When done right, prenuptial agreements are effective tools for advancing the goals of estate planning and tax avoidance for married couples. No one gets married expecting to face the disappointment of a marital separation or divorce. The only thing worse is a legal process that can be contentious, slow and expensive. A prenuptial agreement helps couples to avoid some of the pain and expense of a divorce by making decisions harmoniously before trouble starts.
Prenuptial agreements are vital elements of a well-conceived estate plan that may also include a testamentary will, powers of attorney, business operating agreements, and trust agreements to reduce or avoid federal estate and gift taxes. Chapter 18 of my book contains sample clauses and timely pointers for crafting the most effective prenuptial agreements. Well-written prenuptial agreements can help to preserve a family business or trust assets, ensuring a family legacy for future generations.
When drafting prenuptial agreements, practitioners must consider the tax consequences, such as:
- Tax-related provisions of an agreement are contracts between private parties, which might not be binding on the tax authorities (for example: past due taxes—hold harmless provisions will not matter).
- During prenuptial discussions, if one individual has potential tax liability, it may be important to warn the couple to keep their assets separate from one another. In addition, the potentially liable spouse must be advised about conveying property to others, as doing so may be a fraudulent conveyance.
- Consider including a provision addressing the parties’ respective obligations with regard to any prior joint tax returns in the event of a change in their tax liabilities due to actions of the tax authorities.
A prenuptial agreement that involves the conveyance of property from one fiance to the other, prior to the marriage, may trigger gift tax liability if the value exceeds the annual gift exclusion. The Internal Revenue Code treats those transfers as a gift of property because the waiver of marital rights is not an “adequate consideration” for the property transferred. I.R.C. §2043(b). If you are going to present your fiance with a pre-wedding gift of substantial value, think twice.
In some prenuptial agreements, fiances agree to waive their claims against each other’s retirement benefits. However, any waiver of ERISA retirement benefits must meet the same requirements as a qualified domestic relations order. Anything less is ineffective, as the U.S. Supreme Court held in Kennedy, 555 U.S. 285, 129 S.Ct. 865 (2009). In a series of decisions, the federal courts have ruled that a spouse’s right to an ERISA retirement plan cannot be waived prior to the marriage. Therefore, make sure the appropriate ERISA waivers are signed so that the waivers will be recognized and effective under federal law.
One of the most sensitive components of any relationship — and the cause of many heated discussions, especially within a marriage — relates to finances. The most controversial financial matters considered by couples prior to entering, or even during, a marriage often occur when:
- An individual has already achieved financial success;
- Either spouse is embarking on what they believe will turn into a successful career;
- Either spouse currently owns (or plans to own) a business;
- Either spouse plans to earn an advanced education/certification during their marriage;
- Either spouse has received, or expects to receive, significant assets in the future, including an inheritance;
- One spouse is entering the marriage with a significant amount of assets or debt; or
- Either spouse has children from a prior marriage or relationship.
A well-planned prenuptial agreement or postnuptial agreement can limit the issues which need to be addressed in a divorce, and, as a result, may remove much of the animosity from the divorce process.
Premarital agreements (also called antenuptial or prenuptial agreements) give individuals control over their assets if a marriage doesn’t work or if a spouse dies. Many who come to us for prenuptial agreements are surprised to learn the extent to which the laws of Pennsylvania already address many of their concerns. But there are also many situations for which a premarital agreement is advantageous. We help our clients focus on what needs to be protected while building a partnership meeting the needs of both parties. We also assist same-sex partners with cohabitation agreements.
For family law help in Western Pennsylvania, call me. I’m Brian Vertz, and for more than 25 years, I’ve represented business owners, entrepreneurs, pro athletes, and professionals. I’ve represented all kinds of people with complicated child support and divorce issues. My law firm is a powerful team of lawyers dedicated to family law. In Pittsburgh and Western Pennsylvania, call me at 412-471-9000.