ESTATE PLANNING ISSUES IN PRE- AND POST-NUPTIAL AGREEMENTS First Run Broadcast: January 22, 2015 Live Replay: April 30, 2015 1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes) Martial agreements, whether pre- or post-nuptial in form, are intended to modify the rights a spouse may have otherwise had under law. These agreements are enforceable generally unless they are not voluntary or full disclosure was not properly provided. They are also governed under law that is separate and distinct from estate and trust laws. When clients want to use martial agreements, planners have a series of significant issues to consider, including the extent to which these agreements can modify spousal rights, offsetting estate and trust transfers, enforceability and tax consequences, and much more. This program will provide you with a practical guide to estate and trust planning issues when clients use marital agreements.

• Estate and trust planning issues for pre- and post-nuptial agreements • Substitute transfers for waiver of spousal rights – and relationship to marital deduction • Coordination of estate and trust documents and marital agreements – and enforceability • Portability and the deceased spousal unused exclusion amount • Protecting trust assets in a divorce – marital or separate property, powers of appointment

and withdrawal • Retirement asset issues and beneficiary designations • Planning for children from prior marriages • Personal residence issues

Speaker: Bridget Sullivan is a partner in the Denver office Sherman & Howard, LLP, where her practice focuses on estate planning, wealth transfer planning, estate administration, trust administration, and litigation related to trusts and estates. Ms. Sullivan has extensive experience with sophisticated estate planning techniques for prenuptial agreements, and has written and lectured on the topic for numerous bar and other organizations. She has counseled clients on a variety of wealth transfer strategies and charitable giving techniques to accomplish family giving objectives while minimizing the impact of gift, estate, generation-skipping transfer, and income taxes. Before entering private practice, she served as a judicial clerk to the Honorable Earnest C. Torres of the United States District Court for the District of Rhode Island. Ms. Sullivan received her B.A. from Regis College and her J.D. from Yale Law School.

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Estate Planning for Pre- and Post-Nuptial Agreements Teleseminar

April 30, 2015 1:00PM – 2:00PM

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ESTATE PLANNING ANDPRENUPTIAL AND POSTNUPTIAL AGREEMENTS

BY

BRIDGET K. SULLIVAN, ESQ.1

SHERMAN & HOWARD L.L.C. – DENVER, COLORADO(303) 299-8130

bsulliva@sah.com

1 Bridget Sullivan is the Department Manager of the Tax & Probate Department at Sherman &Howard L.L.C. in Denver. She practices in the areas of estate planning, wealth transferplanning, estate administration, trust administration, and litigation related to trusts and estates.Ms. Sullivan focuses on sophisticated estate planning techniques and prenuptial agreements. Shehas counseled clients on a variety of wealth transfer strategies and charitable giving techniques toaccomplish family giving objectives while minimizing the impact of gift, estate, generation-skipping transfer, and income taxes.

Ms. Sullivan graduated from Yale Law School in 1990. She is named in Best Lawyers inAmerica for Trust and Estates, is named as a Colorado Super Lawyer, and has been named as aTop Lawyer by Denver’s 5280 Magazine.

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1. INTRODUCTION: ESTATE AND TRUST ISSUES IN MARITALAGREEMENTS

The principal purpose of a marital agreement is to alter the rights otherwise provided bylaw of one or both spouses to the property of the other spouse, whether upon termination of themarriage by divorce or by death or both. Many states have a marital agreement act, whichdetermines the rights of parties who have entered a marital agreement, the types of matters thatparties may agree to and the enforceability of marital agreements.2 In most states, maritalagreements are enforceable under the terms of state law unless a party did not execute theagreement voluntarily or was not provided full and fair financial disclosure prior to signing theagreement.

This outline will focus on the trusts and estates, tax law, and estate planning techniquesas they relate to marital agreements. The state laws governing the property rights of a survivingspouse in and to the “estate” of the deceased spouse is a wholly distinct body of law from the lawgoverning property rights in divorce. The concepts of “marital property” and “separateproperty,” while central concepts to divorce law, have no application in the context of thetermination of marriage by the death of one spouse. When parties to a marital agreement intendto alter some of all of the rights and obligations arising as a result of death, the marital agreementshould set forth these death provisions separately from the divorce provision of the agreement.This outline is not intended to provide a discussion of divorce laws and the alteration of spousalrights in relation to a divorce by use of a marital agreement.

2. RIGHTS OF SURVIVING SPOUSE UPON DEATH OF OTHER SPOUSE

a. Waivers of Surviving Spouse Rights

A marital agreement may govern the rights of the parties in the event of the terminationof the marriage by death of either party. The agreement may include a partial or completewaiver of property rights arising at death. The agreement may also include a promise to providefor a substitute transfer of property to the waiving spouse. While both parties to a martialagreement may agree to waive – in whole or in part – their respective property rights arising atdeath, each party remains free to leave more property to the other than would be required by theagreement. In other words, the marital agreement may limit the right to inherit from a spousewithout imposing a ceiling on the potential of one spouse to provide voluntarily for the survivingspouse in excess of the rights granted by the agreement.

A release and waiver of “all rights upon death” or equivalent language in a maritalagreement encompasses the waiver of several statutorily granted spousal rights and priorities.These statutory rights and priorities include the right to a spouse’s elective share (sometimesreferred to as the statutory or forced share), the right to receive the family allowance and exempt

2 The following states have adopted the Uniform Premarital and Marital Agreements Act or somevariation of it: Arizona, Arkansas, California, Connecticut, Delaware, District of Columbia,Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Maine, Montana, Nebraska, Nevada,New Jersey, New Mexico, North Carolina, North Dakota, Oregon, Rhode Island, South Dakota,Texas, Utah, and Virginia.

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property allowance, and the priority to serve as personal representative, executor oradministrator.

b. Status as Surviving Spouse

A person who is divorced from a decedent or whose marriage has been annulled is not asurviving spouse. However a decree of legal separation does not terminate the status of husbandand wife for death purposes. A husband and wife are considered married regardless of whether adivorce action has been instituted. So, if one spouse dies after a decree of separation has beenentered or after a divorce action has been initiated, the survivor will likely have rights as asurviving spouse under most state laws.

A marital agreement can modify these provisions, stating specifically that a separationdecree or the filing of an action for divorce terminates all surviving spouse rights.

c. Intestate Share of Surviving Spouse

If a person dies without a will, the decedent’s property will be distributed in accordancewith the applicable statute of intestate succession. Under many states, the surviving spouse’sshare of the intestate estate is dependent upon the circumstances of the parties, including whetherthere are adult or minor children of the marriage, whether the decedent has adult or minorchildren from another relationship, and whether the decedent is survived by one or both parents.Under the law of many states, the surviving spouse receives the entire intestate estate (1) whenthe decedent has no surviving descendants or ancestors or (2) when all of the decedent’ssurviving descendants are also descendants of the surviving spouse and there are not otherdescendants of the surviving spouse who survive the decedent (i.e., it was likely a first marriagefor both spouses). The surviving spouse’s share tends to be diminished if the decedent hadchildren from other marriages.

d. Spouse’s Elective or Statutory Share

At common law, dower refers to the legal right or interest that a wife acquired in theestate of her husband. It consists of the right to one-third of the husband’s real property. Curtesyis the common law life estate given to a husband in the real property of a deceased wife. Manystates have abolished dower and curtesy, replacing these common law rights with statutory rightsto an elective or forced share.

Absent a marital agreement, the surviving spouse has the right to an elective share.Uniform Probate Code states have adopted a right to elect an amount not greater than 50% of the“augmented estate.”3 Under the Uniform Probate Code, the percentage of the augmented estateto which the surviving spouse is entitled is determined by the length of time the spouses weremarried, but is essentially as follows:

3 The following states have adopted the Uniform Probate Code: Alaska, Arizona, Colorado,Florida, Hawaii, Idaho, Maine, Massachusetts, Michigan, Minnesota, Montana, Nebraska, NewJersey, New Mexico, North Dakota, South Carolina, South Dakota and Utah.

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IF THE DECEDENT AND THE SPOUSEWERE MARRIED TO EACH OTHER:

THE ELECTIVE SHARE PERCENTAGE IS:

Less than 1 year Supplemental amount only.1 year but less than 2 years 5% of the augmented estate.2 years but less than 3 years 10% of the augmented estate.3 years but less than 4 years 15% of the augmented estate.4 years but less than 5 years 20% of the augmented estate.5 years but less than 6 years 25% of the augmented estate.6 years but less than 7 years 30% of the augmented estate.7 years but less than 8 years 35% of the augmented estate.8 years but less than 9 years 40% of the augmented estate.9 years but less than 10 years 45% of the augmented estate.10 years or more 50% of the augmented estate.

e. Augmented Estate

The augmented estate is comprised of property owned by the decedent at death as well ascertain pre-death gifts to the surviving spouse and to third parties, and the decedent’s share ofjoint tenancy property held with third parties. The augmented estate is a statutory conceptcreated to prevent disinheritance of a spouse through transfers to others while at the same timeequitably accounting for inter vivos and testamentary transfers to the spouse.

f. Pretermitted Spouse

Absent a marital agreement, if a married person dies having executed his or her will priorto the marriage, and such will does not provide for the surviving spouse, then the survivingspouse has the right to take a share of the estate as a “pretermitted spouse.” The pretermittedspouse’s share of the estate is generally equal to the spouse’s intestate share.

g. Family and Exempt Property Allowances

Absent a martial agreement, in many states a surviving spouse is entitled to the familyand exempt property allowances. These allowances are in addition to the intestate or electiveshares. These are generally modest amounts.

h. Priority to Serve as Personal Representative or Executor

In many states, the priority to serve as personal representative or executor is establishedby the decedent’s will. However, in the absence of a will or if the will fails to nominate someonewho can act in such position, the surviving spouse has priority to act. Thus, absent a maritalagreement, if a decedent dies intestate or if all persons nominated in the will fail to qualify, thespouse would have priority to serve as personal representative or executor even if that was notthe decedent’s wish. This priority to serve can be waived in a marital agreement.

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i. Federal Law Rights to Retirement Plan Assets

The survivorship rights in and benefits under qualified retirement plans are governed byfederal law, including ERISA and other provisions of the Internal Revenue Code It is federallaw, and not state law, that governs when and how a participant may obtain a valid waiver ofsurvivorship rights and interests in such plans. A participant in a retirement plan cannot obtain avalid waiver of spousal survivorship rights prior to the parties’ marriage. Thus, the generalwaivers of “all rights upon death” or even a specific waiver of rights to a retirement plan, willnot constitute an effective waiver of spousal survivorship rights in a retirement plan.Notwithstanding this fact, marital agreements often include waivers of surviving spouse rights toretirement assets. These waivers must be coupled with mutual promises to execute separateretirement plan waivers after the parties are married. Such a waiver might read as follows:

“Each party hereby waives any and all rights to any pension plan, profit sharingplan, deferred compensation plan or retirement benefits and cash accumulationsin life insurance which have or might have accrued for the benefit of the other,unless specifically designated as beneficiary. Each party agrees to execute thedocuments necessary to effectuate that waiver as required by the terms of thepension plan, profit sharing plan, deferred compensation plan or retirementbenefit plan, state law or federal law.”

3. WAIVERS OF SURVIVING SPOUSE ENTITLEMENTS IN MARITALAGREEMENTS

a. Waiver of statutory and common law rights upon death

A release and waiver of “all rights upon death” or equivalent language in a maritalagreement encompasses the waiver of statutorily granted spousal rights and priorities. Suchwaivers can be done in a general waiver or in a more specific list of waivers. I generally preferthe detailed list, as it serves as an educational template, generating questions from the client anda detailed discussion of spousal rights upon death. My laundry list (covering Colorado law)generally appears as follows:

“Specific Waiver. Upon the death of either of us, the other waives the following:

(i) The right to take an intestate share under _____________;

(ii) The right to an elective share under _______________, and to take anyinterest in the augmented estate under _______________;

(iii) The right to an exempt property allowance under ___________;

(iv) The rights of an omitted spouse under ____________________;

(v) The right to a family allowance under ___________________;

(vi) The right to a homestead interest under ________________ and______________ (as to each other, but not as to third parties);

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(vii) The right to act as a personal representative or trustee of the estate ortrust of the other, unless specifically nominated or designated by the other;

(viii) All rights to any pension plan, profit sharing plan, deferred compensationplan or retirement benefits and cash accumulations in life insurance which have or might haveaccrued for the benefit of the other, unless specifically designated as beneficiary; each of usagrees to execute the documents necessary to effectuate that waiver as required by the terms ofthe pension plan, profit sharing plan, deferred compensation plan or retirement benefit plan,state law or federal law;

(ix) Any rights to contest any disposition of property by the other by any intervivos trust;

(x) Any provisions of the Colorado Uniform Premarital and MaritalAgreements Act in conflict with this Agreement; and

(xi) Any rights either of us might have to claim any portion of the estate of theother under the laws of any jurisdiction other than Colorado which are of like or similar purposeto the enumerated Colorado statutes that provide dower, curtesy, forced heirship, communityproperty or marital property interests or any other right to claim against the estate of a deceasedspouse by a surviving spouse.”

b. Limitations on Waivers If There Are Children of the Marriage

Note, in cases of young couples marrying with family wealth who do not have childrenfrom previous marriages, sometimes these waivers of rights upon death are appropriate only ifthere are no children of the marriage. In such circumstances, if the marriage produces nochildren and the wealthier parties dies, the waivers are intact, and the family wealth passes backto the family, subject to any provisions made for the surviving spouse, whether pursuant to theprovisions of the marital agreement or made voluntarily pursuant to the estate plan. However, ifthere are children of the marriage, it may not make sense to have the less wealthy spouse waive“all rights upon death.” If the wealthier spouse fails to follow up with estate planning or withproper estate planning, the less wealthy spouse, now the parent of the children of the marriage,may be disinherited.

c. Community Property Waivers

I practice in Colorado, which has adopted the Uniform Probate Code and is not acommunity property state. An exhaustive discussion of community property is outside the scopeof this outline.

Generally, community property is owned by both spouses equally. Community propertydoes not include property owned by a spouse prior to marriage, property gifted from one spouseto the other, property received by gift or inherited by a spouse or property which was separateproperty prior to the time the spouses moved to the community property jurisdiction. The titlingof property is not determinative of its status. Earned income of the spouses is communityproperty. Income from separate property is community property in some jurisdictions and not inothers.

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Frequently, parties execute a marital agreement in one state and move to anotherjurisdiction. All practitioners should be careful to draft waivers of rights upon death broadlyenough to cover rights granted in any jurisdiction. A well drafted waiver of rights upon deathwill include a specific waiver of any property rights based on the laws of community property.(See the waiver in 3.a, xi, supra.)

California and Texas are both community property states that permit spouses to contractwith respect to their rights and obligations in property whenever and wherever acquired orlocated. See CAL. FAM. Code § 1612; TEX. FAM. CODE ANN. § 4.003. Thus, spouses may agree,either in a prenuptial or postnuptial agreement, which property acquired during their marriagewill constitute separate property and which will constitute community property.

In Texas, for example, spouses may agree that the income arising from one spouse’semployment will continue to be that spouse’s separate property. TEX. FAM. CODE ANN. § 4.103.Spouses may also, at any time, partition or exchange between themselves all or part of theircommunity property. § 4.102. Similarly, in California, spouses may agree, with or withoutconsideration, to transmute community property to separate property, and vice versa. CAL. FAM.CODE § 850.

From an estate planning perspective, one benefit of preserving community property isthat the entire property receives a step-up in basis at the death of the first spouse. I.R.C. 1014(b)(6). Under Section 1014(b)(6), even though only the decedent spouse’s one-half interest incommunity property is includable in his gross estate, the entire community property obtains astepped up basis. This is perhaps the greatest advantage of community property. Because of thistax advantage, a lawyer preparing a marital agreement for clients in a community property stateor clients who have migrated from a community property state will want to consider whether toretain the community property character of certain assets.

4. SUBSTITUTE TRANSFERS IN EXCHANGE FOR WAIVERS OF SURVIVINGSPOUSE RIGHTS

It is common for parties who enter into mutual waivers of rights upon death to agree tomake substitute transfer to each other, either during the marriage or at the time of death. Likemost provisions of a marital agreement, the wealthier party may seek complete waivers from theless wealthy party in exchange for certain promised gift transfers during marriage and/or certaintransfers upon death. The amount, timing and manner of fulfilling the substitute transfers issubject to negotiation.

a. Federal Gift Tax Marital Deduction Issues

(i) Gifts to a Spouse During Marriage. Transfers to the spouse during themarriage will qualify for the unlimited deduction for gift tax purposes, so long as such transfersare made outright to the surviving spouse or to a qualifying trust. I.R.C. § 2523. A gift of a lifeestate or terminable interest will not qualify for the gift tax marital deduction, unless suchtransfer is a qualified terminable interest as described in I.R.C. § 2523(f). Outright gift transfersare obviously simplest from the perspective of qualifying for the gift tax exclusion. However,

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clients may be adverse to such outright transfers and may wish to make transfers in trust for thespouse.

(ii) Inter Vivos QTIP Trust. If an inter vivos trust is created for the spouse, besure the trust qualifies as a QTIP trust. If a QTIP trust is created and funded during the marriage,be sure to make a timely QTIP election on a gift tax return. The IRS provides no relief for a latefiled QTIP election for an inter vivos QTIP trust.

There are several significant advantages of a lifetime QTIP trust in a maritalagreement setting. First, it allows the wealthier spouse to provide an income stream to the lesswealthy spouse during the marriage and after the wealthier spouse’s death. Second, at the deathof the beneficiary spouse, regardless of the order of deaths, the trust assets will pass to thebeneficiaries selected by the wealthier spouse (presumably the children from the first marriage).The unified credit and GST exemption of the less wealthy spouse can be fully utilized, saving thewealthier spouse’s beneficiaries estate tax.

(iii) Cautions. Be wary of drafting provisions which require the wealthierspouse to make transfers during the marriage or upon termination of the marriage to the childrenof the less wealthy spouse. Such contemplated gifts should qualify for the gift tax annualexclusion (currently $14,000 or $28,000 if the spouses will gift split) or the exclusion forpayment of certain educational or medical expenses. I.R.C. § 2503.

(iv) Gift Splitting. A marital agreement may request the less wealthy spouseto agree to gift splitting during the marriage, thereby allowing the wealthier spouse to maximizegifting to descendants. Be specific about whether the less wealthy spouse is consenting to giftsplitting for annual exclusion gifts only or whether he/she is also consenting to use of his or herlifetime gift tax exemption. I.R.C. § 2513.

b. Federal Estate Tax Marital Deduction

The substitute transfer of property described in a marital agreement should qualify for thefederal estate tax marital deduction. If the form of the transfer qualifies for the unlimited maritaldeduction, the property transferred will pass free of the federal estate tax at the transferringparty’s death. When a martial agreement provides for a marital deduction qualifying transfer,such as a QTIP trust, the agreement should explicitly allocate liability for the estate tax arising atthe survivor’s death (presumably, but not necessarily, from the assets of the QTIP trust). Thefollowing common forms of testamentary spousal transfers will qualify for the unlimited maritaldeduction.

(i) An outright, unrestricted transfer of property;

(ii) A transfer for a qualified terminable interest property (QTIP) trust;

(iii) A transfer to an estate trust or a power of appointment trust4;

4 Because the QTIP trust is the most commonly favored modern form of marital trust, estateplanners don’t often use the estate trust or power of appointment trust in a marital agreement

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(iv) A transfer to a qualified domestic trust (QDOT) for a non-citizensurviving spouse;

(v) A transfer of the right to unitrust or annuity payments from a charitableremainder trust.

c. QTIP Trusts

Estate planners frequently use QTIP trusts to provide for a second spouse, particularlywhen a party wishes to preserve wealth for children of a prior marriage. A testamentary maritaltrust, created under the decedent’s will or revocable trust will qualify for the marital deduction asa QTIP trust if:

(i) Property passes from the decedent to the QTIP trust;

(ii) The governing instrument requires all income to be distributed at leastannually to the surviving spouse;

(iii) No other beneficiary may have any rights in the trust during the survivingspouse’s lifetime; and

(iv) The personal representative or executor makes the corresponding electionon the federal estate tax return filed for the decedent’s estate. I.R.C. § 2056(b)(7).

The obvious benefit of the QTIP trust is that the surviving spouse need not be given ageneral power of appointment over the trust and therefore may be prevented from disinheritingthe remainder beneficiaries of the trust (presumably, the deceased spouse’s children from a priormarriage). This is the best method of “handcuffing” the inheritance of the surviving spousewhile at the same time qualifying the transfer for the marital deduction.

Another advantage of the QTIP trust is that if the surviving spouse has a minimal estateof his or her own, the unified credit of the surviving less wealthy surviving spouse can be utilizedfor the benefit of the wealthier spouse’s beneficiaries. The same is true of the less wealthysurviving spouse’s generation skipping transfer tax (GST) exemption. Since the beneficiaryspouse is considered the transferor of the QTIP trust for estate tax purposes, that survivingspouse’s GST exemption may be allocated to the trust thereby insulating the trust (or asubdivided portion of the trust) from GST tax.

(a) Standards and Guidelines for Principal Distributions. Provided that thesurviving spouse is entitled to the income from the trust, at least annually, the surviving spouse

context. However, both of these trust forms qualify for the marital deduction. They aregenerally not favored in a marital agreement context where the deceased spouse’s desire for theremainder trust to pass to his or her selected beneficiaries, because the estate trust must be paidto the spouse’s estate at death and the power of appointment trust requires that the survivingspouse must have a general power of appointment over the trust property at death. Both of theserequirements can defeat the protection provided to the children of the decedent spouse affordedby the QTIP trust.

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need not be given any other beneficial interests to the principal of the trust. Additional access toprincipal, however, is frequently given to the surviving spouse for health, support, andmaintenance. Many times the marital agreement will specify under what circumstances principalmay be accessed by the surviving spouse. Access to principal for the surviving spouse may beterminated if the surviving spouse re-marries.

(b) Selection of Trustees. The marital agreement may specify that a thirdparty will serve as sole trustee or as co-trustee with the surviving spouse to ensure betterprotection to the trust assets for the remainder beneficiaries. “Neutral” trustees and successortrustees are generally advisable. The surviving spouse as sole trustee generally provides lessprotection to principal than the deceased spouse may want. On the other hand, a child of thedecedent (the step-child of the surviving spouse) as trustee may cause family discord. Asurviving spouse might be allowed to select a trustee among a group of mutually agreeablepotential trustees. Or, a surviving spouse could be authorized to appoint an institutional trustee.

(c) Selection of Assets. The marital agreement may provide specificdirections with regard to what assets will be directed into the QTIP trust for the benefit of thesurviving spouse. If there is a closely held business, both spouses may favor terms prohibitingsuch closely held stock from passing to the QTIP trust. If the wealthier spouse holds promissorynotes from children, the less wealthy spouse may want to include a provision specificallyprohibiting those types of assets from being used to fund the QTIP trust.

(d) Further Examples of QTIP Trust Provisions.

Example 1 – Standard QTIP Provisions:

If our marriage terminates by virtue of Ann’s death, Ann agrees to makeprovisions by will, trust, beneficiary designation or other dispositive instrument toprovide Sam with a disposition of property in a Marital Trust of two milliondollars ($2,000,000) which is intended to qualify as a Qualified Terminal InterestProperty (“QTIP”) trust under Section 2056 of the Internal Revenue Code. Noestate or death taxes shall be allocated to any amount passing to the MaritalTrust at Ann’s death. The trustee of the Marital Trust shall pay to Sam thegreater of all income or a five percent (5%) unitrust payment at least annually forlife. In addition, the trustee in his or her discretion may distribute principal toSam for his health, support and maintenance. The trustee shall be a corporatetrustee designated by the terms of Ann’s estate planning document or anindividual trustee designated by the terms of Ann’s estate planning document andapproved by Sam. At Sam’s death, the balance of the trust principal remaining, ifany, shall be distributed to Ann’s chosen beneficiaries in accordance with her willor trust. Sam acknowledges that Ann’s personal representative may elect QTIPtreatment of the Marital Trust under Section 2056 of the Internal Revenue Code.At Sam’s death, the Marital Trust shall bear any and all estate or death taxesattributable to the inclusion of the trust in Sam’s estate.

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Example 2 – Directions with Regard to Specific Assets:

Jim agrees that if the marriage terminates by his death, he shall make provisionsin his will, revocable trust or other dispositive estate planning instrument toprovide Sally with the following:

1. Cash or marketable securities having a fair market value onJim’s date of death of $3,000,000 and Jim’s entire interest in theresidence which the parties were using as their primary residenceon the date of Jim’s death, free of all debt and encumbrances.

2. A lifetime interest in a Marital Trust which shall meet therequirements of a Qualified Terminal Interest Property Trustunder Section 2056 of the Internal Revenue Code. Under the termsof the Marital Trust, Sally shall receive the greater of all netincome from the trust or four percent (4%) of the net fair marketvalue of the assets (calculated excluding the value of non-productive real property)of the trust valued as of the last businessday of the first calendar month of each taxable year of the trust("unitrust amount"). The net income or 4% unitrust amount shallbe paid to Sally in payments which are made at least quarter-annually. In addition, the trustee of the Marital Trust shalldistribute to or for the benefit of Sally so much of the principal asthe trustee, in its sole discretion, shall consider necessary oradvisable for the support, health, and maintenance of Sally. Sallyshall be afforded the free use and enjoyment of the residence heldin the trust. Sally shall be named as co-trustee of the MaritalTrust, and her rights as a co-trustee under Colorado law shall notbe limited by the terms of the Marital Trust. At Sally's death, thebalance of the trust principal remaining shall be distributed inequal one-thirds to Jim’s two daughters and Sally’s daughter(“our daughters”), or if any one of our daughters is not thenliving, her share shall pass to her descendants, by representation,or if one of our daughters predeceases Sally leaving nodescendants, the balance of the trust principal shall be distributedin equal shares to our daughters, then living. At Sally’s death, ifnone of our daughters nor any descendants of our daughters arethen living, then Sally may appoint 20% of the trust principal by atestamentary power of appointment among any persons, and theremaining 80% shall pass to Jim’s contingent beneficiaries asdetermined by his will or revocable trust document.

d. Credit Shelter Trust

Now that the federal estate tax exemption is set at $5,000,000 and indexed to inflation($5,430,000 in 2015), the provisions for the less wealthy spouse upon the death of the wealthier

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spouse may include an agreement to make the less wealthy spouse the only beneficiary or theprimary beneficiary of the credit shelter trust.

If the less wealthy spouse is the survivor and is made sole beneficiary of the credit sheltertrust, the same issues arise with a QTIP trust, namely: (1) trustee selection, and (2) languageregarding distribution of principal to the surviving spouse.

If the credit shelter trust will allow additional beneficiaries, such as children of thedeceased spouse, the terms of the distribution provisions should be carefully detailed in themarital agreement, to avoid conflict between the surviving spouse and the children of thedeceased spouse.

e. Use of Life Insurance in Conjunction with a Marital Agreement

Some parties to a marital agreement favor a waiver by the less wealthy spouse of allrights upon death of the wealthy spouse coupled with a death benefit paid to the surviving spousepursuant to a life insurance policy. If the wealthy spouse owns the policy and designates his orher spouse as the beneficiary, the policy proceeds will be included in the decedent’s estate, butwill qualify for the estate tax marital deduction. If the surviving spouse is both the owner andthe beneficiary of the policy, the policy proceeds will not be included in the decedent’s grossestate.

The parties to the marital agreement may want to address specifically what type of policyis to be acquired to satisfy the provisions of the agreement. Term insurance will obviously beless expensive, but if the marital agreement requires the insured spouse to maintain suchinsurance until death, a term policy may become impractical or unaffordable at some point. Ifthe marital agreement requires the insured spouse to carry insurance until death, the agreementshould require that permanent insurance be acquired.

The parties to the agreement also may want to specify that the beneficiary spouse be theowner of the policy. This will prevent the insured spouse from changing the beneficiary,cancelling the policy or borrowing against the policy without the beneficiary spouse’s consent.

The agreement should specifically address which party will have the obligation to pay thepremiums.

If you represent the beneficiary spouse, consider drafting a backstop provision which willgive the surviving spouse a right to claim against the decedent’s estate if, for any reason, suchinsurance is not in place at the death of the spouse whose life was to be insured.

Consider using a QTIP trust or an irrevocable life insurance trust as the beneficiary of theinsurance policy if the wealthy spouse wishes to have the policy proceeds remaining after thesurviving spouse’s death pass to his or her children from a previous marriage.

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f. Joint Tenancy

Clients should be advised regarding the implications of joint tenancy and the possibilityof defeating all of the careful planning for death in the marital agreement by holding property asjoint tenants with rights of survivorship.

Consider including a provision in the marital agreement which gives the wealthier spousecredit for joint tenancy transfers against any required devises to the surviving spouse. I generallyinclude the following language:

“Effect of Jointly Held Property, Beneficiary Designation Property, or Transferon Death Property Payable to Joe. If Jane predeceases Joe, the obligation toprovide Joe with an outright disposition of cash or marketable securities having afair market value of $1,000,000 under paragraph ______ shall be deemedsatisfied to the extent of the date of death value of any cash or marketablesecurities passing by beneficiary designation or transfer on death designation andto the extent of one-half of the date of death value of cash or marketable securitiespassing by joint tenancy or tenancy by the entireties as a result of Jane’s death. IfJane predeceases Joe, the obligation to provide Joe with $2,000,000 in a maritaltrust under paragraph ____ shall be deemed satisfied to the extent of the date ofdeath value of any property passing by beneficiary designation or transfer ondeath designation and to the extent of one-half of the date of death value of jointtenancy or tenancy by the entireties property passing to Joe as a result of Jane’sdeath. If the value of property passing to Joe by beneficiary designation, transferon death designation, joint tenancy or tenancy by the entireties should exceed therequired amount payable to Joe pursuant to paragraphs _____, then Jane’s estateshall have no further obligation to Joe under this Agreement, nor shall Joe haveany obligation to return funds to Jane's estate.”

g. Tenancy by the Entirety

As with joint tenancy, clients must be wary of the implications of holding property in thismanner. Tenancy by the entirety resembles joint tenancy in that upon the death of either thehusband or wife, the survivor automatically acquires title to the share of the deceased spouse. Instates that recognize tenancy by the entirety, it may exist only between a husband and a wife, andcan only be terminated by death, divorce, or mutual agreement. Thus, it might be wise to includea provision similar to the one above whereby the wealthier spouse is given credit for transfers ofproperty held in tenancy by the entirety against any required devises to the other spouse.

5. COORDINATION OF ESTATE PLANNING DOCUMENTS WITH THEMARITAL AGREEMENT

a. Maintenance of Testamentary Documents

If the marital agreement requires that wills, trusts, beneficiary designations, deeds, orother documents be prepared to reflect the agreement reached, this can be done by one of twomethods: (1) the marital agreement can be drafted as a specific roadmap which will contain the

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essential terms of the documents that will be prepared at a later date, or (2) the marital agreementcan include concurrently prepared and executed documents as exhibits to the agreement.

If the parties execute a marital agreement which provides a general waiver or “all rightsupon death” or similar language, be sure to advise your client to maintain updated estateplanning documents after the marriage if your client does in fact wish to leave property to thesurviving spouse.

b. Enforcement for Breach

If the marital agreement requires a spouse to devise property to the surviving spouse, theagreement constitutes a contract to devise property. Be sure to consult your state laws regardingcontracts to make a will or devise to ensure that the marital agreement satisfies any specificrequirements. Assuming the marital agreement also qualifies as a contract to make a will ordevise, the terms of the agreement will be enforceable notwithstanding the decedent’s failure tomake the devise required by the contract. The surviving spouse would then be treated as aclaimant against the decedent’s estate and would have to comply with the claims statutes. If yourepresent the spouse who is to receive the devise in accordance with the marital agreement,consider including language which extends the surviving spouse’s time for making a claim andwhich reimburses the surviving spouse for attorney’s fees incurred in connection with the claim.I use the following language:

“Provisions Binding on John’s Estate. John intends to make provisions in hiswill, revocable trust or other dispositive estate planning instrument which willprovide Sally with the benefits described in paragraph ___. However, if no suchwill, revocable trust or other dispositive estate planning instrument provisionshave been executed, or if purported will or revocable trust provisions or otherdispositive estate planning instrument provisions should be ineffective or onlypartially effective, or if for any reason provisions made by John do not secure forSally the benefits described in paragraph ___, John agrees and specificallydirects that if Sally survives him, she shall have a claim against his estate oragainst any other assets, or the transferee of any other assets, passing as a resultof his death, for the benefits described in paragraph ___ or for so much of suchbenefits as are not otherwise provided for her, and for Sally’s reasonableattorneys' fees incurred to present such claim. If John predeceases Sally, Johnintends and directs that his estate, fiduciaries, beneficiaries, and transferees shallbe bound by this Agreement and direction, and John further agrees that if Sally’srights under paragraph ___ are created by John’s agreement and direction in thisparagraph that Sally shall have a claim for them, rather than by specificprovisions in John’s will, revocable trust, beneficiary designation or by non-testamentary provisions, and if for any reason Sally fails to file her claim duringthe period in which a claimant may file such a claim against John’s estate, Johndirects his fiduciaries, beneficiaries and transferees to refrain from asserting thatfailure as a defense to Sally’s claim, so long as such claim is made within oneyear of John’s death.”

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c. New Estate Planning Clients – Verify Whether a Marital Agreement Exists

New estate planning clients may not mention the existence of an old marital agreement.Estate planning attorneys should specifically confirm with clients whether or nor a maritalagreement exists, and if one does, obtain a copy.

d. Estate Planning Clients with Grown Children

When preparing estate planning documents for wealthy clients with grown children,consider having a discussion with those clients regarding whether the children have or shouldhave marital agreements in place. This may affect whether a client decides to leave propertyoutright or in a lifetime trust to an adult child.

6. PORTABILITY AND THE DECEASED SPOUSAL UNUSED EXLCUSIONAMOUNT

Portability of a deceased spouse’s estate tax exemption was made permanent on January2, 2013, with the American Taxpayer Relief Act. Now, Code Section 2010(c)(4) which allowsthe surviving spouse of a deceased spouse dying after December 31, 2010, to use the deceasedspouse’s unused exclusion amount (DSUE) as an exemption against estate tax in the survivingspouse’s estate, is a permanent part of the estate tax law.

In order for the surviving spouse to obtain the deceased spouse’s DSUE amount, anelection must be made on a timely filed Form 706, Federal Estate Tax Return, at the firstspouse’s death.

With the estate tax exemption now set at $5 million, plus inflation adjustment, theportable DSUE amount should be viewed as a valuable asset of the less wealthy spouse. Forexample, if the prospective wife has an estate of $10 million, and her prospective husband has anestate of $1 million, if the husband predeceases wife, his unused exemption amount or DSUEcould be ported to the wife’s estate at her second death, allowing her to shelter over $4 million ofadditional assets at her death.

Because the portability election must be made by the Executor or Personal Representativeof the first spouse’s estate, the parties should agree in the Marital Agreement that the lesswealthy spouse will leave instruction in his or her estate planning document directing his or herExecutor or Personal Representative to file the Form 706 and make the portability election. Inthe absence of such a filing, the children of the less wealthy spouse may not want to file theForm 706, because it would otherwise be unnecessary if the less wealthy spouse’s estate is wellunder the estate tax exclusion amount. Because of the added costs of preparation of the Form706 for the less wealthy spouse’s estate, which filing benefits only the wealthier spouse’s estate,the marital agreement should obligate the wealthier spouse to pay for the preparation of the Form706.

Please see the article entitled “Portability and Prenuptials: A Plethora of Preventative,Progressive and Precautionary Provisions,” by George D. Karibjanian, published in the 2012Tax Management Memorandum by Tax Management Inc, for numerous examples of samplelanguage for marital agreements dealing with the portability issues.

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7. PROTECTING TRUST ASSETS IN A DIVORCE

If the marital agreement does not specifically address trust assets, then whether trustassets will be subject to distribution upon a dissolution of the marriage, and if so to what extentthe trust assets could be invaded are subject to litigation at the time of the dissolution proceeding.This litigation is costly and time consuming.

a. State Law Concerns. Each state has different rules regarding the criteria whichresults in trust assets being treated as “property” upon dissolution. Although the parties mayenter into marriage in one state where the laws are known and aligned with the partiesexpectations, the parties could later move to another state whose laws are very different,therefore the marital agreement should detail the expectations of each party with respect to trustassets.

b. Trust Assets: Marital Property or Separate Property. The marital agreement needsto specify whether certain trust assets will be excluded and treated as sole and separate property,including the criteria for possible future trusts created by the spouse, the spouse’s familymembers, etc. The marital agreement should also specify how distributions from any trustsduring the parties’ marriage will be treated: will they be considered marital property oncedistributed from the trust or are distributions intended to remain sole and separate property?

c. Powers of Appointment/Powers of Withdrawal. The marital agreement needs tospecify exactly what is intended with respect to any powers of appointment or powers ofwithdrawal over trust assets. Many times trusts are created by parents or grandparents allowingan invasion of principal at stated times during the trust terms. The parties need to thoroughlystate what their intentions are with respect to withdrawals that have not yet been taken by thepermitted party or how powers of appointment should be exercised. Is it intended that the spousethat is a beneficiary will take the permitted distributions, or is it left to that spouse’s solediscretion to decide?

8. PERSONAL RESIDENCE ISSUES

Frequently, the marital agreement will address the use and disposition of the primaryresidence during the marriage, upon a divorce, or after the death of the owner spouse. Inaddition, the marital agreement frequently addresses secondary residences as well.

a. Definitions. First, it is important to define the primary residence, so that formulti-residence couples, there will be no room for ambiguity.“The primary residence where the

parties intend to reside following their marriage is located at_________________. In the future, if the parties choose an alternate residenceas the parties’ primary residence, such primary personal residence shall bedefined as that residence in which the parties jointly spent more nights than anyother residence owned by either or both of the parties in the twelve monthsimmediately prior to [dissolution of the marriage or death of one party].”

b. Expenses of Residences. In many cases, it may be important to clarify whoshould pay for expenses of the parties during the marriage.

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“Joint Living Expenses. John will pay for our reasonable and customary jointliving expenses incurred during the marriage and prior to the filing of a petition,at a standard of living which John determines reasonable in his sole discretion.Joint living expenses shall include, but not be limited to, the following: (a) allexpenses incurred in maintaining all residences of the parties; (b) all reasonableexpenses incurred for our support and maintenance; (c) all expenses related toour health and medical care; (d) all expenses incurred in procuring, maintaining,and insuring automobiles for each of us; (e) all expenses incurred for our jointtravel, recreation, and entertainment; and (f) all joint debt. Joint living expensesincurred after the date of a separation but prior to the date a petition is filed shallbe reasonable and customary and consistent with past practices. Use of separateproperty or income from separate property by Steve to pay joint living expensesshall not cause his separate property, or any portion of it, to be recharacterizedas marital property.”

- or -

“Living Expenses Related to Residences. Each party will pay all expenses formaintaining all residences titled in that party’s name. For any jointly titledresidences, all expenses of maintaining such joint residences shall be split equallybetween the parties.”

c. Transfer of Interest in Residence as Gift During Marriage

“Gifts During Marriage. John agrees that as a gift to Jane, no later than sixtydays after the Marriage Date, she will cause to be delivered and recorded a deedtransferring to Jane a one-half interest in John’s residence located at_______________, Colorado. Title shall be held by both parties as equal tenantsin common. This gift is contingent upon the occurrence of our marriage.”

- or -

“Use and Possession of Primary Residence After Filing of Petition. During thependency of the petition, John shall have the exclusive right to the use andpossession of the parties’ primary residence. John shall have a right of firstrefusal to purchase Jane’s ownership interest in our primary residence. In orderto exercise such right of first refusal, John must give written notice to Jane withintwo months of the filing of a petition that she will exercise her right. John willthen have an additional two months to complete the purchase of Jane’s interest inthe residence at fair market value less Jane’s share of debt encumbering theproperty, if any, and refinance any mortgage so that he is solely responsible forany mortgage on the residence. If John does not exercise his right of firstrefusal within two months of the date a petition is filed, then Jane shall have aright of first refusal to purchase John ’s interest under the same terms. Jane’sright of first refusal shall last for two months from the time John fails to exercisehis right of first refusal. The fair market value of the residence shall bedetermined by the average of two appraisals performed by qualified residential

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appraisers and based on comparable sales; one obtained by John and oneobtained by Jane. That average appraised value shall then be multiplied by theseller’s ownership interest as set forth on the title to determine the gross purchaseprice. The debt encumbering the property, if any, shall also be multiplied by theseller’s ownership interest as set forth on the title to determine the seller’s shareof debt. The seller’s share of debt shall then be subtracted from the grosspurchase price to determine the net purchase price. If both John and Janedecline their respective right of first refusal, the house shall be placed on themarket for sale as soon as possible. If the house is placed on the market for sale,mutually agreed upon expenses incurred in preparing the house for sale and allcosts of the sale shall be paid by the parties in proportion to their respectiveownership interests as indicated on the instrument of title. John shall pay allmaintenance expenses, including the mortgage (if any), taxes, and insurance,from the time a petition is filed until the residence is sold, unless Jane exercisesher right of first refusal, in which case she shall pay all maintenance expensesfrom the time she gives John written notice that she is exercising such right.”

Be wary of provisions which transfer a property to the less wealthy spouse during themarriage, such as title to a residence, but provide that if a divorce were to occur the residenceshall revert to the wealthier spouse. This may be attractive from an estate planning perspectiveand it may be attractive to the less wealthy spouse because she will hold the residence outright(rather than in a marital trust) at the wealthier spouse’s death. However, this arrangement maynot qualify for the gift tax deduction as an outright transfer to the less wealthy spouse. Rather itwill likely be treated as a terminable interest because the interest transferred to the less wealthyspouse will terminate or fail upon an event (the divorce) and because the donor retains in himselfan interest in such property (the right of the property to revert to the donor upon a divorce).I.R.C. § 2523(b).

d. Transfers of Residence Upon Death of One Spouse

“Provisions for John as Mary’s Surviving Spouse. If our marriage terminates byMary’s death and if John survives Mary by at least 90 days, Mary agrees that shewill make provisions by will, trust or other dispositive instrument to provide Johnwith a Marital Trust which shall be funded with Mary’s entire ownership interest,if any, in the parties’ primary residence free and clear of all encumbrances, plusfurniture and furnishings in the parties’ primary residence. The trustee shall bedesignated by the terms of Mary’s estate planning document.”

If the residence is transferred to the QTIP trust, it will be important to include provisionsin the QTIP trust so that the surviving spouse’s rights to the residence will constitute thenecessary qualifying income interest (i.e., the surviving spouse must have the right to demandthat unproductive property be made productive). Consider the following provision:

“Following the settlor’s death and during the surviving spouse’s remaininglifetime, the real property that was used by the parties as their primary residenceshall be distributed to the marital trust. The trustee shall accord to the survivingspouse the free use and enjoyment of such real property as one of the benefits of

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this trust. The trustee shall also be authorized, in its discretion, to sell orexchange such residential real property held as a trust asset, and to invest theproceeds in other residential real property, or to hold any residential realproperty acquired by exchange, supplying to the surviving spouse the free use andenjoyment of such newly acquired real property, so that she shall be afforded asatisfactory home during her lifetime. Such use and enjoyment shall be accordedas the surviving spouse’s sole responsibility, but the trustee may utilize so much ofthe net income of the trust or, if the net income is insufficient, the principal, as itshall determine to be necessary or advisable to discharge the cost ofmaintenance, upkeep, insurance, and taxes on such property. At such time as thesurviving spouse ceases to use such residential real property and has no use forother residential real property for her personal use, the trustee shall be free tosell the residential real property that is an asset of the trust and add the proceedsfrom such sale to the principal of the trust. The trustee always shall have fullauthority to carry such insurance on such real property, and in such amount andform, as it may require for its own protection, as an expense of administering thetrust. The trustee shall not be accountable for any loss sustained by reason of anyaction taken under the provisions of this paragraph.”

9. IRA, 401(K) AND RETIREMENT ACCOUNT ISSUES & LIFE INSURANCEPOLICY CONSIDERATIONS

a. Retirement Accounts. Retirement accounts like 401(k), IRAs, 403(b) or similarqualified plans provide many unique concerns. These assets pass by beneficiary designations soit is important to be sure that what was agreed to in a marital agreement actually gets filed withthe plan administrators. Furthermore, there are specific rules with qualified plans that requireconsents if the spouse is not the named beneficiary. It is important to get the proper waivers andconsents during the time you are signing the marital agreement so that there are no problemsdown the road. Additionally, there are tax implications to who is the beneficiary of the qualifiedretirement accounts and those need to be negotiated as well.

b. Insurance Policies. Insurance policies are similar to retirement accounts in thefact that they too pass by contract beneficiary designation. Insurance policies are a terrific wayto fund some of the obligations that incur under the marital agreement, but this also creates therequirement to maintain insurance. There are some considerations if you have a policy which isintended to be split among different beneficiaries. What happens if the policy is cancelled ordoes not perform, is there another plan in which to fund the obligations. Again here it isimportant to be sure to correctly complete the insurance designation forms so that the formsmatch what was agreed to in the marital agreement.