Sharon Klein, a Family Wealth Strategist and Trusts & Estates Attorney and Madeline Marzano-Lesnevich, a Family Lawyer in Hackensack, discusses top tips for negotiating premarital agreements with Dan Couvrette, CEO of Family Lawyer Magazine and Divorce Marketing Group.
Dan: Sharon, what services do you offer and how do you help family lawyers in the premarital planning context?
Sharon: Well, Wilmington Trust offers the full spectrum of wealth management services, and in particular in the matrimonial advisory solutions group that I lead, we collaborate with family law attorneys like Madeline to provide a comprehensive suite of services for their clients who are either getting divorced or recently been divorced, and that could run the gamut to everything from investing settlement proceeds to acting as a neutral independent trustee to reviewing business valuations, reviewing insurance, reviewing estate planning, documents which typically all need to be updated after a divorce, as well as providing family office services and private banking services. Specifically, in the pre-divorce context, we have sophisticated analytical tools, proprietary tools that can run comprehensive financial projections that can take into account all assets, which could be private, like a business, as well as generating very specific cash flows, which can take into account tax considerations as well as what’s going on in the marketplace so we could stress test the portfolio depending on market conditions, and all this provides very important information for family lawyers to use at the negotiating table to best position their clients in the negotiation process.
Sharon mentioned prenuptial agreements and prenuptial planning. Is that part of your practice, Madeline?
Madeline: Definitely, and in the past decade or so, I would say that it has increased tremendously.
Dan: A lot of people are also inheriting money, which they’d want to protect in some way as well.
Madeline: They do, but most states provide that inherited monies as long as you keep it separate from marital monies and keep it in your own name, will not be subject to sharing should there be a divorce. But you can always do that extra precaution of listing it in a prenuptial agreement as well.
Sharon: You also don’t know where people are going to end up living, right? They have a tendency to be mobile and move, and you don’t know what law is going to govern their marriage ultimately.
Madeline: Absolutely, and that’s why in virtually every prenuptial agreement that you write, no matter where the spouses may be residing at the time of a separation or divorce, you do want a certain jurisdiction’s law to govern the agreement.
Dan: Sharon, before we get to planning for future prenuptial agreements, have there been any recent tax changes that family lawyers should be mindful of for existing prenuptial agreements?
Sharon: Yes, absolutely. There’s been a very significant recent change in the character of alimony payments. Before 2019, alimony payments were considered deductible to the person who made the payments and they were picked up in the income of the recipient. With the person paying the alimony likely to be in a higher income tax bracket than the person receiving the alimony, that bracket play often resulted in savings when you looked at the couple together. But the change in the law now is if you get divorced beginning this year, alimony is no longer deductible to the person who pays the alimony and it’s no longer included in the income of the recipient. For people who have gotten divorced before 2019, the old tax treatment is grandfathered. So, if you have a divorce or a separation agreement that was signed before January 1 of 2019, you do get the benefit of the old tax characterization.
However, what people need to be mindful of in the premarital planning context is that if you have a prenuptial agreement that was signed before 2019, that is likely not considered a divorce or separation agreement that is grandfathered under the change in the law. That means that if you have a prenuptial agreement that was negotiated and signed before 2019 and was premised on the assumption and the foundation that the person paying the alimony was going to get a tax deduction, that is probably no longer going to be the case, which people will be very surprised to learn. All premarital agreements that were signed before 2019 need to be reviewed with that eye. Of course, it’s always possible to reopen and renegotiate a prenuptial agreement to take into account this later change in the law, but oftentimes people are reticent to do that because they don’t want to open a can of worms in opening a premarital agreement.
Dan: Right. Madeline, is there anything you want to add to that comment by Sharon?
Madeline: Well, what Sharon raised is a very good point that’s affected a lot of matrimonial lawyers doing prenuptial agreements. And since this is so new, we have suggested to former clients for whom we have done prenuptial agreements that they consider coming back to us and letting us revise the agreement. I will say quite frankly, that they do not. As Sharon said, it’s a can of worms. Nobody wants to be reminded of their prenuptial agreement when they’re in the midst of a happy marriage. What we started doing to avoid this coming up is instead of providing in a prenuptial agreement for periodic alimony payments from one spouse to another, we agree upon a lump sum. For example, if you are married one to five years upon divorce, you will receive X amount of dollars. If you are married five to 10 years, you will upon divorce receive X amount of dollars. That avoids the whole question of the tax issue at that point.
Sharon: Another element that I want to add that I think is very important is that estate planning documents must dovetail with premarital obligations. If you have an obligation pursuant to a prenuptial agreement, that has to be reflected in your estate planning documents. Because if you have an inconsistency there and a premarital agreement says one thing, and your estate planning documents say another, you’re probably going to have litigation. I think that’s particularly important in the business owner context because oftentimes business owners have buy-sell agreements and you have to make sure that the estate planning documents also dovetail with the buy-sell agreements. Otherwise, again, you’re probably going to have litigation.
Dan: Wouldn’t it make sense for a family lawyer to bring a financial professional like you in when they’re doing a prenuptial agreement?
Sharon: Yes. I’m glad you said that because I think that’s perfect advice. I think when you collaborate across disciplines, you get the best result for your client.
Madeline: It’s very important if you can have your client to agree to think about all the estate planning, all the trust documents, and the buy-sell agreement at the same time that they’re negotiating the prenuptial agreement. When we have a prenuptial agreement in draft form before we show it to the adversary, what we want to do is send it to the estate lawyer, send it to the wealth management person that our client is working with. You want to make sure that everyone agrees that this is in the client’s best interest, so they really have to think about all these things before they just put pen to paper and sign a prenuptial agreement.
Sharon: There are so many nuanced issues that each discipline is well aware of that outside of that discipline, it may not be so obvious. That’s why the approach that Madeline is suggesting – this collaboration – is really essential in order to have all these moving pieces working together.
Dan: Does it surprise you, Madeline, that some family law attorneys who are very accomplished don’t put this in as part of their process in terms of how they manage their clients and expectations?
Madeline: I would say I am surprised on a daily basis.
Dan: Sharon, are there any alternatives to prenups or techniques to consider in combination with prenups?
Sharon: Yes. Actually, the asset protection trust is a very interesting technique to consider. In most jurisdictions, you can’t create a trust and remain a beneficiary of that trust and have that trust protected from your creditors. In some jurisdictions, actually in an increasing number of jurisdictions, 17 or 18 states now have legislation that permits someone to create a trust and remain a beneficiary of the trust and still have those assets protected from creditors. So, for example, if you’re in Delaware, you could create a Delaware asset protection trust.
You could remain an income beneficiary of the trust. You could reserve the right to receive the principle at the discretion of a disinterested trustee, and you could also actually reserve the right to receive up to a 5% unitrust amount. The reason to create asset protection trusts is to create obstacles for creditors to make it difficult for creditors to reach those assets. And of course, in this scenario, in the matrimonial scenario, the quintessential future creditor is a future ex-spouse. For example, in Delaware, to maintain an action against the Delaware asset protection trust, you have to start the action in the Delaware Court of Chancery, there’s a four-year statute of limitations, and you have to prove by clear and convincing evidence that the transfer of assets to the trust was fraudulent with respect to that particular creditor. There are lots of obstacles. I actually see a lot of documents cross my desk and one drafting tip that I wanted to share that I think is very valuable is that I see practitioners in some of these trusts put in a provision that requires as a prerequisite to making a distribution to the beneficiary that a beneficiary’s spouse waives all marital rights. Otherwise, the distribution can’t be made. Other practitioners require that the beneficiary has to have a valid prenuptial agreement in order to be eligible to receive distributions. Something else to bear in mind is that practitioners recommend when you’re doing a trust like this, is to have very broad discretion in the trustee and the ability to pay out assets to a broad class of people. Because to the extent that the trustee is not mandated to make distributions, and there’s a class of beneficiaries and not just one beneficiary, the interest is very indeterminable. In that case, it would be much less likely that a court would find that the interest in the trust is reachable in divorce. That’s very important.
One more thing that I want to add is that although there is an increasing number of jurisdictions that have asset protection legislation, for some of them, the legislation is very new. The ink is really not yet dry on the books. So, many people prefer to go to an established jurisdiction to set up these trusts. In Delaware, for example, that law has been on the books for over two decades, and of course, you don’t need to live in Delaware to have a Delaware asset protection trust. You just need to have a Delaware trustee. And more and more people are availing themselves of this technique.
Dan: So, Sharon, it sounds like this is a very complex matter, and I can understand why somebody would want to talk with you before doing anything that has to do with the subject. Madeline, when you’re setting up a prenuptial agreement, what needs to be included in the prenuptial agreement?
Madeline: Well, after listening to Sharon, I would say the first thing you would disclose is an asset protection trust. You definitely would have to include that. The burden falls on both parties to the prenuptial agreement. It is not just the person who has a significant amount of assets or who has different things that they wish to protect that must disclose what they have. Both sides have an equal burden of disclosing all they have and all they owe. For example, you would attach to the prenuptial agreement different schedules, a schedule for the soon-to-be husband, a schedule for the soon-to-be wife. They would have to list all of their assets of any nature whatsoever. If there is an asset that you know is coming very soon, say, for example, one future spouse’s parent recently died and the estate has yet to be probated, you would list what you anticipate that particular person receiving from the estate. So it’s not just the asset you have now, but it is the asset that you can foresee is going to come in the future. You would list all your real estate, your investments, your business ownerships, any kind of trust that you have. Basically any asset whatsoever. Jewelry, you wouldn’t list it specifically, but you would say personal jewelry and give an approximate value.
In fact, thinking of that, what you really need to do is make sure the value you list coincides with what you have on your homeowner’s insurance. You would also list your liabilities. If you have credit card debts, if you have a mortgage, if you have a loan on a car, you actually must list all of that. If you have tax obligations that perhaps you haven’t satisfied yet. You must list that as well. Also, we would expect you to include tax returns. Now you do not have to go back and list five years of tax returns or 10 years of tax returns, which would be the case should you be facing a divorce. But for your prenuptial agreement, you would just be putting your most recent tax return as part of your schedules.
Dan: When you’re doing a premarital agreement, are you putting in values to these items or it doesn’t matter?
Madeline: No. You do put in the values as well, and that’s often a tricky question because people feel: why should I go out and have my real estate appraised and pay the cost of it? Why can’t I just put what I paid for? No. You really need to establish what was the value of that at the particular time that the prenup was entered into. If there are significant real estate holdings, we will ask our clients to get appraisals. If the holding is merely one home or a townhouse that is below $1 million, you really don’t need an appraisal. You can find that information generally on the Internet, but it’s best to disclose it all. If you have a particular explanation as to how you arrived at a value, you just footnote it all. The more information that’s given, the better chance you have of having that agreement be enforceable should the other side try to contest it.
Dan: Sharon, are there any other assets worth negotiating for in a prenuptial agreement?
Sharon: Yes. I always like to raise the issue of the hidden asset as I call it because I don’t think everybody is aware of this asset. What I mean by that is, every person has an exclusion from the federal estate and gift tax. In 2019, anybody could give $11.4 million away without a federal estate and gift tax consequence. In 2020, that amount is actually going to rise to $11.58 million. Before 2010, if spouses were married and one spouse didn’t use their entire exclusion amount before death, it was lost. It was a use it or lose it proposition.
Since 2010 we’ve had the concept of portability, which means that if one spouse doesn’t use their whole exemption amount before death, they could pass it or port it to the surviving spouse. This can really be worth a lot of money when you consider that an $11 million exemption can be passed to a surviving spouse to shield $11 million worth of assets in the estate of the second to die. Considering that the top federal estate tax rate is 40%, with $11 million of a shield, you could potentially save over $4 million in estate taxes. Even if people don’t have assets that rise to that level, if you have a taxable estate, you’re saving potentially 40% on every dollar that you shield. So on $1 million, you’re saving $400,000. It’s a very, very valuable asset. But here is the trick. The trick is that in order to port the amount from one spouse to the other spouse, you need to file a federal estate tax return after the death of the first to die, even if a return is not otherwise required. So even if you’re below the threshold to filing a return, you have to file in order to get portability, and the only person who could file is the executor of the estate of the first to die. You could imagine in a second or subsequent marriage situation, it’s not always the surviving spouse who is the executor. It might be a child of a prior marriage, and it might be a stretch, but perhaps you can envision a situation where you have a stepchild who is not otherwise required to file a return and spitefully refuses to file just to be hostile to his or her beloved stepparent. Maybe that’s not too much of a stretch. In order to avoid that tussle and in order to avoid a recalcitrant executor refusing to file because they’re hostile to a stepparent, I think it’s advisable to put the obligation to file in the prenuptial agreement. This means that if you have a less wealthy spouse, the non-monied spouse who might think that she or he doesn’t have an asset to negotiate with, who knew they actually have this very valuable asset. It also means that the monied spouse should consider this an asset that is really worth negotiating for.
Dan: Madeline I have the feeling Sharon doesn’t miss anything. Is that your consensus by experience?
Madeline: She covers every base. She is knowledgeable on every base. She has made my clients feel extraordinarily comfortable and protected.
Sharon: I will add also that it’s been my pleasure to collaborate with Madeline because what I see when she works with clients is it’s not just the technical legal expertise that she is so proficient at. It’s the way she gives advice holistically about moving on to the next chapter of a person’s life. She is able to put things in perspective and really give advice that someone could rely on. She’s a champion. You’re a champion for your clients, and it’s really very rewarding for someone to witness the bond that you have with your clients in the way they feel about you. So, I feel blessed to have seen that firsthand.
Dan: I’ve known her for 20 years, so I had my consensus of that for sure. Madeline, how long is a prenuptial agreement binding for?
Madeline: It depends upon whether you write into the agreement itself an expiration term. We often will put in what we call a sunset clause. In other words, if we are married and continue to be married for approximately, say 20 years, this agreement will automatically expire. It will be null and void and we will just subject ourselves to the laws of the jurisdiction of the state in which we reside, should we divorce subsequent to that. But I find that that’s the rare exception.
Most of the time, people do not put in sunset clauses. They say, I just want the agreement to be valid for as long as I choose it to be valid for, and if we ever want to throw it aside, we’ll do that later, but I don’t want to make that decision at this time. I find the best practice is to write into the agreement itself that there is no expiration date for this prenuptial agreement. This does not contain a sunset clause.
Sharon: Otherwise it could be a ticking bomb, right?
Madeline: Yes, definitely. Sometimes if you have a sunset clause that says, this will expire in 20 years and you’re at year 19 and you’re very unhappy, you can make a decision and think: well, I think I’ll just stay for another year since I would be the person receiving less. And they just do that and then hit the 20-year mark and file for divorce.
Dan: Would anybody ever put in a review period to review this every five or 10 years? Have you ever seen that?
Madeline: I have never seen that, nor would I ever recommend it to anyone because often the emotions are so high when you’re doing a prenuptial agreement. You know, it has been known to cause marriages to not take place. So, I don’t think people would be willing to sit back and wait five years and redo this all over again. Do it right the first time.
Sharon: It also hearkens back to an article that we wrote together on prenuptial agreements where the advice was: after you’re done with the prenuptial agreement, put it away.
Madeline: Definitely put it away and don’t speak of it.
Dan: Right. It’s insurance. It’s in the background. Sharon, can trust provisions be changed in a divorce?
Sharon: Well, in the divorce context, there are certain techniques that parties can look at if they have a beneficiary of a trust that was drafted in happier times, and perhaps they no longer want that beneficiary to be in the trust agreement. There’s one technique, in particular, a very powerful technique called decanting, and that gives the ability of a trustee to potentially take the trust assets and pull them over into a new trust with different terms. There’s a case that recently came out of Connecticut in which a trustee was successful in putting a very large trust about $100 million out of reach of a divorcing spouse because the trustee decanted the trust assets into a trust with different terms that the soon-to-be ex-spouse couldn’t reach. That’s very powerful in the divorce context. What I see some attorneys doing now, in order to prevent a beneficiary being indelible in a trust agreement, is to use a concept that trust and estates attorneys use as a term of endearment: “the floating spouse”, which means that the spouse to whom I married at the time a distribution is made, is the spouse I want to benefit. And of course, that self-adjusts with every marriage and divorce and remarriage. I have some attorneys tell me that that doesn’t exactly generate a good vibe when you have a married couple in your office and you have this “floating spouse” concept.
Dan: Can you summarize what a prenup covers?
Madeline: Definitely. What you want to have in your prenup is anything that is your separate property or you’re about-to-be spouse’s separate property. You really wanted to define that so it is not in the marital pot, so to speak. You want to define how you’re going to acquire joint property, who is going to be responsible for payments of it? You want to cover what one person would be receiving in the event of a divorce, and what would be the triggering event? Would it be the actual filing of a divorce complaint, or would it just be the separation, or would it be noticed to the other side? You want to provide what would be the situation if one person is dependent on the other financially during the period that you’re going through a divorce proceeding. In other words, is there temporary support? Is there not? Will counsel fees have to be considered in case there is a divorce? Will you have joint expenses? How will that be paid? How will your income be treated? Especially if you have one party who makes a significant amount of income and the other party does not, is all that income going to be considered marital property, or are you each going to contribute a proportionate share to expenses and what is not used, you are free to put into your separate property. What happens if you sell real estate that is separate property and you use the money that you receive from that to buy a house that will become the marital home? What is going to happen with that? Will you get back the money that you initially put in?
You really want to cover everything you have and everything you think you’re going to have.
Dan: Is there anything else we should add, Sharon?
Sharon: When you said Madeline about whether the trigger is the filing of a divorce proceeding or the actual getting divorced, that reminds me that there are some documents if you’re considering getting divorced, that you should change right away. During the pendency of a divorce proceeding, oftentimes, you can’t retitle assets or change beneficiary designations because the court will want to keep the status quo until the divorce is finalized. But there are some documents, like for example, a power of attorney or a healthcare proxy, which gives someone the authority to make healthcare decisions for you if you’re not able to do it.
It’s likely if you’re in the process of getting divorced, that you don’t want your soon-to-be ex-spouse to have a power of attorney to conduct financial transactions on your behalf or make healthcare decisions for you. Those documents should be changed as quickly as possible. There are some states like New York that revoke a power of attorney if you’re divorced, but as I mentioned, during the pendency of a divorce that’s not going to help you. There are some states that actually revoke these types of documents during the pendency of a divorce, but the problem is not all states have those statutes, and I am a firm believer that you shouldn’t rely on state default law. State default law is there to add in a presumed intent of what most people would have wanted had they considered the issue. So, I think as advisors, it’s our job to make sure they do consider the issue, and they’ve advised their documents to reflect intent.
By the way, a will is usually a document that people can revise during the pendency of a divorce proceeding and should do so as soon as possible – if they’re not prohibited under their particular state’s law from doing it – to make sure that that document reflects their intent before the divorce is finalized in case something happens to one of the parties in the interim.
Madeline: I would agree with everything Sharon just said.
Dan: I would agree with everything Sharon says, period, and I’m going to make sure that I do not introduce my wife to either of you. It’s absolutely clear to me that the two of you work very well together. How do you think this benefits the client? I mean, it seems very obvious to me how it would benefit a client, but is there anything that I’ve missed that you could share about that?
Sharon: Well, it’s really just a reiteration of the message that I think that we’ve both been communicating during our time with you, which is that different experts have different viewpoints. There are so many nuances to different disciplines, and you might not appreciate it unless that is your discipline. When you bring professionals together and they all add in their viewpoints, and you put all these pieces together, you get the best result for the client. So obviously in the context of a divorce proceeding, you need an expert family lawyer to advise on negotiation strategies, to advise on legal requirements, to look at the whole situation and make those recommendations. Often, as we’ve been saying, that goes hand in hand with running financial projections to see what’s possible. What happens if you stress test a portfolio? What happens to cash flow projections if you have an unanticipated expense? All this information gets funneled together in a way where different experts, including trust and estates counsel when they’re revising planning documents, either as people are considering getting divorced or finalizing them after a divorce, everybody brings their own expertise to the table, and I think clients benefit when everybody works off of each other and respects and incorporates the expertise of their professional colleagues. You really have a team approach.
Dan: Anything you want to add to that, Madeline:
Madeline: Only that what is as important to me and my clients is that when you bring Sharon into the picture and make her part of the team working for the benefit of this client, Sharon brings her team into it. We get different aspects of what they can do and what they can help a client with.
Dan: Sounds great. I want to thank both of you for your time today and I’ve already paid you the highest compliment possible. That is, I’m not going to introduce my wife to either of you because I would just be afraid. I’m already afraid as it is and I don’t want to be more afraid. Thank you very much for your time. Thank you.
Sharon Klein is president of Family Wealth, Eastern U.S. Region for Wilmington Trust. She coordinates the delivery of all wealth management services by teams of professionals and heads Wilmington’s National Matrimonial Advisory Solutions Practice. She is a fellow of the American College of Trust and Estate Counsel and chair of the Domestic Relations Committee of the Trusts and Estates Magazine, where she sits on the board. www.wilmingtontrust.com/divorce
Madeline Marzano-Lesnevich chairs the family law department of Lesnevich, Marzano-Lesnevich, O’Cathain & O’Cathain LLC in Hackensack, New Jersey. Her practice focuses on complex matrimonial law proceedings and high-net-worth individuals as well as high conflict custody matters. Madeline is past-president of the American Academy of Matrimonial Lawyers, a former president of its New Jersey chapter, a fellow of the International Academy of Family Lawyers, and a diplomat of the American College of Family Trial Lawyers. www.lmllawyers.com
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