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

Legal and tax considerations of pre and postmarital agreements?(part II)

Objectives.

The primary objective of a premarital agreement is to settle property rights in case of divorce or at death and maintenance in the case of divorce.  Except for child support, a couple is free to enter into any type of agreement they wish.  There are many important issues to consider, such as:

  1. Choice of Marital Regime.  In some jurisdictions( e.g., France), the parties are free to choose their marital regime e.g., separation de biens, communaute universelle or communaute reduite  aux acquets. Similarly in Germany, one can override the “default” marital regime of community o accrued gains or “Zugewinngemeinschat” by selecting other optional marital regimes such as exclusion of any community o property (“Gutertrennung”) or of general community of property (“Gutergemeinschat”).  In the United States, if the parties reside in a common law (separate property state) they cannot choose community property as their marital regime. This may be an oddity of U.S. tax law which permits a double basis step up upon the death of one spouse for those residing in community property states.
  2. Definition of Non-Marital or Separate Property.  This includes property owned before marriage, gifts and inheritances, including in some states interest and dividends earned by that property.  Non-marital property typically is not divided on a divorce and will pass on death without a claim by the surviving spouse.  However, a couple could agree to use non-marital property for the purchase of a residence and that could be treated as marital property.
  3. Definition of Marital Property.  This is property acquired after the marriage other than separate property, but the agreement can limit this to only property in joint name or designated in writing as marital property.  The parties can specify how marital property is divided on a divorce or distributed at death.
  4. Wages and Earned Income.  Under most state laws, earned income, wages, and Social Security benefits acquired after marriage are marital property.  The agreement can provide, however, that earned income is to be treated as non-marital property.
  5. Retirement Plans.  Contributions to retirement plans after the marriage are generally treated as marital property.  The couple can agree to allow each party to accumulate retirement benefits separately.  The agreement can also provide that each party may name someone else as the beneficiary, but to be effective the participant’s spouse must sign a waiver of rights to a qualified retirement plan after the marriage.
  6. Maintenance or Alimony. A party can agree to waive maintenance or alimony in case of divorce or agree to a specified schedule of payments.   The couple needs to consider the ability of each spouse to support himself or herself after the divorce if circumstances change, such as the birth of a child.  Some states allow a court to award maintenance or alimony if due to unforeseen circumstances the spouse would suffer undue hardship or be eligible for public support at the time of the divorce.
  7. Death. The couple can agree on how their property will be distributed on death including the waiver of certain spousal estate rights.  A party is free to name his or her spouse in his or her will or trust or may make lifetime gifts.  The couple may specify how the marital residence will be distributed if the owner dies first.  Sometimes, the surviving spouse is given the right to remain in the residence for period of time after the first spouse’s death. In the absence of an agreement, in common law states, a surviving spouse has a statutory right of election to receive a specified percentage of the probate estate or a fixed percentage of the augmented estate e.g., in Virginia.  In community property states, each spouse has the right to dispose of his or her separate property and one-half of the community property.  With an agreement, a spouse can completely waive all spousal rights including statutory right of election, community property interests, and miscellaneous rights such as homestead allowance, exempt property, and family allowance.
  8. Guardianship. Conditions of guardianship may be included as well in some countries, although not in the U.S.