In re Estate of Riefberg, 58 N.Y.2d 136 (1983)

A buy-sell provision of a corporate stockholder’s agreement, amended shortly before death to divert proceeds directly to beneficiaries other than the estate, can be a testamentary substitute subject to a surviving spouse’s right of election under EPTL 5-1.1.

Summary

The New York Court of Appeals addressed whether a buy-sell agreement, amended just before the decedent’s death, constituted a testamentary substitute subject to the surviving spouse’s elective share. The decedent, Sid Riefberg, amended a stockholder agreement to direct payment of his shares’ value to his former wife and her children instead of his estate, thereby circumventing his current wife’s (Maria’s) right of election. The court held that the amended agreement was indeed a testamentary substitute, emphasizing the decedent’s control over the disposition of the property and the agreement’s impact on estate assets available to the surviving spouse. The court also upheld the lower court’s finding that Maria had not abandoned the decedent, thereby preserving her right to election.

Facts

Sid Riefberg’s will left the bulk of his estate to his former wife, Henrietta, and her children, with only a small bequest to his daughter from his second wife, Maria. Sid and his brother were equal shareholders in a close corporation. The original stockholder agreement mandated the corporation to purchase a deceased shareholder’s stock, with proceeds going to the estate. Shortly before Sid’s death, the agreement was amended to direct payment for Sid’s shares to Henrietta and her children, bypassing the estate. Maria had requested that the locks be changed on the marital apartment, and the couple was living apart at the time of Sid’s death.

Procedural History

Maria filed a spousal election, which Henrietta (as executrix) challenged based on alleged abandonment. The Surrogate’s Court ruled in Maria’s favor on the abandonment issue. Maria then initiated a proceeding to determine if the stockholder agreement constituted a testamentary substitute. The Surrogate’s Court found it to be a testamentary substitute and directed Henrietta to include the stock’s value in calculating Maria’s elective share. The Appellate Division affirmed both decrees, and Henrietta appealed to the Court of Appeals.

Issue(s)

1. Whether Maria forfeited her right to elect by unjustifiably abandoning Sid during his lifetime.
2. Whether the amended buy-sell agreement constitutes a testamentary substitute under EPTL 5-1.1, thereby subject to Maria’s spousal right of election.

Holding

1. No, because the estate failed to prove that Maria’s departure from the marital home was unjustified and without Sid’s consent.
2. Yes, because the agreement, particularly after the amendment, allowed Sid to retain control over the disposition of his property, effectively circumventing Maria’s elective share.

Court’s Reasoning

Regarding abandonment, the court emphasized that more than mere separation is required; the abandonment must be unjustified and without consent. The estate failed to provide sufficient evidence to meet this burden. As the court noted, proving abandonment is difficult without the testator’s testimony due to the Dead Man’s Statute (CPLR 4519). Regarding the testamentary substitute issue, the court delved into the history of EPTL 5-1.1 and its purpose of preventing circumvention of spousal rights. The court reasoned that the “in trust or otherwise” language of EPTL 5-1.1 (subd [b], par [1], cl [E]) should be interpreted broadly to include arrangements that, like the amended buy-sell agreement, allow a decedent to control the beneficial enjoyment of property while stripping the estate of assets. The court rejected the argument that because a contract can be abrogated by mutual consent, that it cannot be considered a testamentary substitute. The court stated, “[T]he agreement here was the means by which the decedent not only controlled the beneficial enjoyment of the property right at stake, but stripped the estate of assets which should have been subject to his surviving spouse’s right to her elective share. Indeed, its ‘express provisions’ enabled the decedent, in terms of an appropriate use of ejusdem generis, to retain a power to ‘revoke’, ‘consume’, ‘invade’, or otherwise ‘dispose’ of the corpus.” The court emphasized that while certain assets are specifically excluded from being considered testamentary substitutes (e.g., pension plans, insurance proceeds), stockholder agreements are not among them. Thus, the amended agreement fell within the statute’s definition of a testamentary substitute.