Introducing Pre- and Post-Marital Agreements

by | Sep 30, 2014

Marriage today is more complex than ever given the high rates of divorce, second marriages, blended families, and increasing globalization of couples. Anyone with significant property, an inheritance, a family business, or children from a prior marriage ought to consider a pre-marital agreement. Those entering a same sex marriage or civil union should also consider one. If the couple is multinational or goes global, there could be unintended changes to property ownership and tax consequences.

What additional considerations should a couple take into account in planning for their marriage and the pre-marital agreements? While different sources present different lists, in 2012 the following were the counties with the highest divorce rates:

  1. Russia
  2. Aruba
  3. USA
  4. Panama
  5. Ukraine
  6. Belarus
  7. Moldova
  8. Cuba
  9. Czech Republic
  10. South Korea

More striking is the fact that in the United States, the rate of divorce for 1st marriages is approximately 50%, for 2nd marriages 60% and for 3rd marriages 70%. 1

A premarital agreement may be one way to address issues not just upon divorce or death, but upon a move to a new jurisdiction.

This paper will examine the premarital agreement (including the international premarital agreement) and postmarital agreement, what they seek to achieve, tax and other considerations including planning for same sex couples, common law marriages, and couples on the move.

The Premarital Agreement and the Postmarital Agreement

Definition:

  • Premarital Agreement: A premarital agreement (or prenuptial or ante-nuptial agreement) is a contract between a couple prior to marriage or a civil union that typically provides how property owned before or acquired during the marriage will be divided in case of divorce or at death and can provide for alimony or maintenance. The agreement can be as broad or as limited in scope as the couple desires, except certain jurisdictions, including the United States, do not allow a marital agreement to govern child support or child custody rights.
  • Postmarital Agreement: A postmarital agreement seeks to achieve the same objectives as a premarital agreement, but it is entered into after the couple is married.
  • International Premarital Agreement: There is no such thing as an “international premarital agreement” per se. If more than one jurisdiction is involved, a couple should consider the law of each such jurisdiction. These different jurisdictions may include: where the couple celebrates their marriage, their first marital abode, their nationality, their residence, their domicile, and the location of their assets. In some instances, any one of these factors could connect the couple to a particular jurisdiction thereby requiring the advisor to look to the law of that jurisdiction. Not all countries recognize premarital agreements so one must always consult local counsel. When a couple is married, their advisor should review the nationalities of the couple, their residence, and the location of their assets. The law of the country that will govern the dissolution of the marriage may affect the marital regime or the use of a pre or postmarital agreement. For instance, some countries do not consider pre and post-nuptial agreements to be valid, so some couples will be unable to vary their marital regimes.

Legal and Tax considerations

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:

  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • Guardianship: Conditions of guardianship may be included as well in some countries, although not in the U.S.

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

Leigh-Alexandra Basha focuses her practice on domestic and international tax and estate planning. She counsels an affluent international client base on a wide range of sophisticated matters, including estate and trust administration, family wealth preservation, foreign trust planning, tax compliance, as well as business succession, expatriation, and pre-immigration planning. Leigh is head of the Firm’s Washington, DC, Private Client Practice Group.

Leigh-Alexandra Basha

Leigh-Alexandra Basha

McDermott Will & Emery
marital agreement

Maud Udry-Alhanko

McDermott Will & Emery
  1. https://www.divorcestatistics.info/divorce-statistics-and-divorce-rate-in-the-usa.html[]