Navigating the Intersection of Family Law and Estates Law
By Lisa Zeiderman and Matthew Marcus | August 27, 2020
When it comes to drafting prenuptial and postnuptial agreements, matrimonial and family law becomes deeply intertwined with trusts and estates law. While marital agreements are meant to enhance the marriage by providing certainty for the parties, clarity of their financial affairs, and protection in the event of a dissolution of the marriage, these agreements can also function as an invaluable tool in protecting and dividing assets after death. In this respect, it is important that matrimonial counsel work closely with trusts and estates counsel when drafting these agreements. When crafted with care, the pre and/or post marital agreement can protect not only the rights of the parties signing the document, but also other individuals, such as the client’s spouse, children from past or future marriages, heirs and other family members.
To ensure that a marital agreement protects your client’s family and his/her most valued assets, an in depth understanding of the client’s net worth, history, goals, and the applicable legal concepts, such as the right of election and the issue of portability is necessary. Only then can the practitioner ensure their client is protected.
The Full Picture
For an attorney to provide sound legal advice or meaningfully negotiate with opposing counsel, he or she must have a full understanding of both their client’s objectives and the assets and liabilities and even the anticipated expenses at issue.
At its core, a prenuptial or postnuptial agreement allows the parties to opt out of certain provisions contained in the Domestic Relations Law and the Estates, Powers, and Trusts Law, which would otherwise govern in the event of a divorce and/or death. For instance, rather than have a Judge decide the ultimate disposition of assets or the appropriate amount of spousal maintenance to be paid, the parties can resolve these issues on their own, in advance. Often, clients who have inherited or been gifted substantial assets retain counsel to draft a marital agreement for the purpose of preserving that asset’s separate property status during and after the marriage or death. For instance, a client may simply want their separate property to return to the source from which it originated upon their death. Or, perhaps a client may wish to expand the rights their spouse might ordinarily have by creating a life estate in certain property, which would otherwise be separate, by allowing that spouse to use and/or enjoy the property for the duration of his or her life, with a provision that the property shall pass to a specific beneficiary thereafter. However, even the explicit designation of specific property as “separate” may not be sufficient for the property to truly remain “separate” in the event of a divorce and/or death. For example, the Domestic Relations Law exempts “appreciation…due in part to the contributions or efforts of the other spouse.” There is an entire body of case law that distinguishes “passive” appreciation, which retains its separate property status from “active” appreciation, which may be deemed marital property if the appreciation is due, in part, to the direct or indirect efforts of one or both spouses. The well drafted prenuptial or postnuptial agreement stops this inquiry in its tracks by unambiguously waiving the statute or purposefully delineating whether passive and/or active appreciation will constitute separate or marital property.
Counsel is also advised to ascertain whether their client or their prospective spouse has been previously divorced, and if so, it is imperative that he or she closely examine the documentation dissolving the prior marriage, including the Judgment of Divorce, any final Court Orders, the Stipulation of Settlement setting forth the resolution of all of the ancillary issues of the client’s prior divorce, and even the net worth statements and valuations of business interests previously filed in the divorce action. A review of these documents may in fact reveal that your client or their future spouse has already committed to reserving or guaranteeing valuable assets for their children from prior marriages or their ex-spouses. In such a case, the parties may have inadvertently waived their soon to be spouse’s right of election, and if so, it may then be incumbent upon counsel to devise an alternative means of securing marital rights such as the designation of a life insurance policy to replace assets that would have ordinarily passed under the law by the right of election.
It is important to remember that prenuptial agreements are subject to the general principles of contract law and can be invalidated based upon fraud, undue influence, duress, or overreaching. Counsel should therefore ensure that any agreement is entered into freely and voluntarily and that both spouses understand and are active participants in the negotiations.
The Right of Election
Perhaps the most common intersection of matrimonial and estates law is the right of election. As set forth in section 5-1.1-A of New York’s Estates, Powers, and Trusts Law, the right of election provides that upon the death of one’s spouse the living spouse is entitled to “fifty thousand dollars or, if the capital value of the net estate is less than fifty thousand dollars, such capital estate, or one third of the net estate.” In simple terms, the law provides that one cannot completely disinherit their spouse.
The marital agreement, however, allows the parties to waive their respective rights of election, which means that upon a party’s death, the entirety of his or her estate can be maintained as their separate property and kept out of the hands of the surviving spouse. In order for this waiver to be effective, strict adherence to the statutory requirements is crucial; to wit, the waiver “must be in writing and subscribed by the maker thereof, and acknowledged or proved in the manner required by the laws of this state for the recording of a conveyance of real property.” In the absence of a duly acknowledged agreement, the decedent’s wishes are unlikely to be enforced following their death.
Counsel must also be careful to ensure that the language contained in the prenuptial agreement waiving the right of election is clear and unambiguous, since inartful drafting has proven to be a breeding ground for litigation. For example, in In Re Strout, 155 A.D.3d 1135 (2017), the right of election waiver referenced EPTL 5-1.1, which only applies to a person dying prior to September 1, 1992. Fortunately for the drafting attorney, the Court held that, “the incorrect statutory reference does not, however, invalidate the waiver as “[t]here is nothing in EPTL 5-1.1-A (e) (2) that requires any particular form, wording or reference to a particular provision of the statute in order to make the waiver effective… A plain reading of the waiver reveals that respondent intended to renounce any interest in decedent’s estate…” Counsel, however, would be wise not to rely upon the mercy of the Court to determine the enforceability of such an important provision.
While less often discussed, counsel must also consider the issue of portability during their negotiations, particularly in cases where the parties have considerable assets, since it allows spouses to maximize their federal estate and gift exemptions and potentially save their heirs millions of dollars in taxes.
Portability is the vehicle, which allows one spouse to give or “port” the unused portion of their federal estate and gift exemption (also referred to as the Deceased Spouse’s Unused Exemption Amount or “DSUE”) to the other spouse, so that the estate tax liability for the heirs of the surviving spouse is reduced. In certain cases, the DSUE can be worth millions of dollars, since the federal estate and gift tax exemption now protects $11.58 million and $23.16 million for individuals and couples, respectively. For example, let’s assume W, who has assets of $5 million, is married to H, whose assets total $28 million. Let’s further assume that W predeceases H. Utilizing the concept of portability, W can port her $6.58 million DSUE to H, so that upon his death, his federal estate and gift tax exemption will total $18.16 million, which means significant tax savings for H’s heirs. Of course, W is not required to port her DSUE to H, and counsel may wish to use this tax device as a bargaining chip in the negotiation of prenuptial or postnuptial agreement.
The Need for Matrimonial and Estates Counsel to Work Collaboratively
Even the most expert understanding of one’s own practice area will not save the practitioner from issues that may fall outside his or her purview. Sometimes attorneys do not even know what they do not know and that is precisely why it is so important for matrimonial counsel to work hand in hand with estates counsel in the drafting of prenuptial and postnuptial agreements. In this author’s experience, where one spouse has both matrimonial and estates counsel and the other spouse is represented by counsel with knowledge of only one practice area, the deficit is significant. By working collaboratively, counsel can best ensure their marital agreement is not later the subject of litigation.
Link to original article: https://www.law.com/newyorklawjournal/2020/08/27/navigating-the-intersection-of-family-law-and-estates-law/
Reprinted with permission from the “August 27, 2020” edition of the “New York Law Journal”© 2020 ALM Media Properties, LLC. All rights reserved.
Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 – [email protected].