The Premarital and Postmarital Agreement- consider it when tying the knot or thereafter

Legal and tax considerations of pre and postmarital agreements?
(Part VI)

Income Tax Planning Considerations in Premarital and Post Marital Agreements.

In drafting the premarital or postmarital agreement it is important to address certain U.S. income tax issues in the agreement:

  1. Qualified Retirement Plans. Since a premarital agreement cannot vary the terms of federal law under the Employee Retirement Income Security Act of 1974 (“ERISA”), the agreement should provide that if a spouse will waive his or her rights in qualified retirement plans, that the spouse not only consent to the waiver but that the spouse shall sign a consent expressly waiving such rights under a qualified retirement plan after the marriage ceremony. One should consider attaching a sample wavier form that the spouse agrees to sign after marriage.
  2. Assets Passing To Surviving Spouse. The agreement may provide that assets passing to a surviving spouse will be placed into a marital trust. This can include retirement plan benefits and other benefits. A martial trust may be needed for QDOT purposes in order to obtain a martial deduction.
  3. Payment on Divorce.
    1. Alimony and Separate Maintenance Payments. “Alimony or separate maintenance payments” may be taxable or non-taxable based on IRC Section 71(b). The parties can decide if the tax on such payments will be paid by the payor or the payee. The requirements for alimony or separate maintenance payments are as follows: (i) it must be a payment in cash, (ii) such payment is to be received by or on behalf of a spouse under a divorce or separation instrument, (iii) the divorce or separation instrument does not designate such payment as a payment which is not includible in gross income and not allowable as a deduction (under section 215); (iv) the payment is not paid while in the same household if the spouses are divorced, (v) there is no requirement to make payment after the death of the payee spouse, and (vi) if the payor and payee are still married they may not file a joint return for year alimony treatment is claimed. In order to avoid recapture of excess alimony payments during the 3 year post-separation period, one should provide that an obligation to pay terminates if a payee spouse dies and payments to a divorced spouse should not vary by more than $15,000 during the first 3 post-separation years. One should consider a provision that if the law changes regarding tax deductibility that the provision governing alimony or separate maintenance payments may change.
    2. Child Support. Child support cannot be provided for in a premarital agreement and there is no deduction for the payor spouse; child support is not income to the payee spouse.
  4. Taxation of Transfer of Property Upon Divorce. IRC Section 1041(a) provides that no gain or loss is recognized on a transfer of property from an individual to or in trust for a spouse or former spouse incident to a divorce. This does not apply to transfers to non-resident alien spouses. The nonrecognition rule shall not apply if the spouse or former spouse of the individual making the transfer is a nonresident alien. If a spouse purchases another spouse’s interest in jointly held property there is no recognition of income on a sale between the parties. Basis generally carries over, however, there are some exceptions.
  5. Filing of Returns. One may wish to provide in the premarital agreement for the treatment of filing of joint tax returns or separate tax returns including the payment of any tax due, indemnification for undisclosed income, and a pro rata distribution of any tax refunds.

II. Other Considerations in Drafting Premarital and Marital Agreements.

When drafting an international premarital agreement, one must consider many other factors. Does one have a separate agreement for each jurisdiction involved similar to a situs will or is it better to have a single global agreement that takes into account each jurisdiction and is negotiated with the assistance of counsel for each party in each jurisdiction? What is the governing law? Will the jurisdiction permit the law of another jurisdiction to govern property located in that jurisdiction? For example, Germany does not permit a marriage contact to provide that it be governed by foreign law. When drafting a premarital agreement, what language should be the “original” with the other languages being a translation of the original? Must the parties be represented by separate counsel in each jurisdiction involved?

VII. Conclusion.

Many of the financial issues facing a couple marrying today can be resolved by a properly drafted premarital agreement. The need to protect children of a first marriage or to preserve a family business can be accomplished through such an agreement. The couple should continue to review and amend the agreement when circumstances change, since it is a plan for the future that should evolve with the couple’s marriage. Complications may arise for the international couple both in terms of drafting a premarital agreement and its enforceability in different jurisdictions. Couples whether same-sex or not, whether entering a traditional marriage or a common law marriage, should consider such an agreement. Additionally, if a couple selects a marital regime or later changes it, they should be careful of unexpected tax consequences.

1. Hurwitz v. Sher, 982 F.2nd 778 (2nd Cir. 1992), Cert. Denied 508 U.S. 912 (1993); Treasury Regs. Section 1.401(a) – 20, Q&A 28.

2. See Section IRC 71(f).

3. IRS Section 1041(d).

4. Treasury Reg. Section 1041-1T(a), Q&A 2.

5. See IRC Section 1041(e).