Understanding Premarital Agreements and their Alternatives

If you have questions about divorce, legal separation, alimony entitlement, or alimony in Connecticut, please feel free to call the experienced divorce attorneys at Maya Murphy, P.C. in Westport today at 203-221-3100 or email Joseph C. Maya, Esq. at JMaya@Mayalaw.com.

ALTERNATIVES TO A PREMARITAL AGREEMENT

Although a premarital agreement may be appropriate in many cases, it may not always be, especially if a marriage is a first one for both parties.

Identification Of Property/Revocable Trusts

Under the law of most states, property brought into a marriage is separate property, which is not subject to division upon divorce, if such assets are not commingled with marital property. Further, appreciation and increases of these assets also do not become marital property unless the increase or appreciation is due to the efforts of either party during the marriage. In the case of an individual whose separate property is passive, such as investment assets, if such individual understands that these assets must be kept separate and not commingled with marital property, keeping these assets separate should protect them from a claim in a divorce proceeding. Explaining the law to a prospective spouse and encouraging him or her to keep his or her property separate may be sufficient.

A bank custody account could assist in a prospective spouse keeping his or her property separate. Clear identification and documentation of the fact that a given custody account consists of assets having a specific origin, which the spouse wants to identify and maintain separate, would be means of arranging for effective separation.

Another means by which to ensure that such an individual will keep separate assets separate is for him or her to establish a living trust and reregister the assets in the name of the living trust, being sure that the prospective spouse is not a trustee of the trust nor has any other power with regard to the trust under any type of power of attorney. In this manner, a specific lot of property is identified, while keeping the entire lot traced and identified as it is invested and reinvested.

Also, a couple moving from a community property state to a common law state might want a clear identification of the community property assets. A revocable living trust can serve this purpose as well.

Irrevocable Trusts

Likewise, if a family is concerned about making a gift or bequeathing an inheritance to an individual who may be married, the family can transfer property to such individual in a trust. Although a distribution made from the trust, if then commingled with marital property by the beneficiary, would become marital property, the property retained by the trust, and so separate, would not be subject to the claims of a surviving spouse. Also, the parents can condition any trust distribution on being subject to the discretion of an independent trustee. When an individual is the beneficiary of a trust established by another for his or her benefit, however, he or she should also make sure that trust distributions do not follow a pattern that could give rise to an expectation of entitlement with respect to either income or principal distributions. Richard M. Horwood and Lauren J. Wolven, Pre-Divorce Estate Planning: Bed Bash & Beyond, 30 Tax Mgmt. Est., Gifts and Tr. J. 111 (Mar.-Apr. 2005).

Family LLC Or Partnership/Buy-Sell Agreement

A family wary of its assets passing to children who may, intentionally or not, subject the assets to the claims of a divorcing spouse could form a family limited partnership or limited liability company to hold these assets. Typically, these entities restrict transfers of interests of these entities and/or require a divorcing partner/member to offer his or her interests to the entity for purchase by the entity and/or the other partners/members at a discounted price.

These provisions typically apply not only for a divorcing partner/member, but also to a partner/member at death. As for a prospective spouse who feels that the family does not trust him or her, or in the case of a prospective spouse who is already actively involved in a family business, the family could explain that, although it may not be concerned if interests were to pass to the prospective spouse in the event of the death of the family’s heir, the family is nonetheless concerned about the event of the prospective spouse’s remarriage and the inadvertent transfer of the family’s interests outside the immediate family to his or her future spouse, who is currently unknown by the family. Erika L. Haupt, For Better, For Worse, For Richer, For Poorer: Premarital Agreement Case Studies, 37 Real Prop. Prob & Tr. J. 29 (2002.)

Another option for the family of a prospective spouse who will inherit family business interests is to implement a buy-sell agreement among the parties. Although this type of agreement may force the family to purchase interests that would otherwise be transferred to an unfriendly party, the agreement prevents unrelated third-party involvement without the family’s consent, avoids possible litigation in an attempt to retain intra-family control, and provides certainty regarding purchase price and terms. Id. at 45.

Life Insurance

Although it may be possible to protect the future inheritance of one spouse without a premarital agreement, what about protection for the other spouse upon the death of the “wealthy” spouse? Even without an agreement, state spousal rights would give little comfort to the other spouse if most of the deceased spouse’s assets are tied up in family trusts or family entities. In this case, the “wealthy” spouse could purchase a life insurance policy on his or her life as a means as providing protection to the other spouse.

It is important to remind a client, however, that although a state statute may protect separate property upon death or divorce even in the absence of a premarital agreement, the client’s behavior in handling assets during the marriage may result in a loss of this protection.

CONCLUSION

As described in this article, an estate planning attorney should not draft a premarital agreement without an understanding of his or her state’s domestic relations law. If an attorney does not know what the law is, he or she will not be able to feel confident that the client understands what is being waived for the provisions of the premarital agreement. Likewise, if an attorney does not understand the standards of enforceability, he or she cannot be sure that the agreement will be valid and enforceable many years hence.

The practitioner should encourage his or her client to begin the process of preparing the premarital agreement as many months in advance of the wedding date as possible. The attorney should be sure that the other prospective spouse engages independent legal representation. The attorney should insist that his or her client provide adequate financial disclosure. The attorney should feel confident that there is no undue influence or duress present, and that the agreement is signed under circumstances that do not give rise to any presumption of improper execution.

Finally, whether an attorney’s jurisdiction requires that an agreement is fair, a good attorney will recognize that the parties are in love and that their relationship is more of a fiduciary one than parties who may typically contract with one another. As such, there is a higher level of trust and confidence that each party is looking out for the other’s interest as well as his or her own. For this reason, a responsible attorney should ensure that the agreement is a fair one for both parties, which is the best way for a marriage built upon a premarital agreement to start off on the right foot.

For a free consultation, please do not hesitate to call the experienced family law and divorce attorneys at Maya Murphy, P.C. in Westport, CT at 203-221-3100. We may also be reached for inquiries by email at JMaya@mayalaw.com.

Source: Stephanie B. Casteel, Planning and Drafting Premarital Agreements, 0890 PRACTICAL TAX LAW. 4898 (2005).