Snowball Arkansas Real Estate - PDF by tlt12652

VIEWS: 21 PAGES: 9

More Info
									,ART[ C
      7                                                                     marital planning for divorce, however, may actually
                                                                            ease some concerns associated : with dissolution of
Real Estate and Divorce:                                                    marriage andremoveconflict.:from future marital de-
                                                                            cisionmakirg by initiating open communication re-
13m4ldht Up Is Hard To Do                                                   garding difficult topics
                                                                               Ownership; of. real: estate.I and sharing of expenses
by Lauren J. Wolven, J.D.                                                   related to.real: estate isofteritroublesorne in new mar+
                                                                            nages. andi. in divorce...Asciients marrying again, or
                                                                            later. hi life, .combin hOuseholds, issues regarding
                                                                                                                  .:
                                                                            residential... an4 investment..p.opem es are brought to
                                                                            the forefront, an4.it: may, be useful to work the topic
Ab5 tract .....                                                             into th e .. analysis. of the client’s particular circum-
                                                                            stanceL Forexample, if a client mentions that heex-
   The divrc .e. rate has increased significantly over                      pectsto.:purchase:property,usc a discussion of expec-
the last-few decade% and now almost half of all mar-                        tationsreg.rding that new, real estate as transition to a
riages end ia divorce The majority of divorces in-                          discussion.of:divorce in .general.
volve a divisiop of property, and many entangle real                           Yet anothermethod is t6 introduce the bare statis-
estate ,.Vi            second marriages, and more mar-                      tics. Switchiiig the focus to the general population and
riages later in life, incorporating divorce planning into                   away: frn. the, clients can be.a useful method to break
            i areas, such as real estate, becomes even
other pract’ce                                                              down the communicaon barrier regarding divorce
more       :rt:. when one considers the ancillary ef-                       Discussing past experiences, such as "I’ve dealt with
fects of vorce                                                              a couple that had a similar issue is also helpful
   Disssingdivorce, particularly in the context of                              Many clients respond positively to having the attor-
compietelyunre. lated transactions, can be tricky. First,                   ney break the ice and provide a forum to express con-
this article a4dve sses.the ethical and emotional chal-
                 .                                                          cerns the clients have kept silent. If a client reacts
lenge that the .. attorney faces when representing. a                       negatively, you can simply move on, knowing you
couple.Conteflp*W1 .g: marriage or the possibility of                       have tried and done your duty to the client by noting
divorce, including.. a discussion of separate property                      the issue. Once the topic is on the table, counseling
and a brieLint.odUcftry. guide to drafting premarital                       the client regarding some or all of the following in-
agreements that..prot trea estate. Second, this article                     struments may be appropriate.
explains :.w.... tiflCOi!pQ rate a discussion of divorce                        It is useful fdr attorneys dealing with real estate, as
whenrepresentingcients.wbo are already married as                           set bwnershi.nUd tax issues to be versed in thetopic
well as the use of postmarital agreements to protect                        of divorce.        8 article provides basic guidelines to
                                                                                               .



real estate. Third this article summarizes the proce-                       protect your client’s real estate in the event of divorce.
dures involved in advising a couple (or spouse) con-                        Premarital Agreements
templating divorce and the necessary follow-through                             Premarital agreements have become increasingly
to protect real estate once a divorce decree is entered.                    popular in the last 20 years as a method to address the
                                                                            financial risks incident to divorce .4 Although premari-
Advising Clients Contemplating                                              tal agreements are useful in any, situation where the
Marriage                                                                    cost of preparation is appropriate in relation to the as-
   Raising the possibility of divorce with couples be-                      sets at risk, premarital agreements are especially help-
fore divorce is even considered, preferably when a                          ful in certain situations. Some examples include
couple is contemplating marriage, is important. There                       couples: (1) with disparate wealth, (2) one party to
are reasons to believe that planning early for the pos-                     which does not work, (3) with disparate amounts of
sibility of divorce is less stressful. When a relation-                     debt, (4) at least one party to which has children from
ship is newer and a wedding is imminent, the "new-                          a previous marriage, (5) one party to which has been
lywed phase" may lead to a more cooperative atti-                           through a contentious divorce, (6) one party to which
                                                                            owns an interest in a family business and (7) when
tude.2 Early in a relationship, each spouse may be                          there is an anticipated inheritance. 5 Where there is an
more willing to compromise and act reasonably,                               interest in a family home or real estate occupied by
whereas, particularly if marital strife is the reason for                   one party that will become the marital residence, a
a postmarital agreement, antagonism developed over                          premarital agreement is also an excellent tool to de-
the course of the relationship may complicate concili-                       fine expectations and protect rights.
ation. 3
   No doubt, the topic of divorce is difficult to broach
with clients who are contemplating marriage. Pre-                              ’ From 1978 to 1988, the number of premarital agreements
                                                                            tripled, and approximately 5% of marrying couples (50,000) sign
                                                                            premarital agreements each year. Marston, Allison A., "Planning
   Horwood Marcus & Berk, Chartered; Chicago, Illinois.                     for Love: The Politics of Prenuptial Agreements," 49 Stan. L Rev.
  ’Stake, Jeffrey E., "Mandatory Planning for Divorce," 45                  887, 890 (1997).
Vand. L Rev. 397, 419 (1992).                                                    See Haupt, Erika L., "For Better, For Worse, For Richer, For
                                                                            Poorer: Premarital Agreement Case Studies," 37 Real Prop. Prob.
   ’ id.                                                                    & Tr J. 29, 29-43 (2002).

                                                   Tax Management Real Estate Journal
                                ' 2009 Tax Management Inc., a subsidiary of The Bureau of National Affairs, Inc.                        203
                                                                ISSN 8755-0628
ARTICLES

   Couples who do not engage in the exercise of en-                         tentious divorces. 12 Many jurisdictions now authorize
tering into a premarital agreement may not do so for                        couples to enter into these contractual agreements
several reasons, from cultural taboo to emotional con-                      that, like business transactions, result from arm’s-
cerns. It is important to explain to reluctant couples                      length negotiations where both partIes knowingly de-
the benefits a premarital agreement may. provide both                       termine.their. rights in relation to one another.
to the marriage and in the event of divorce.. The pre-                         MorØ than half thestates have adopted. the ijfrni
marital agreement allows the couple to alter the de-                        Premarital Agreement Act (UPAA) in its entirety or
fault statutory scheme with a divorce plan specific to                      with minor modifications.’ 3 Under the UPAA, a pre-
their situation. Furthermore, the planning proces& re-                      marital agreement is presumed valid and enforceable.
quired for a premarital agreement may benefit the                           A party seeking to void the agreement has the burden
couple by communicating the expectations of each                            of proving that the agreement was unconscionable and
party and exposing incompatibilities. 6                                     there was nondisclosure of property or financial obli-
    A premarital agreement also allows a husband and                        gations by one of the parties. Even without consider-
wife to characterize their property as non-marital or                       ation, apremarital agreement is enforceable under the
marital. In most jurisdictions, non-marital property is                     UPAA if it is signed by both parties.
not part of the marital estate and is not divisible upon                        Although the UPAA has been adopted in the major-
                                                                            ity of states, a few states still leave the governance of
divorce .7 The two most common forms of non-marital                         such agreements to common law. Although the re-
property are (1) property acquired by gift, legacy, or                      quirements for a valid premarital agreement may vary
descent before or during marriage, and (2) property                         across jurisdictions, three common criteria generally
acquired before the marriage and not transferred into                       apply.’ First, the agreement must not be a product of
co-ownership with a spouse. " Depending on your ju-                         fraud, duress, mistake, misrepresentation, or nondis-
risdiction, income and appreciation from the non-                           closure of material fact. Second, the agreement must
 marital assets may or may not remain non-marital 9                          not be unconscionable when executed. Third, changed
 Marital property typically is defined as all assets pos-                   circumstances must not make enforcement of the pre-
 sessed by either spouse during or on dissolution of                         marital agreement unfair or unreasonable. Generally,
 marriage.’0                                                                 the inquiry under the UPAA requires less disclosure
    The most effective premarital agreement is possible                      for a valid premarital agreement than does the com-
 only if the attorneys involved understand the law of                        mon law. 15
 the governing jurisdiction regarding enforceability of                         Although courts typically focus on compliance with
 premarital agreements. The following introductory                           procedural requirements, they also analyze the pre-
 guide to preparing a premarital agreement serves also                       marital agreement for substantive fairness. There are
 as a general guideline for reviewing premarital agree-                      some limits on the types of provisions that a court will
 ments, but it is important to engage an expert (usually                     enforce. Generally, provisions that regulate day-to-
 an estate planner or matrimonial attorney) familiar                         day marriage issues, such as frequency of sexual, rela-
 with the particular requirements of the governing ju-                       tions or visits by the in-laws, are unenforceable. 16
 risdiction to ensure effective planning that protects re-                   Some suggestions of provisions that a court would en-
 alty and other assets.
                                                                                12
                                                                                     Id.
Enforceability of Premarital                                                      ’ States that have adopted the UPAA in its entirety or with nil-
Agreements                                                                   nor modifications include Arizona, Arkansas, California, Con-
   Premarital agreements have a past history of hostile                      necticut, Delaware, District of Columbia, Florida, Hawaii, Idaho,
treatment by the courts, which held that premarital                          Illinois, Indiana, Iowa, Kansas, Maine, Montana, Nebraska, Ne-
agreements were against public policy because they                           vada, New Mexico, North Carolina, North Dakota, Oregon,
supposedly fostered divorce." As the divorce rate in-                        Rhode Island, South Dakota, Texas, Utah, Virginia, and Wiscon-
creased to its current level, courts and legislatures rec-                   sin. In 2009, it was introduced to Mississippi, Missouri, South
ognized premarital agreements as more appealing                              Carolina and West Virginia. See also Uniform Premarital Agree-
                                                                             ment Act of 1983.
than clogging the dockets with large numbers of con-                             14
                                                                                    Schembri, note 11 above, at 333.
                                                                                 ’ Id. at 335.
  6
    Marston, Allison A., "Planning for Love: The Politics of
                                                                                 16
                                                                                                    provisions have also included (1) safekeeping
Prenuptial Agreements," 49 Stan. L. Rev. 887, 890 (1997).                    of a treasured snowball collection in the freezer, (2) walking the
    Bennett, Margaret A., "The Real Estate Lawyer’s Divorce                  dog, or (3) authorizing a husband to sue for divorce if his wife
                                                                             gains more than 15 pounds. A court, when deciding on the en-
Primer (and the Divorce Lawyer’s Guide to Real Estate)," 86 Ill,
                                                                             forceability of a provision that the husband’s mother could live
B..!. 488, 489 (1998).                                                       with the married couple, stated that prospective spouses, in their
   8
                                                                             marriage enthusiasm, may make promises to one another outside
   9
                                                                             of human nature, and these promises violate public policy. Mar-
   " Jamieson, Lisa H., "Marital Property Issues in the Modern               ston, Allison A., "Planning for Love: The Politics of Prenuptial
Estate Plan," 49 Baylor L. Rev. 391, 393 (1997).                             Agreements," 49 Stan. L. Rev. 887, 900(1997), and Belcher, Den-
   11
      Schembri, Nancy R., "Prenuptial Agreements and the Sig-                nis I., and Pomeroy, Laura 0., "A Practitioner’s Guide for Nego-
nificance of Independent Counsel," 17 St. John’s J. Legal Comm.              tiating, Drafting and Enforcing Premarital Agreements," 37 Real
 313, 313 (2003).                                                            Prop. Prob. & Tr J. 1, 19.


                                                    Tax Management Real Estate Journal
 204                             ' 2009 Tax Management Inc., a subsidiary of The Bureau of National Affairs, Inc.
                                                                 ISSN 8755-0628
                                                                                                                                   ARTICLES

force include the duration of the contraci, division of                       for either1 party to challenge the enforceability of the
property, division of incorne.treaunent of debi,..speci-                      premarital. agreement. 24
fication of support and living expenses, decisions re-                            Even with separate representation,... the emotional
garding surnames, birth control, children, housework,                         charge of premarital: agreements. can be surprisin
domicile, reigion willsand inheritance, a plan for. the                       and. attorneys ’ should always proceed with ,caution.
resolution of arguments, and dissolution of the mar-                          Many COflflflefltatOrs: opine that independent counsel
riage.’7                                                                      is so important that it should be required for premari-
   Premarital agreements most often are attacked on                           tal agreements, even though imposing legal represen-
the basis that there was duress, lack of knowledge re-                        tation may infringe on an individual’s freedom to con-
gardIng the terms, overreaching, and unconscionabil-                          tract. 6
ity 18 A will-drafted and properly,        e.. xecuted
                                           premarital                         Considerations for Drafting an Enforceable
agreement, however, is likely to be upheld The effect                         Premarital Agreement
of the emotional nature of the agreement generally is                            One of the most difficult challenges in drafting pre-
not a defense, to enforcement’ 9 A threat to cÆliOffth                        marital agreements stems from the fact that it is virtu-
marriage, even if the spouse is pregnant, will not of-                        ally impossible to envision all the possible directions
ten constitute duress. Representation by counsel                              the couple may take in the future (children, careers,
may preclude a claim of duress The statute of limita-                         inheritances, etc), as well as to contemplate the direc-
tions on duress typically begins when the agreement                           tion the law may take when a spouse seeks to enforce
is signed, and a claim of duress may be waived unless                         the agreement, possibly 15-20 years later. 27 Fre-
timely asserted . 21 Furthermore, a refusal to read and                       quently, a party will attack the validity of the premari-
endeavor to understand the agreement will not allow                           tal agreement alleging that the agreement is unfair
avoidance of terms. 22                                                        given the new set of circumstances at the time of the
                                                                              divorce. Although it is virtually impossible to fore-
Ethical Considerations for Advising Clients                                   close every avenue for challenge of a premarital
Regarding Premarital Agreements                                               agreement due to the uncontrollability of the future
                                                                              circumstances in which the couple may find itself,
   Representation during the signing of a premarital                          certain drafting techniques can reduce substantially
agreement requires complete loyalty to the interests of                       the effectiveness of an attack on a premarital agree-
a singLe party, whose interests more than likely are di-                      ment.
rectly adverse to the interests of the future spouse                             Drafting in a manner that sets forth a separate pip.
Rule 1.7 of the Model Code prohibits one attorney (or                         vision for every possible contingency creates inflexr
firm) from representing a client with interests directly                      ibihty and ignores the unimaginable event The rec-
adverse to another client. The rule also prohibits a                          ommended drafting approach, therefore, is to create
lawyer from representing a client when the represen-                          an agreement that modifies itself over time by refer-
tation would be materially limited by representation                          ence to external factors, either contingent or specific,
of another client.                                                            in order to provide a flexible structure that will stand
   Even though Rule 1.7 does allow a client to con-                           the test of time In a situation where the growth po-
sent to representation despite the conflict, separate                         tential of the assets of one party due to employment
representation is strongly recommended .23 Represen-                          during the marriage causes the other party to have
tation after consent may present ongoing risks of es-                         concerns that the agreement will not be fair after the
calating the current conflict, placing the attorney in an
ethical quandary, and possibly even opening the door
                                                                                 24 MRPC 1.7. See Schembri Nancy R Prenuptial Agree-
                                                                              ments and the Significance of Independent Counsel," 17 St. Johns
  17                                                                          U. J. Comm. 313, 338 (2003). "Lack of independent counsel is not
      Marston, at 900 and Belcher and Pomeroy, at 19.                         fatal to a premarital agreement. The mere fact that a party was not
  18  Horue Leonard 0., "Drafting Matrimonial Agreements                      represented is not enough, per se, to have a marital settlement
- Pre-Nuptial Agreements," 300 PL/En 9, 30 (2001).                            agreement vacated or modified. The parties must have an oppor-
   ’9 1d. at 38.                                                              tunity to consult with an attorney; however, the lack of counsel in
   20 1d. at 36-37. The attacking party may even be estopped from             the formulation of a premarital agreement can be a factor or serve
asserting the agreement is unenforceable. If the spouse acknowl-              to corroborate a claim of fraud, deceit, duress, non-disclosure, co-
edges the marriage would not have occurred but for the agree-                 ercion or overreaching."
ment, the parties entered the marriage in reliance upon the agree-               25
                                                                                    Marston, Allison A., "Planning for Love: The Politics of
ment.                                                                         Prenuptial Agreements," 49 Stan. L. Rev. 887, 894 (1997). It is
   21
      Id. at 38-42. In some cases, a claim for duress can be waived           also important to document the communication of the terms and
even when the statute of limitations has not completely run.                  their meanings to your client, given the emotions that may be
   22
      Id.
          at 31-34.                                                           present. Also document issues intentionally not addressed by the
   23
      MRPC 1.7. First, the attorney must reasonably believe that              agreement. With documentation, advice (or lack thereof) can be
representing both clients would not adversely affect either client.           demonstrated during an action for duress or a claim of malprac-
In addition, both clients must consent after consultation. Under              tice. 300 PUIJEst 9, 47.
the revision of the Model Rules in 2000, the consent must be in                  26 Marston, note 6 above, at 890, and Schembri, note 11 above,

writing. Regardless of whether a writing is required by a particu-            at 338.
                                                                                 27
lar jurisdiction, it is always recommended,                                         Florescue, note 18 above, at 18.

                                                     Tax Management Real Estate Journal
                                  ' 2009 Tax Management Inc., a subsidiary of The Bureau of National   Affairs, Inc.                         205
                                                                  ISSN 8755-0628
passage of substantial time, one solution to address                             a party’s separate property under the laws of the gov-
this concern is to have the agreement extinguish itself                          erning, jurisdiction, clients need to be protected iroiii
entirely or in part, contingent on certain events, gen-                          inadvertent commingling with marital property or
erally the passage of time.                                                      conversion to community property. This is particu-
  For example, Mary is a successful physician with                               larly difficult with the primary residence, when huih
two children from a prior marriage. Her spouse, Jack,                            parties may contribute their salaries to mortgage pay-
is a successful sales manager who agrees to stay home                            merits on the home owned by one party before the
and care   for the children of Mary because Mary’s in-                           rnarnage..
come is 10 times the income of Jack. Jack W. con-                                   With regard to growth of premarital assets, it is im-
cerned that if the parties are married for a length of                           portant to address whether appreciation and income
time, say 15 years, and then decide to divorce, Jack                             from those assets will be treated as marital property
will be in a situation where he has given up a. career                           or as separate property. Failure to clearly identify and
to enable Mary to further her career, and Jack feels                             address premarital assets in the premarital agreement
equally entitled to share in the financial benefits of                           can leave the client to face the often impossible task
that joint endeavor. This type of situation is one where                         of tracing the assets back to premarital property when
it may be appropriate to terminate the property divi-                            the parties later divorce, which may be many years
sion provisions of the premarital agreement and leave                            later. Including a definition of separate property is im-
the decision to the courts or agreement of the parties                           portant, as is ensuring the definition is clear and con-
in the event of divorce.                                                         sistent with the parties’ intent regarding division of as-
   As noted earlier, one of the most important techni-                           sets upon either death or divorce. One useful tech-
cal requirements is ensuring lull and complete finan-                            nique is to attach to the premarital agreement a
cial disclosure to ensure an educated understanding of                           separate schedule of each party’s separate property,
the agreement (aided by counsel). 28 The more detailed                           which at least provides a starting point if tracing does
the information, the better the disclosure protects the                          become necessary. In certain situations, it may even
disclosing party. In addition, the information should                            he advisable for clients to file separate tax returns fol-
he updated to ensure that it is as accurate as possible                          lowing the marriage to continue reinforcing the sepa-
                                                                                                               32
at the time the premarital agreement is signed. If par-                          rate property designations.
ticularly valuable real estate is involved, an appraisal                            For real estate, it is important to address existing
may be advisable. As evidence of disclosure, it is rec-                          equity, future contributions to reduce indebtedness,
ommended that a net worth statement he attached to                               and appreciation. Use and ownership upon separation
the agreement itself. The client should be advised that                          and divorce are important to consider, as is treatment
the disclosure is a legal requirement, which may en-                             of capital contributions for major renovation or even
                     Disclosure often prompts addi-                              routine repairs and maintenance. To ensure that the
tional negotiations, so provide the financial statement
co                                                                               premarital agreement is effective upon death as well
on a schedule that gives the other party ample time to                           as in the event of divorce, it must contain a general of
review and respond.                                                              waiver of the spouse’s state law rights as against the
                                                                                                                        33
   Disclosure is essential, as courts often view disclo-                          estate of the deceased spouse.             The waiver may be a
sure as the equivalent of fairness. 29 If the client has                          general waiver or a specific waiver as to a certain cat-
concerns about leaving the disclosure documentation                               egory of property, such as separate property (as de-
in the hands of other individuals, arrange to have all                            fined in the premarital agreement). 34
copies returned and provide in the agreement that the                                One way to maintain flexibility of the document
information will be produced only in the event of liti-                           and to maintain a level of fairness is to increase the
gation between the parties regarding the remarital                                surviving spouse’s share of the decedent’s estate over
agreement and only under protective order.                                        time. Another option is to terminate the waiver after
   Difficulties of ensuring proper disclosure and con-                            the parties have been married a certain number of
cerns regarding fairness aside, the most frequent prob-                           years, thereby leaving the spouse full rights to de-
lem areas in drafting arise in defining premarital prop-                          mand a spousal forced share. Because the spousal
city and income, and in resolving estate rights, dispo-                           forced share may be defeated by the establishment of
sition of the marital residence, spousal support, and                             a trust under the law of some states ’ 35 it may be pref-
bequests in conflict with the agreement. 3 Property                               erable to define the rights under the agreement rather
owned before the marriage should be addressed                                     than reverting to state estate rights. In any event, de-
clearly in the premarital agreement. Although prop-                               fining what assets are included in the estate is impor-
erty acquired before the marriage may be considered

                                                                                    32
                                                                                       Schlissel, note 29 above.
  28   1d. at 43-44. It is important to take this disclosure seriously.              331t is important also to consider limitations on a surviving
Although it is commonly expected that spouses have duties to                      spouse acting as administrator or executor or serving in some
each other, many jurisdictions also hold that a fiancØ has a fidu-                other fiduciary capacity in the estate.
ciary obligation to a future spouse.                                                   Florescue, note 18 above, at 9.
   29
      Schlissel, Stephen W., "Negotiation and Drafting Consider-                       See, e.g., Johnson v. LaGrange State Bank, 383 N.E.2d 185,
ations," 184 PLI/Est 51(1989).                                                    192 (Ill. 1978); Johnson v. Farmers & Merchants Bank, 379
     Id.                                                                          S.E.2d 752, 756-757 (W.Va. 1989); In re Estate of Wechsler, 225
       Florescue, note 18 above, at 9.                                            A.2d 785, 786 (N.Y. App. Div. 1996).

                                                        Tax Management Real Estate         Journal
206                                  ' 2009 Tax Management Inc., a subsidiary of The Bureau of National Affairs, Inc.
                                                                     ISSN 8755-0628
                                                                                                                                        ARTICLES

tantt as is requiring that the parties be living together                        relinquishment of property rights was a taxable gift. 42
(as well as married) at the time of death in , order for                         Additionally, a prospective. spouse cannot give up his
ther survivor to receive any share of the estate.                                orproperty rights in exchange - for marriage.
   Particularly with second inamages or later-in-life                            Supreme Court fod that although marriage may be
marriages a couple may reside in a home previously                                &qi ate: consideration l undet;: contract law, it could
owned by one spouse. If the spouse with title to the                             not be reduced to monetary value. However, if pro-
house dies first it is important to consider a living ar-                        spective: exchan ge mutual releases of future
rangement for the surviving spouse and who will be                               marital rights, there are no tax implications. 45
responsible for the payment of mortgages, taxes, and
upkeep. Provisions for sale of the home upon the sur-                            Keeping Separate Property Separate
vivor wanting or needing to move (e.g., into a nursing
home)1 should becoæsidered; Whatever the case, the                                  Whether or not a:. couple signs a premarital agree-
provisions of the premarital agreement should be in-                                       is important to educate clients on the law re-
                                                                                 Ifleflti:it
corporated- intO the client’a estate plan so that the two                       garding marriage, and property in their state. Even
are,                   or ambiguous, which would open                           without a premarital agreement, it is possible to keep
the door .       e:.litj.gatjofl :                                              separate.. "property: in the hands of the person who
   Consistent withi the goal Of avoiding protracted liii-                       brought it to the marriage upon divorce. Particularly
gatioiflover property, a premarital agreement custom-                           with real estate, where use of joint funds to pay a re-
arilyincIudes a: provision that neither party will con-                         lated debt can so easily blur the lines, it is important
testtheother’s will 37 In light of this clause, can a be-                       to advise clients regarding the conversion of premari-
quest to a spouse in the will amend a premarital                                tal or separate property into marital or community
agreement withłut a written modification of the                                 property, and the consequences.
agreement and consent of both parties? To avoid un-                                 Tracing separate property over the course of a mar-
intŁntiOnal Inodification of the premarital agreement
and to forecloSe thØ argument that the premarital                               riage can be problematic. If clients decide to forego a
agceerriertwas nullified by a party’s actions in prepa-
                                                                                premarital agreement, they should be advised of the
ration of the party’s estate plan, the premarital agree-                        importance of maintaining separate records and the
meæt shOuld               a statement that the waiver of                        implication of using marital funds to pay a debt obli-
spousel rights doe.S not preclude a party from actually
                                                                                gation on real property. Clients should be advised not
bequeathing more than is required under the agree-                              to add funds to premarital bank or investment ac-
ment, and neither does the waiver preclude the survi-                           counts in order to prevent commingling. Furthermore,
vor from accepting such a bequest                                               it is recommended that the clients open new bank and
                                                                                investment accounts to receive and use all income
Tax Implications                                                                earned during the marriage by the couple for their
   The typical premarital agreement involves payment                             "marital" financial activities.
by one spouse in exchange for the relinquishment by                                 Even if the parties do not want to create a premari-
the other of property (courtesy, dower, or survivor-                            tal agreement, they may wish to have a less formal
ship) rights. 3 Section 25 12(b) of the Code dictates                           letter of agreement regarding joint contributions to
that when pr operty is transferred for less than ad-                            real estate that was purchased with separate assets.
equate and full consideration in money or money’s                               Having such an agreement may make life easier by re-
worth, the amount by which the value of the property                            quiring less diligence in maintaining separation of
exceeds the value of any consideration given is a                               property.
        The Code is clear that the relinquishment of
property rights does not satisfy the requirement for                                States are divided on whether property (real or per-
adequate and full consideration. 40 Many couples try                            sonal) acquired before marriage is susceptible to divi-
to get around this by drafting a premarital agreement                           sion upon divorce.’ The maj7ority of states statutorily
in which one spouse gives up his or her common law                              exempt premarital property. 4 However, there are two
or statutory forced share of the other spouse’s estate                          conditions that will cause exempt premarital property
or they include a provision stating that community                              to become divisible marital property; the "use" test
property laws will not apply if there is a dissolution                          and inseparable commingling. 48 Under the "use" test,
of marriage. 4’ Unfortunately for estate and gift tax                           premarital property becomes marital property if used
purposes, the Supreme Court in Merrill v. Fahs held                             for the common benefit of both parties during the
that the relinquishment of property rights was inad-
equate, and the transfer of funds in exchange for the
                                                                                   42   Merrill v. Fahs, 324 U.S. 308, 312-13 (1945).
                                                                                        O’Connell, note 38 above, at 25.
       Florescue, note 18 above, at 9.                                                  Comr v. Wemyss, 324 U.S. 303, 307 (1945).
       Id.                                                                          O’Connell, note 38 above, at 26.
    O’Connell, Marjorie A., Estate Planning for Divorced or Re-                    46
                                                                                    Diehl, Michael, "The Trust in Marital Law: Divisibility of a
married Individuals, CA39 ALl-ABA 1, 24 (Sept. 7, 1995).                        Beneficiary Spouse’s Interests on Divorce," 64 Tex. L. Rev. 1301,
       §2512(b).                                                                1338 (1986),
  4
       O’Connell, note 38 above.                                                        Id.
  41                                                                               48
       Id.                                                                              Id.


                                                       Tax Management Real Estate Journal
                                    ' 2009 Tax Management Inc., a subsidiary of The Bureau of National Affairs, Inc.                         207
                                                                    ISSN 8755-0628
marriage. 49 Commingling occurs when one category                              property, but three of the most common are self-
of property is. mingled with another in a fund or asset,                       settled, revocable, and irrevocable trusts.
such as using both premarital and marital funds to                                 .\ self-settled trust enables a beneficiary to contrib-
purchase a home Residential real estate is particu-                            ute his own assets to a discretionary irrevocable trust
larly susceptible to falling prey to a divorce under                           and protect the trust income and principal from being
both tests.                                                                    marital property, as long as he does not have the right
   Additionally, there is the problem of income and in-                        to withdraw the trust assets. 55 .\ revocable trust,
creased value that accrues: from premarital property; is                       which may be altered at any tulle, is considered part
it premarital or marital? 51 There tend to be three rules                      of the grantor’s estate, accessible by creditors and
of law, which are hihlighted..by California, ColOradO,                         spousal claims, and subject to taxation. The irrevo-
and Texas. California considers both income and in-                            cable trust (the 11(1st that offers the most protection)
creased value to remain premarital: property, Colorado                         requires the grantor to give up all property rights over
regards the increased value as marital property, and                           the trust corpus, which effectively removes the corpus
Texas treats the increased value as premarital property                        from the grantor’s taxable estate and prohibits spousal
and the income as marital property. 52 Among the                               claims against it. However, the beneficiary with a
states that recognize a difference between premarital                          mandatory interest should consider holding any in-
and marital property, the majority follow the rule of                             in me
                                                                               come distributed to him in a separate account with no
                                                                               other assets to avoid commingling the distributed in-
law in Texas? 3 In some states, it may be easy for a                           conic with premarital property, in the event it is deter -
real estate investor to immediately and unknowingly                            mined that such distributed income was marital prop-
offer up his investment growth to his spouse through
the act of marriage.                                                           erty.
                                                                                   .J urisdictiotis that do not grant special treatment for
                                                                               property classification consider all trust distributions
Advising Married Clients                                                       divisible at divorce; U . premarital property is cx-
   Discussing divorce with married clients is no easier                        etilL. a corpus distribution may he divisible."’ In ju-
than broaching the topic with couples contemplating                            risdictions that exempt only premarital and inherited
marriage. Even though the, couple is already married,                           property, an inter vivmis gilt can he divided. -59 Further.
planning for divorce may initiate important open com-                            F state law prohibits the distribution of premarital
munication regarding difficult topics. In fact, they                            property and property acquired by gift or inheritance,
may be more honest: (which can be good or bad) than                            the trust corpus should also he exempt from distribu-
couples contemplating marriage.                                                tion even though the increased value and income ma
   Married clients, should be advised of the state law                          be divisible.’"’ Finally, the ability to access and use
regarding property rights upon divorce and death as                             trust corpus is equivalent to constructive possession;
part of the planning conversation. Surprisingly, mar-                           once the beneficiary takes possession ot the trust
ried clients often react positively and have thoughtful                         through a required distribution, the trust no longer cx
discussions regarding divorce, and those conversa-                                                                      &n
                                                                                ists and the property is subject to’...sion!’’
tions aid in the planning process. Clearly, however,                            Enforceability of I’osimariial .-lgreements
not all clients will appreciate the mention of divorce,                            Courts have been even slower to accept postmarital
and it is important to weigh the benefit of such a dis-                         agreements than premarital agreements. largely due to
cussion against antagonizing a client.                                          the issue of consideration. Courts enforcing postman-
   If, during the course of planning discussions, cli-                          tal agreements conclude that the waiver of statutory
ents reveal that they have commingled separate prop-                                                  ,
                                                                                rights created by marriage constitutes consideration
erty unintentionally, and both spouses desire to rem-                           for the agreement.’’ No jurisdiction will support a
edy the situation, a postmarital agreement may be ap-                           posttnanital agreement where a spouse agrees to do
propriate. Postmarital agreements also may be                                   what he or she is already obligated to do by law"
warranted following a reconciliation of estranged                               The trend in the law, however, is toward upholding
spouses or when a couple later decides to have a child                          these contracts when there is adequate consideration.
and one of the spouses has a child by a prior marriage                             In jurisdictions that enforce postmarital agree-
Continuing to Keep Separate Property Separate                                   ments, the criteria generally are the same as the erite-
   In most states, premarital property that is carefully
designated as inaccessible trust corpus will remain
separate property along with 54 appreciation of the
                               the                                                    Herman, Keith A., "How to Protect Trust Assets from a Ben-
trust at the time of marriage. Several different types                          eficiary Divorce," 63 J. Mo, B. 228, 233 (2007).
                                                                                   56
of trusts exist that can be used to protect premarital                                   Id.
                                                                                     ’ Diehl, note 46 above, at 1346.
                                                                                   58
                                                                                      Id.
   40
        Id.                                                                        59 1d.
        Id.                                                                        60 1d.
   s’   Diehl, note 46 above, at 1341.                                              ’ Id.
                                                                                   62 K’an, Ronald S., "Tax Aspects of Spousal Rights: Pre
   52
        Id.
   53   1d. at 1338.                                                             and Post Mortem," 184 PLtIEst 301, 303 (1989).
                                                                                    63
        Id. at 1346.                                                                     Id.


                                                       Tax Management Real Estate Journal
 208                                ' 2009 Tax Management Inc., a subsidiary of The Bureau of National Affairs, Inc.
                                                                     ISSN 8755-0628
                                                                                                                                  ARTICLES
na for enforcing premarital agreements. 64 Full finan                            ianships and trusts, for children. No steps should be
cial disclosure is probably the most nporta. factor                             taken: to transfer assets. (such: as.ititling real estate)
to determine fairness Once again ,.a court will review                           without the approval of the divorce attorney; Overly
an agreement for procedural and substantive fairness                             aggressive action .. regaling’::.asset.. transfers or estate
The typ1al attacks on postmaritalagreements ate the                             planning may, prejudice .the:clienVs case and do more
same as those with respect to premarital agreements.                            harm than good in the end.
However4 post marital agreements are often challenged                               Encourage divorcing:..’:dlients to review and update
for lack of consideration.                                                      their estat&.’plans. ’ The’. fiht step is reviewing asset
                                                                                                                      .   :




Ethical Considerations for Advising Clients                                     ownership and dt     eennuung whether the plan com-
Regarding PsttoiAgiemts                                                         ports with the requirements of any premarital or post-
                                                                                marital agreement. An estate plan contradictory to the
   As with. premarital agreements, ttorny representa                            terms of an i agreement could result in protracted estate
tion during the signing, of a postmarital agreement                             litigation if the client dies while the divorce is pend-
protects the interests of a client with interests directly                      ing Estate litigation will spend down the assets avail-
and openly adverse to those of the other. spouse Rule                           able to other legatees on attorney fees, expenses, and
1.7 of the Model Code prohibits representing both                               court costs arid’ . rnay prevent other legatees from re-
spouses, and even though Rule 1.7 does allow a client                           ceiving any benefits from the estate for several years.
to consent to representation despite the confhct, sepa-                            Advise the client to gather evidence as to the char-
rate representation is virtually required and is strongly                       acter of property. For example, the client may have
recommended The ongoing risks of the conflict are                               documents that enable him or her to trace shares of
even more intense with postmantal agreements due to                             stock to a gift or inheritance, which would make the
the higher threshold for court enforcement                                      shares ’separate property. Or, the client may have a pa-
Drafting a Postmarital Agreement                                                per trail documenting a down payment on real prop-
   Again, issues that arise when drafting a postmarital                         erty that came from separate assets. Funding sched-
agreement generally are the same as the issues that                             ules on trust agreements also can be useful. Property
arise when drafting a premarital agreement, SIdet-                              that is traceable as separate property is not subject to
ing both can serve the same purposeL The only -:issue                           division or transfer by the divorce decree. For this
that should be conten plated more SC! with a
                                           . us                                 reason, clients who have been receiving annual gifts
postmarital agreement i§ the consideration. for en-                             from family members should either request that the
forceability. If the parties are negotiatg . pifica11y                          gifts cease until the divorce is final or that the donor
to address issues with real estate, it may be possible                         establish a separate trust to receive those gifts while
to use exchange of rights related to the property to                           the divorce action is pending Separate assets can be
create consideration.                                                          transferred or otherwise dissipated in theory, but in
   Postmarital agreements generally are perceived as                           practice it is best to have the client consult with the
stemming from conflict, and therefore, are thought of                          matrimonial attorney before any asset transfers are
as more difficult to prepare. Often, however, postniari-                       made
tal agreements are easier to draft because the couple                              Married couples often designate their spouse as the
is more likely to have one or a few specific issues that                       beneficiary of life insurance, retirement plans or other
bring them to the table. In addition, depending on the                         property that passes by beneficiary designation Al-
length of the marriage so far, it may be easier to nar-                        though the soon-to-be former spouse’s signature may
row future contingencies that need to be addressed in                          be required to change certain beneficiary designations,
the agreement. For instance, the couple may already                            e.g., 401(k) accounts, beneficiary designations should
have children, own a home together, etc. Those issues                          be changed if appropriate and if the matrimonial at-
can be addressed directly and perhaps more concisely                           torney is in agreement. In addition, a revocable trust
than they would be in a premarital agreement.                                  may be desirable to help avoid the spousal forced
                                                                               share rights under state law in the event the client dies
Advising Clients Contemplating                                                 before the divorce is final. In many states, as long as
                                                                               the assets pass through a nonprobate environment
Divorce                                                                        (e.g. joint ownership, beneficiary designations, totten
   A divorcing spouse’s first call should be to his or                         trusts, and revocable or irrevocable trusts) they are not
her matrimonial attorney. The second call should be to                         subject to the spousal elective share. 67
his or her estate planning attorney. An existing estate                        The Use of Trusts to Protect Property
plan may need revision, and a client without an estate                           A trust is one of the most practical ways to prevent
plan must assess the need for one given laws regard-                           loss of real property and is often employed by one
ing intestate share, spousal forced share rights, guard-
                                                                                  67
                                                                                     Baskies, Jeffery A., "Family Law: Step Two in Any Divorce
  64 1d.
  65 id.                                                                       Proceeding: See an Estate Planning Attorney," 72 Fla. Bar. J. 80,
   66
                                                                               See, e.g., Johnson p. LaGrange State Bank, 383 N.E.2d 185, 192
      MRPC 1.7. First, the attorney must reasonably believe that               (Ill. 1978); Johnson v. Farmers & Merchants Bank, 379 S.E.2d
representing both clients would not adversely affect either client.            752, 756-757 (W.Va. 1989); In re Estate of Wechsler, 225 A.2d
In addition, both clients must consent after consultation.                     785, 786 (N.Y. App. Div. 1996).


                                                     Tax Management Real Estate Journal
                                     2009 Tax Management Inc., a subsidiary of The Bureau of National Affairs, Inc.                        209
                                                                 ISSN 8755-0628
   EIE
spouse o protect his or her property from spousal                               Premarital Agreement
claims.6 The trust can be created through premarital                                 If Betty and her fiancØ execute a premarital
agreement, while considering or in the process of a di-
vorce, or through a postmarital agreement. Although                                  agreement valid under the laws of Betty’s
trusts are quite common care must be taken to avoid                                  state of residence at the time of her marriage,
an unintentional taxable gift upon creation of the trust                             and the agreement addresses the treatment of
   Jack and Mary live in a state that excludes revo-                                 her separate property and the division of
cable trusts from spousal forced share. rights. Prior to                             marital property upon divorce, then the
marryMg. Mary, Jack. transferred assets to a trust un-                               trustee shall distribute $40,000 to Betty on or
der the. terms that he retained the rights to the trust in-                          before the date the wedding is solemnized.
come as. well as general power of appointment.
Through. a specific waiver, Mary waived her right to                              Incentive provisions must be used with thought and
Jack’s estate, to. the. extent she would receive trust as-
sets,, but is able to take her marital share from the re-                      skill, however, because they truly may represent "bad
mainder of Jack’s estate outside the trust. Because                            psychology." If they are viewed as trying to control
Jack did not transfer any property to Mary there are                           the child’s life choices, incentive provisions may be
no tax implications.                                                           more likely to produce rebellion than compliance
Trusts to Protect Younger Generations
                                                                                  Incentive provisions also can be risky because if
                                                                               crafted in a manner that is too restrictive or inequi-
   More and more couples are looking to prevent the                            table, they can be a source of litigation. Provisions
loss of their beneficiary’s property because of divorce.                       that encourage divorce or are otherwise contrary to
For example, if Jack and Mary create a testamentary                            public policy will be voided, and any trust restriction
or inter vivos trust for their children or descendants,                        touching on premarital agreements skirts close to the
these trusts can protect the trust assets against the ben-                     line. The trick in using such provisions is to get .the
eficiary’s spouse in divorce proceedings. 69 If Jack and                       message across to the beneficiary without creating
Mary’s beneficiary has no more than an expectation                             such inflexible rules that the beneficiary becomes bit-
that he will receive the trust corpus or income, then                          ter or frustrated.
he does not have the power to demand distribution of                              Another challenge with requiring a beneficiary to
the trust corpus or income. 70 Until trust corpus or in-                       have a premarital agreement is that the agreement has
come distribution is required, it remains trust property                       value only if the particular state of residency recog-
and is neither premarital nor marital property. 7 If a
beneficiary receives regular distributions, however,                           nizes the premarital agreement. 74 Fortunately, as indi-
some courts will consider that income for property                             cated above, a majority of the states recognize and au-
settlement and support purposes.                                               thorize premarital agreements . 75 The greater issue to
   To protect the premarital property of a trust, it may                       consider is whether the beneficiary will raise the ar-
be advisable to include provisions to prevent the dis-                         gument that he or she was forced to sign the premari-
tribution of property during divorce. 72 Specifying                            tal agreement under duress, (e.g., there was a threat to
state law for trust administration and distribution is an                      cease distributions if the agreement was not signed). 76
added layer of protection for real property. An attor-                            Finally, it may be useful to include a statement of
ney could include a clause from a more divorce-                                the grantor’s intent with the trust instrument. 77 Al-
friendly jurisdiction stating that "the property inter-                        though courts tend to frown on trust statementsthat
ests of the beneficiary shall be determined by the law                         mandate ’income from the trust shall be the benefi-
of the chosen forum." 73 Whether a divorce court will                          ciary’s separate property" because it is contrary to the
honor this clause is debatable, but it does not hurt to                        public policy argument that the former spouse should
include it. Careful contemplation of the governing                             be provided for, a grantor might get lucky and wind
law, the beneficiary’s rights, choice of trustee, and the                      up in a state that permits grantor intent to sway the
definition of "spouse" are important in drafting a trust                       general equitable powers of the court. 78
that will be effective in a divorce situation.                                    Although steps can be taken to protect real property
   In the past decade, incentive trusts have been a hot                        from divorce, problems still exist when the property
topic, and some grantors will use this type of trust to                        is left by gift, bequest, devise, or descent, which is
require their beneficiaries to have a premarital agree-                        why the creation of trust with very specific directions
ment in order to continue to receive distributions.                            is so important. If assets are left to a beneficiary out-
These trusts provisions are specifically targeted at en-                       right, the property received by the beneficiary will be
couraging or discouraging particular behaviors. For                            protected from a marital property division. Depending
example:                                                                       on the jurisdiction, however, a spouse may argue the
                                                                               income and appreciation from the assets is marital
  68
     O’Connell, note 38 above, at 26.
  69 Jamieson, Lisa H., "Marital Property Issues in the Modern                       Id. at 1357.
Estate Plan," 49 Baylor L. Rev. 391, 399 (1997).                                     Id.
   ’ Id.                                                                          76
                                                                                     Id. at 1356.
  71
       Id.                                                                        77 1d. at 1358.
  72
       Diehl, note 46 above, at 1355.                                             78
                                                                                     Id. at 1359.
  73   1d. at 1356.

                                                      Tax Management Real Estate Journal
210                                ' 2009 Tax Management Inc., a subsidiary of The Bureau of National Affairs, Inc.
                                                                   ISSN 8755-0628
                                                                                                                                ARTICLES

property." If Mary created a revocable trust that                              instead find evidence of actual ownership alo with
stated all assets were to be distributed to her children                       any encumbrances on the title 0 the property. A
in equal shares, each child would receive $100,000                             tionally, a vengeful spouse can use a pre-existing line
that would be considered the child’s separate property.                        of credit or ahome equity loan to obtain large
Tf the child purchased a home with.. $100,000 and                              amounts of money without the knowledge of the
the child’s spouse refurbished the house to resell it,                          ’then. 85 Take care to obtain written documentation
the appreciation in the value of the home might be                             from the mortgagors, lenders, and banks that the line
considered marital property because of the labor con-                          of credit has been closed. 86
tributii the spouse made to the appreciation of the                               Employing..strategies to cut off a vengeful spouse
home.                                                                          must be done with care in order to avoid antagonizing
                                                                                             tCesiding over
   Anotherproblem with leaving property outright is                            thejud
that
that separate ?roPerty is often commingled with man                   -
                                                                               erishin ge    spouse with the financial disadvantage.
   property. 8 So, if Mary’s child took the $100j1O()                          Asset transfers considered to he fraudulent convey-
tell tO herin a revocable trust and put it into a broker-                      ances will be set aside, SC) caution is i’equircd. 5 ’ Also,
 age account that contained money earned during the                            it may be strategic to demonstrate good will and the
marriage, the $100,000 is now commingled property
and ptentiaJly subject to division upon divorce. Al-                           desire to preserve assets for the parties and their chil-
                                                                               dren. One effective technique is to establish a separate
though cuiiuninglin property does not always result
in marital property. if there is no way to determine the                       trust to hold for safekeeping assets pulled from joint
nrn-mantal share, there is a statutory presumption                             accounts.
that all property acquired during marriage is marital. 1’
Additionally, if a spouse puts non-marital property in
the names of both spouses, the properly may he con-                            Conclusion
  erted into marital property. 83                                                 Regardless of whether or not planning was done
   To avoid any commingling of property or inadvert-                           while the divorce was pending, an estate plan review
ent conversion of separate property to marital, atlor-                         that incorporates an analysis of asset ownership and
neys should advise heir clients to think about trails-                         beneficiary designations is necessary once the divorce
furring property to family niembers in a discretionary                         decree i is final. Even seemingly minor last-minute
lifetime trust. If property is held in trust, then it can-                     changes to a settlement agreement may create a con-
not be thoughtlessly titled in joint name or com-                              flict with the estate plan, disrupting the intentions of
mingled with marital property (as lung as the spouse                           the testator and opening the door to estate litigation if
does not contribute his ov,-ii assets to the trust). the                       not resolved during the client’s lifetime.
                                            sidered
principal of the trust should not he considered ii ian tal                        Attorneys can do great service to their clients by
property I I I as tong as the beneficiary has no property                      advising them regarding divorce and the protection of
right in the principal of the trust, and (2) the trust con-                    real property no matter their marital status. Ignoring
tains a spendthrift clause. If the beneficiary has the                         the contingency of divorce, which is the result of ap-
right to withdraw assets from the trust, however, the                          proximately 50% of all marriages, leaves planning in-
corpus may he open to attack on divorce.                                       complete. Knowing the law regarding separate prop-
   One problem clients often face in divorce is the                            erty, premarital agreements, and postmarital agree-
vengeful spouse. A discussion w ith the matrimonial                            ments is crucial to effective planning and to
attorney regarding legal descriptions of property.
                                                                               representing the best interests of clients.
freezing lines of credit, and severing joint tenancies is
important. The careful attorney will not settle for the
legal description of a piece of real property, but will
                                                                                  84 Bennett, Margaret A., "The Real Estate Lawyer’s Divorce
                                                                               Primer (and the Divorce Lawyer’s Guide to Real Estate)," 86 III.
   79   Herman, note 55 above, at 229.                                         B..!. 488, 490 (1998).
   80                                                                             85
      Id.                                                                              Id.
   81                                                                             86
      Id.                                                                              Id.
   82
      Id.                                                                          Zolla, Marshall S., "An Interdisciplinary Approach to Mod-
                                                                                  87

   83
      Id.                                                                      em Family Law Practice," 23 L.A. Law. 19 (2000).




                                                    Tax Management Real Estate Journal
                                   ' 2009 Tax Management inc., a subsidiary of The Bureau of National Affairs, Inc.                        211
                                                                   ISSN 8755-0628

								
To top