When drafting and executing prenuptial agreements, the parties are generally concerned about protecting their assets and delineating their rights upon divorce. In addition to provisions in the event of divorce, however, careful attention also must be paid to the disposition of one's assets upon death. The provisions in the event of death may be particularly important where the assets to be protected were received from one's family or are comprised of a family business. Depending upon the circumstances, the death provisions of a prenuptial agreement may be used to negotiate more favorable divorce provisions for your client. Whether or not used in negotiation, any death provisions included in a prenuptial agreement require an understanding of complex federal tax issues, knowledge of state property law, and thoughtful drafting.

Waivers Applicable At Death

While the details vary from state to state, the law is generally protective of the surviving spouse of a decedent. Through the spouse's elective share, a surviving spouse is granted a certain amount (which, depending on the state, differs dramatically), either outright or via a life estate, of his or her deceased spouse's assets. In addition, some states still grant a surviving spouse dower, or a life estate in the decedent's real estate, which in some cases can be the estate's most valuable asset. The spouse's elective share, dower and the many other benefits and rights granted by law to widows and widowers should be addressed by way of waivers and other provisions in any prenuptial agreement. In the absence of such provisions, a party's well-thought-out estate plan can be nullified and the protections gained by signing a prenuptial agreement can disappear upon the death of one of the parties.

Prenuptial agreements govern how much money or property each spouse receives at the termination of the marriage. The goal of most prenuptial agreements is to preserve all or a portion of each spouse's assets as separate property and to set forth the division of marital property. Given the goal of a prenuptial agreement, the agreement should include appropriate provisions even when the marriage terminates as a result of death. To achieve that goal, it is recommended that both parties waive all rights, except as expressly set forth in the prenuptial agreement to the contrary, with respect to the surviving spouse's separate property. Each spouse should waive all of his or her claims of dower, courtesy, the elective or forced share, homestead rights, widow's or widower's allowance, his or her share of the estate's community property, and the rights of a surviving spouse to take under the state's intestacy statute.

In addition to the more obvious waivers, the attorney should consider including a waiver of the right to challenge the other's will, codicil and other estate planning documents, as may be appropriate by state law. It also is advisable for each spouse to waive his or her right to serve as executor, administrator, guardian or conservator for the other, unless specifically named or nominated by the other in writing. Due consideration also should be given with respect to waiving one's rights to the deceased spouse's body, particularly in the instance of a second marriage where there are children of the first marriage.

While it is generally advisable to waive all of the surviving spouse's rights, it is exceedingly important to draft such waivers appropriately so that spousal benefits, which do not reduce the decedent's assets passing to issue, such as wrongful death suits and claims for social security benefits, are not inadvertently waived. Appropriately tailoring such waivers would permit an increase in amounts passing to the surviving spouse as long as there was no corresponding decrease in the assets in the decedent's estate or in assets passing to the decedent's other heirs. It is also necessary to include a clause that a spouse's rights are waived, except as necessary to enforce the terms of the prenuptial agreement. In addition, each party should agree to execute all instruments, including disclaimers, as necessary or desirable to cause the decedent's estate to devolve as if there had been no marriage.

If the intent of the prenuptial agreement is to protect all of a person's assets completely, the prenuptial agreements also should provide for the waiver of the surviving spouse's interest in any retirement plan benefits of the deceased spouse. With respect to nonqualified plans, a waiver set forth in the agreement should be sufficient. A prenuptial agreement that includes a spousal waiver of a qualified plan benefit, however, is not sufficient. The IRS insists that for a spousal waiver of a qualified plan benefit to be valid under the Employee Retirement Income Security Act of 1974 (ERISA), it must be executed by a spouse, and execution by a "spouse-to-be" is not sufficient for such purpose. Accordingly, it is recommended that the prenuptial agreement state the parties' intention and agreement to sign separate spousal waivers after the wedding. Further, a good practitioner should insure that such waivers are actually executed after the marriage. A properly executed spousal waiver should preserve the retirement plan benefit as individual property even if one of the spouses dies during the marriage.

When drafting the various spousal waivers applicable at death, it is important to keep in mind that your client may wish ultimately to provide greater benefits to the surviving spouse than are set forth in the prenuptial agreement. In the event that a long-term marriage terminates because of death, more generous death provisions are common and justified. The prenuptial agreement, however, exists to protect against the unintended disposition of assets in the event of death after the marriage has broken down but prior to a legal divorce, or in the event of death after a short-term marriage where the decedent had prior obligations to children and a former spouse or wishes to have other family members benefit from a larger portion. To ensure that your client will not be unduly constrained by the prenuptial agreement in the future, you should include a provision which states that, despite the provisions of the prenuptial agreement, either party may provide more to the other in his or her estate plan than is provided for under the agreement.

Spousal Benefits Applicable At Death

As with the divorce provisions of a prenuptial agreement, the death benefits awarded to a surviving spouse may vary depending on the number of years of marriage between the parties. Regardless of how much property is actually left to the survivor, each spouse first must consider whether to leave the property outright, in a marital deduction trust, or any combination thereof. The estate tax marital deduction permits one spouse to leave the other any amount of property free of estate tax. However, any property remaining at the surviving spouse's death, will be subject to state and federal estate taxes.

Under Section 2056 of the Internal Revenue Code, there are several ways for a trust to qualify for the estate tax marital deduction. When a spouse has children from a prior marriage, it is often appropriate for the spouse's death benefit to be held in a qualified terminable interest property trust (QTIP trust). QTIP trusts are desirable because they allow one spouse to leave the other a lifetime income interest, but preserve the trust property for his or her children at the death of the surviving spouse. (Although not generally addressed in prenuptial agreements, there are several other ways, including the purchase of life insurance, to benefit a spouse's prior children and preserve their inheritance.) A trust instrument will generally provide that at the death of the surviving spouse, the remaining assets of the QTIP trust will be paid to, or held for the benefit of, the children, issue or other family members of the decedent. The provisions of QTIP trusts are dictated by the Internal Revenue Code at section 2056(b)(7) and the provisions of this code section should be cited and incorporated into the prenuptial agreement. A QTIP trust must provide that income be distributed at least annually to the surviving spouse. Further, no person other than the surviving spouse may appoint the property to any person other than the surviving spouse. The executor of the decedent spouse's estate must make a QTIP election on the decedent spouse's estate tax return to qualify the property for the marital deduction. If the trust fails to comply with section 2056(b)(7), the trust will not receive the marital deduction and the deceased spouse's estate will incur a potentially significant unintended estate tax.

As indicated above, QTIP trusts are defined by statute and not by a client's wishes. For instance, a party to a prenuptial agreement may want the surviving spouse's interest to terminate upon his or her remarriage. Although not an unreasonable desire, drafting such a provision as part of the QTIP trust will disqualify it for the marital deduction. Similarly, a client may want income and principal distributions to be made to the surviving spouse only in the discretion of an independent trustee chosen by that client. Again, regardless of who is serving as trustee, the QTIP trust will only qualify if the trust provides for mandatory income paid at least annually to the surviving spouse.

Although an outright gift of a specified amount to a surviving spouse easily qualifies for the marital deduction, it raises other issues that may not be so clear. While your client may wish simply to leave his or her spouse a portion of his or her "estate," carrying out your client's intention may require more sophisticated drafting. The term "estate" must be clearly defined in the prenuptial agreement. Will the spouse receive a portion of the decedent's gross estate before taxes are calculated or the net estate after taxes? Will the surviving spouse's portion be computed by using the asset values as reported on the estate tax return or will other valuations be used? If the assets appreciated or depreciated between the date of valuation and the date of distribution, who will bear the gain or loss? When will the gift be paid? May the gift be paid in kind or must it be paid in cash? May other assets not included in your client's estate, eg, life insurance proceeds from an irrevocable insurance trust, be used to satisfy such bequest? The answers to these and many other questions must be considered, agreed upon and clearly set forth in the prenuptial agreement.

If the spousal death benefit does not qualify for the marital deduction, the prenuptial agreement should address who bears the estate tax burden and how such taxes should be calculated. The agreement also should address the payment of estate taxes at the death of the surviving spouse. Whether such taxes are paid marginally or proportionately could have a significant impact on the value of the assets ultimately passing to the decedent's descendants. Careful drafting may avoid costly and time consuming litigation between the decedent's second spouse and the children of the first spouse.

Conclusion

Drafting the death provisions of a prenuptial agreement deserve and require the same attention that is generally granted to the divorce provisions. As a family lawyer, it may be helpful to consult with an estate-planning attorney regarding the tax implications of any trusts or gifts provided for in a prenuptial agreement. In any event, your client should be well advised of any rights his or her spouse will acquire in the event of your client's death merely as a result of the marriage so that the issue of waiver may be intelligently discussed and considered. Prenuptial agreements are primarily designed to protect a spouse's assets upon the termination of the marriage. Ignoring or failing to deal appropriately with the termination of the marriage at death, however, will expose a party's separate assets (such as a family business) to the claims of the surviving spouse and leave children and/or a spouse from a prior marriage unprotected.