Posts Tagged ‘married couple’

Marital Agreements and Death of One Spouse

OCTOBER 17, 2011 VOLUME 18 NUMBER 36
John and Marsha, contemplating marriage, want to enter into an agreement spelling out what will happen to their separate and community property if they later divorce, or when one of them dies. Or perhaps John and Marsha have been married for years, but are contemplating separation and maybe divorce — perhaps they want to divide their property interests now, just in case. Or maybe John and Marsha are perfectly happy in their marriage, but they both want to make sure that after one dies the survivor won’t change the ultimate recipients of their combined estate. Can John and Marsha agree to change the nature of their respective property rights and interests?

Yes, of course, they can. Most people are familiar with the concept of a premarital agreement (sometimes called a prenuptial agreement). Less familiar, but still fairly common, is the postnuptial agreement, entered into between spouses even after they have married. Even less common are contracts not to make a new will — John and Marsha can enter into an agreement that neither will change their will without both agreeing, and thereby try to prevent changes after one of them dies.

It is important to note that each of those types of agreements must be prepared in conformance with state law — and the requirements are different for each type of agreement and in each state. That can make it very confusing to figure out how to make an effective agreement. Depending on family circumstances, relative wealth of the spouses and other factors, it might well be worth exploring an agreement. One important rule that governs at least prenuptial and postnuptial agreements: the spouses should each have separate legal counsel (that is, each should have their own lawyer).

So what happens if a couple has signed an agreement and one spouse dies? Assuming the agreement is valid and enforceable, the deceased spouse’s heirs or estate should be able to get appropriate orders effecting the terms of the agreement. What happens if the couple’s situation changes? In most cases, nothing prevents them from changing the terms of their agreement.

Here’s a common scenario: John and Marsha sign an agreement about how they will treat their property (in this case it is not going to matter whether they sign before or after their marriage). The agreement provides that neither is entitled to receive anything from the other’s estate.

After the agreement is signed, John decides to leave a substantial sum of money (or a life insurance policy, or an IRA — it doesn’t matter which kind of asset) to Marsha anyway, and he changes his will, or makes her beneficiary. If John dies, can his other heirs — the children of his first marriage, perhaps — set aside the bequest to Marsha?

Assuming the documents are properly signed, and John was competent and not subjected to undue influence, the agreement probably will not prevent Marsha from inheriting. The agreement probably did not say any will provision or beneficiary designation would be invalid — it more likely just provided that John did not have to do anything to benefit Marsha, but probably does not prevent him from leaving her anything.

That’s not the situation in a recent Florida case, however. Jeffery and Andrea Steffens’ postnuptial agreement gives some insight into how tricky it can sometimes be to figure out what the agreement means.

In 2002 Jeffrey Steffens signed his will. He left most of his estate to his wife Andrea. Five years later, though, the marriage was shaky and Jeffrey and Andrea were considering separation or even divorce. They signed their postnuptial agreement in 2007, providing that each waived any right to receive any property from the other’s estate. Two years later, when Jeffrey died, the couple was still married.

Andrea filed Jeffrey’s 2002 will and asked the probate court to appoint her as personal representative. Jeffrey’s first wife, acting on behalf of his (and her) minor children, objected, and argued that Andrea had waived the right to receive under Jeffrey’s 2002 will.

The postnuptial agreement expressly authorized either spouse to leave the other more than money by will or beneficiary designation, but it also had each spouse waiving any right to claim property from the other’s estate. Since the will had been signed before the postnuptial agreement, and since Jeffrey did not sign a new will leaving anything to Andrea after signing the agreement, the probate court agreed with Jeffrey’s first wife.

The Florida Court of  Appeals upheld the probate court ruling. Consequently, Andrea received nothing from Jeffrey’s estate, and instead it went to the children of his first marriage. Steffens v. Evans, October 5, 2011.

Was that what Jeffrey Steffens wanted, or would have wanted? It may not be clear. Andrea sought court permission to produce evidence about what Jeffrey actually intended, but the probate judge (and the appellate court) denied her the opportunity, ruling that the agreement was unambiguous.

Assume for a moment that Jeffrey was hopeful about his relationship with Andrea, and wanted his 2002 will to be effective. What might he have done? One easy step would have been to simply “republish” his will — perhaps by signing a new copy of the exact same document, or even by signing a statement that he intended the will to remain effective. It would have been important that he have two witnesses sign at the same time. Just telling Andrea — or even a third person (even, for that matter, his first wife) — what he wanted would not have been sufficient.

Arizona Community Property Is Not Always Subject To Probate

OCTOBER 9, 2000 VOLUME 8, NUMBER 15

Arizona is one of nine “community property” states in the country, and that can be the source of some confusion about estate planning, taxes and property ownership rights for married couples. Recent changes in Arizona’s law make the “community property” designation a little more friendly and understandable, and the benefits to this unique property ownership choice are now clearer.

“Community property” concepts were not part of the English common law. Under the system imported to most of the American states, property was owned by one spouse or the other, though the non-owner might acquire some rights in his or her spouse’s property. The French and Spanish, however, understood the marital community to be a separate entity from either spouse individually, and permitted the “community” to own property. Each spouse then holds an equal interest in the community’s property.

Those American states with rich Spanish or French histories tended to adopt some version of the community property concept. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are community property states, although the method of implementing the concept varies somewhat. Alaska also permits some trust assets to be held as community property.

In community property states a married couple is presumed to hold assets as community property regardless of the actual title on the asset. Couples may, however, choose to hold their property in joint tenancy or as tenants in common if they wish.

One important advantage to having assets titled as community property comes, oddly enough, from federal tax law. Although capital gains taxes are ordinarily due any time an appreciated asset is sold, the increased value of property held by a decedent at the time of death is not taxed. The property’s income tax “basis” is said to “step up” to its value on the date of the owner’s death, often resulting in substantial income tax savings for heirs.

Jointly owned property only receives a partial “step up” in basis. Property held in joint tenancy will usually only get half the income tax benefit on the death of one joint owner. Community property, however, is treated differently: the entire value of a community property asset gets “stepped up” to the value on the first spouse’s death, resulting in twice the income tax savings.

The main drawback to holding community property in Arizona has long been the requirement of a probate proceeding to pass the property to the surviving spouse. Although the long-term tax savings can be substantial, the probate costs are immediate and, in most people’s minds, too high. Since 1995 Arizona has permitted married couples the best of both worlds: property can be held as “community property with right of survivorship” and secure the favorable income tax treatment while still avoiding the probate process. The value of this type of property ownership is, of course, restricted to married couples.

One caveat: some commentators, relying on fairly arcane interpretations of the federal tax law, argue that the “community property with right of survivorship” designation could conceivably be found to result in no step up in tax basis at all. So far the federal government has not taken such a position, but there remains some slight possibility of a problem. In addition, the effect of titling separate property as community property (with or without the “right of survivorship” language) has more than just tax effects. In other words, you should consult an Arizona attorney before changing title on your existing assets or deciding how to title a new acquisition.

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