefits of ownership in the trustproperty.33ANALYSIS AND HOLDINGThe Rhode Island Supreme Court considered the two preva-lent tests, the fraudulent-intent test and the illusory-transfer test,used to evaluate inter-vivos transfers of property by a deceasedspouse. 34 The court concluded that the illusory-transfer test shouldbe used to determine whether an inter-vivos transfer of real prop-erty will defeat a surviving spouse's statutory share created by sec-tion 33-25-2. 35 The court found that the illusory-transfer testbalances the policy interest of protecting the continuation of thesurviving spouse's interest in the real property with the policy in-28. See id.; see also Staples v. King, 433 A.2d 407 (Me. 1981).29. See Pezza, 690 A.2d at 348.30. See Newman, 9. N.E.2d at 969.31. See id. The requirement of "good faith" in this context "does not refer tothe purpose to affect his wife but to the intent to divest himself of the ownership ofthe property." Id.32. 433 A.2d 407 (Me. 1981).33. See id. at 411.34. See Pezza, 690 A.2d at 348-49.35. See id. at 350.1998] 573574 ROGER WILLIAMS UNIVERSITY LAW REVIEW [Vol. 3:387terest of allowing an owner of real property to freely divest himselfof ownership.36 According to the court, the illusory-transfer testmandates that a conveyance of real property made by a spouse to atrust or other third party be "real, complete and not illusory."37When an inter-vivos transfer is made to a trust, the survivingspouse must prove by clear and satisfactory evidence that the de-ceased spouse did not finally and completely transfer all ownershipinterest and control over the trust property.38The court applied the illusory-transfer test to the facts of thiscase and determined that Anthony's transfer of real property to thetrust was real and complete when it became irrevocable on Decem-ber 5, 1986.39 The court noted that when Anthony first establishedthe trust in 1983, he may not have had the present donative intentto totally divest himself of the real property. But at the time of hisdeath, the trust was not illusory because he named his son succes-sor trustee, and divested himself of the right to revoke the trustand the right to demand payment of the trust principal. 40 Conse-quently, the real property is not subject to a life estate in favor ofOlga.41CONCLUSIONIn Pezza, the Rhode Island Supreme Court acknowledged thatsection 33-25-2 is a reflection of the policy considerations concern-ing protection of a surviving spouse's interests in real propertyowned exclusively by the deceased spouse at the time of death. Inadopting the illusory-transfer test to determine if an inter-vivostransfer of real property will defeat a claim under section 33-25-2,the court took the position that a spouse with complete ownershipof real property may transfer that ownership if the transfer is com-plete, real and not illusory at the time of the transferor's death.Therefore, the transaction is judged by its substance, not its form.36. See id. The court was careful to note that the interest created under sec-tion 33-25-2 is only an expectancy interest that vests when one spouse dies whileowning real property in fee simple. Therefore, a spouse owning real property in feesimple can transfer his whole interest, in fee simple, to another without interferingin the surviving spouse's interest under section 33-25-2. See id. at 349.37. Id. at 350.38. See Slepkow v. Robinson, 324 A.2d 321, 325 (R.I. 1974).39. See Pezza, 690 A.2d at 350.40. See id.41. See id.19981 SURVEY SECTION 575Because the intent requirement is irrelevant, the illusory-transfertest evades the argument of a surviving spouse that a presumptionof fraud arises whenever the deceased spouse has transferred apart of his estate during his lifetime without the surviving spouse'sknowledge.Karen M. Hagan

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1997 Survey of Rhode Island Law: Cases: Workers\u27 Compensation

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