“Frequently Forgotten Factors in Prenuptial Pacts”
by Jeffrey L. Crown
Requirements for validity
Separate Representation
Each prospective spouse should have separate, independently selected counsel, who advises him or her of what rights he or she would have in the absence of the agreement and the effect of the agreement on those rights.
Full and Adequare Disclosure of Assets
The prospective bride and groom must each list all of their assets and their sources of income. NOTE: Even with full and adequate disclosure, the agreement might not be bullet proof. Courts may look to the fairness of the agreement not only when it was signed, but when one spouse tries to enforce it.
“Waiver” of spousal rights in retirement plans
The Retirement Equity Act
A Federal statute called the “Retirement Equity Act” was supposed to ensure that the spouse of a pension or profit sharing participant receives survivor benefits from the plan even if the participant dies before reaching retirement age.
Effect of waivers – divorce
Several courts have held that, in the context of divorce, spousal rights in qualified plans may be waived prior to marriage. However, the rulings are not unanimous.
Effect of waivers – death
Death benefits under pension and profit sharing plans are treated differently. The statute states that, absent an effective waiver, a surviving spouse is automatically entitled to receive a “qualified pre-retirement annuity”. The Treasury Regulations are specific that those benefits may not be waived, except by a spouse. The Treasury Regulations provide that “an agreement entered into prior to marriage does not satisfy applicable consent requirements.”
Since the parties to a prenuptial are not yet spouses, a waiver will not be effective.
A possible solution
Perhaps a variation of a "no contest" clause would be useful. If the spouse agrees to waive her rights after marriage and has not done so, other provisions for her would be reduced by the value of the retirement benefits she received.
Note re subsequent marriage
REA does not just apply to beneficiaries designated during marriage. Marriage essentially voids all existing beneficiary designations.
EXAMPLE: Smedley is divorced with two children, whom he’s named as beneficiaries of his profit sharing plan. After a two week whirlwind courtship, he marries Velveeta. The children are out. Velveeta is in.
You CAN take it with you
Until the beginning of 2011, a person’s unused estate tax exemption [properly called either a “unified credit” or “applicable exclusion amount”) died with him or her. It could not be used by his or her surviving spouse. We now have “portability” and a new acronym, “DSUEA,” – Deceased Spouse’s Unused Exemption Amount.”
At least until the end of 2012, “excess” estate tax exemption can be, essentially, transferred to one’s spouse.
EXAMPLE: Elmer has $2 Million of assets. His wife, Elsie, has cashed in on her commercial success and is worth $7 Million. Assuming that Elsie doesn’t remarry and that Elmer’s executor prepares and files certain documents, Elsie could use a portion of Elmer’s exemption against her own estate tax. With today’s $5 Million exemption, Elsie could pass her entire estate to her beneficiaries tax free.
What to do
In order to take advantage of portability, the deceased spouse’s executor has to prepare and file a Federal estate tax return. In many cases, that return would otherwise not be required. This could create more work and expense for his executor, possibly with no benefit to the deceased spouse’s beneficiaries. Since the surviving spouse will benefit from this effort, she should be paying for it.
You might want to provide, in a Pre-Nuptial Agreement, that:
- If, when the first spouse dies, they are married to each other, the deceased spouse’s executor will, upon the survivor’s request, sign and file a Federal estate tax return.
- If that return would otherwise not be necessary, the surviving spouse will pay the costs of preparing it, including all fees for lawyers, accountants, appraisers, etc. If a return is necessary, the survivor agrees to pay the incremental cost of complying with the portability provisions.
- The executor will file all documents necessary to make a portability election of the Internal Revenue Code.
- Each spouse agrees to provide that her or his executor is authorized or required to make the election.
Income and gift tax returns
Allocation on joint income tax returns
Consider language similar to this:
“If JOHN and MARY file a joint income tax return for any year, each of them shall pay his and her proportionate share of the taxes reflected on that return, and any interest and penalties on it.
That proportionate share shall be based upon their respective incomes, reduced by their respective credits and deductions. Any income tax refund for any year for which JOHN and MARY have filed a joint income tax return shall be allocated between them in the same proportion that the tax paid by each of them bears to the total taxes paid. The term ‘income tax return’ includes all Federal, state and local income tax returns reporting any one or more items of income, gains, profits and avails, including earned income, dividends, interest and capital gains.”
Gift splitting
Gifts made to third parties may be treated as having been made one-half by the donor’s spouse by signifying her consent on a gift tax return.. Especially if one spouse will never need her entire gift tax exemption, it might make sense to have her agree to consent to gift splitting. The agreement should provide that the donor spouse pay the costs of preparing her gift tax return.
Alternatively, the agreement might provide that each spouse consents to split gifts within the annual gift tax exclusion (currently $13,000 per donee.) NOTE: One cannot selectively split gifts, for example, by consenting only up to the annual exclusion. The consent applies to all gifts by the donor spouse in the applicable year.
What rights are being waived
Many pre-nuptial agreements waive the spousal elective share, support allowance and other monetary rights in a deceased spouse’s estate. The parties may wish to consider waiving other “marital benefits” as well. The following list is not exhaustive:
- To contest provisions of a will, trust, conveyance or beneficiary designation.
- To be named as an administrator.
- To be a conservator.
- To receive proceeds of personal injury or wrongful death action.
- Homestead.
- To serve as a health care representative.
- To consent or object to anatomical gifts.
Miscellaneous provisions
- What are home maintenance expenses and who pays them?
- If joint or tenants in common property is sold, who is entitled to the proceeds?
- Community property and quasi community property.
Further reading
For a discussion of additional estate planning issues in planning for marriage and remarriage, read our article, "Mickey Rooney Meets Liz Taylor: Planning for the 2nd Marriage and Beyond."