By: Irwin Scherago ischerago@mlg.com

As the 21st century approaches, estate planning will have to embrace and accommodate the changing lifestyles in the United States. The 1980's and 1990's brought to full flower a variety of living styles which re not traditional, and these relationships - gay life partners and unmarried, heterosexual, live-togethers - are not provided for in the statutory inheritance laws of the State of New York and most other states in the United States. Thus, unmarried individuals who have lived together many years and wish to provide for their partner, or companion, must take a hard look at how the current inheritance laws work. The matrimonial genie came out of the bottle shortly after the end of World War II. Today, approximately 50% of all marriages terminate in divorce. We could pine for the good old days when marriage lasted for forty years, or more, unti lone spouse went "poof" to Valhalla Farms. Pining will do us no good. We must address and plan for the varied lifestyles of the years 2000 and following. This article will seek to highlight particular problems attendant to late-life marriages; first and second marriages of a propertied spouse to an impecunious spouse; unmarried live-togethers; and terminating marriages.

What Are The Special Problems Attendant to the New Lifestyles

The State laws of inheritance, estate tax and income tax, only recognize one kind of marriage: the marriage performed by a priest, a minister, a rabbi, or a judge. Several states recognize "common law" marriages - marriages that are not performed by the clergy or a judge, but which are based upon living together as husband and wife and holding each other out to one's friends and the public as such. Under New York law, there is no "Common Law" marriage. New York recognizes a "common law" marriage only if it was consummated in a sister State which does recognize such a marriage.

Unmarried Live-Togethers Have No Inheritance
Rights if There is an Intestacy

If an individual dies without a Will, he or she is said to have died "intestate." In an individual leaves a Will which is set aside in a Court proceeding contesting the validity of that Will, you also have an "intestacy." In an intestacy situation, the right to receive the decedent's property is determined by State law and in New York State, the individuals who take a decedent's property if there is no Will is determined pursuant to the New York Estates Power and Trusts Law ("EPTL") Section 4-1.1.

Who Takes If There is an Intestacy

If an individual dies without leaving a will, then the following individuals share in his or her intestate estate:

Nowhere on the above table do you see a line, or sliot, for a loving unmarried life's partner. If two individuals are not legally married, neither has a statutory right to share in the estate of the deceased partner.

Inheritance Rights if Decedent Left a Will

New York, and its sister States, protects the financial interests of a surviving spouse. A surviving spouse, under section 5-1.1A of New York's EPTL, has a right of election against the estate of the deceased spouse if the surviving spouse is not provided for according to the minimum amount determined by Statute.

In Money Mogul Martin Monroe seeks to cut out his wife, Mary (long suffering) Monroe, from his estate by leaving all his assets to the children of their marriage or to his newly acquired friend, Fifi Latour, then Mary can exercise her Spousal Right of Election.

Spousal Right of Election

New York State (EPTL 5-1.1A) and most of the other States protect the rights of a surviving spouse in the estate of a deceased spouse. The fundamental philosophy is two-fold: we do no want the surviving spouse to become ward of the State; and if a surviving spouse endured a marriage of any length then he or she should be entitled to recompense for the period of marital service which helped create the assets.

What is The Right of Election?

The right of election of a surviving spuose means that a survivng spouse has the tight to take a portion of the estate of a deceases spouse. In New York, the minimum sopuosal right of election against the assets passing by Will and by testamentary substitutes (joint property, in-trust-for accounts, revocable trusts, etc.- all transfers taking effect at death) is 1/3rd of the net estate.

Who Qualifies for Spousal Right of Election?

A surviving spouse (a person legally married to the decedent) may exercise his or her right of election if the decedent did not satisfy the spouse's minimum rights, either under the Will or by testamentary substitutes (joint accounts, in-trust-for accounts, revocable trusts, etc) passing to the surviving spouse.

Unmarried Life Companions Have No Spousal Right of Election Against the Estate of an Unmarried Partner Unless Marriage Consummated In "Common Law" State.

Since an unmarried life companion is not a legally recognized spouse, he or she has no right to a spousal election against a Will or testamentary substitute created by the deceased companion. However, judges in New York State will try to protect the interests of a surviving life's partner in the estate of a deceased life's partner. If a "common law" marriage was consummated in a sister State which recognizes "common Law" marriages then, if it is a valid marriage in the "common law" State (i.e. Pennsylvania, Georgia), it is a valid marriage in New York. In two separate cases where surviving life's partner sought to exercise a "spousal right of election" under EPTL 5-1.1 (the predecessor 5-1.1A), a Nassau County judge found a Georgia "common law" marriage valid for elective share purposes and a New York County judge found a Pennsylvania "common law" marriage valid and permitted the "surviving spouses" to elect against the Will of the deceased"spouse." In each case, the life's companions had lived together 15 and 18 years and each judge found, on the testimony of the surviving life's companion (and the guest register at a motel/hotel), that each couple had spent the night together and consummated the marriage in the "common law" State. The moral- If you wish to elect against a Will or testamentary substitute of a long standing life's partner, sign in and get in at the INN.

The Legitimate Surviving Spouse of the Deceased Gay Life Partner or Live Together Pal Has the Election Right

If a long-standing relationship was maintained between unmarried life's partners, one of whom is married to a third person and continues to be married to the third person during this extra-marital relationship, then the surviving spouse of the deceased has an absolute right of election to take against the Will, or any testamentary substitute, left by the deceased to his or her unmarried life's partner. If one of the life's companions who is still married to another person does not adequately provide, by Will or testamentary substitutes, for his or her legal husband or wife (and that is one-third of the deceased's assets) then the legal surviving spouse of the decedent will have the absolute right of election against the decedent's estate even though the decedent left his or her entire estate to the surviving life's companion.

Estate and Gift Taxation

It should not come as a surprise that transfers at death, and during life, between unmarried life companions do not qualify for the estate tax or gift tax unlimited marital deduction. Transfers between life companions are fully exposed to Federal Estate tax and Gift tax and State Gift tax and State Estate tax subject to the basic Federal Credit and State Credits against taxes, where allowed (the "unified credit" of $211,3000 for Federal and the New York State credit, presently $10,000). The estate tax and gift tax impact on unmarried life's companions is identical to the estate and gift tax impact on a surviving spouse (widows and widowers) and never marrieds (bachelors and spinsters).

Making Sure That the Estate Goes Where the Dying
Unmarried Life Companion Wants It To Go.

Given the problem of possible attacks against the Will of an unmarried life companion which, at the least, could result in a delay of probate with legal costs or even a cash settlement, life companions - gay life partners and unmarried heterosexual live togethers - should take steps to protect the interests of their unmarried live-togethers from possible attacks upon the testamentary (Will) and non-testamentary, provisions made by the first to die of the life companions for his or her unmarried live together.

1. Holding Title to Property in Joint Name

Property which is jointly held with rights of survivorship (JTWROS) will pass automatically by operation of law, without probate, to the surviving joint tenant (subject, of course, to a surviving spouse's right of election if one of the live togethers is still married to another person). Jointly held property is generally the anathema of estate tax attorneys and estate planners but this is not entirely so where we are involved with unmarried life companions. If an estate, or part of an estate, is passed by the method of joint ownership, then there is no need to probate a Will as the method of joint ownership, then there is no need to probate a Will as to the testamentary substitutes, and thus, no notice will be given to kin (mother, father, brother, sister, etc.) who could start an attack against a Will.

A) Problems With Jointly Held Property

(i) Joint Tenant Can Empty Account
During life, either joint tenant may clean out a bank account subject only to the other tenant's right to his or her moiety (a one-half interest in the joint bank account).

(ii) Two Joint Tenant's signatures Needed On All Other Property Transfers
If the property contributed to the joint tenancy is one individual's real estate or brokerage account, the contributor must understand that, in the future, the signature of both joint tenants will be required to transfer the asset during life. If all the contributing joint tenant wants to do is assure that the property passes without a battle at death, then the joint tenant contributing the property to the tenancy should take back a general power of attorney and stock powers (with signatures guaranteed) from the non-contributing joint tenant. Thus, if the non-contributing joint tenant ceases to be a companion, the contributing joint tenant can get back his or her property with little, or no, trouble.

(iii) Gift Tax

(a) The creation of a joint tenancy in real estate or brokerage accounts would result in an immediate taxable gift subject to the unified credits available at the time, unless an immediate power of attorney, as above described, is executed back to the joint tenant contributing the property to a joint tenancy from the non-contributing joint tenant.
(b) The withdrawal of monies from a joint bank account by the non-contributing joint tenant during the lifetime of the contributing joint tenant will be deemed a gift at the time of the withdrawal from the contributor to the withdrawer.

2. Bank Account (Totten) Trusts are the so-called "poor person" trust. A bank account is created in the name of the depositor who then names another to whom the account will be payable at the death of the depositor. Upon the death of the depositor, the beneficiary named on the account receives the amount in the account automatically by operation of law and no probate proceeding and attendant notice to relatives) intestate distributees) is necessary to transfer the assets. There is no gift tax on the creation of this account and the depositor (creator) can withdraw the funds at any time during his or her life without accountability to the beneficiary and this bank deposit trust can be revoked by a provision in the Will of the creator of the account naming the account, the bank and the account number.

3. Living Trusts Can Protect Significant Other

A living trust is a valuable estate planning tool when one wishes to control his or her own assets during life and wishes to avoid probate at death. This tool, the living trust, is especially useful in protecting the interests of unmarried live-togethers.

The living trust is particularly adaptable to unmarried companions who whish to avoid Will contests that very often arise when the unmarried life's companion is favored over the family of the decedent.

Assuming that neither of the life companions has an undivorced surviving spouse in existence, then there is no surviving spouse who can make an election to take assets from the living trust (which is the testamentary substitute). In addition, upon the death of the creator of the trust (the Grantor), the trust continues until debts, taxes and expenses are paid and final distributions made. The successor trustee to the Grantor/Trustee steps into the shoes of the Grantor/Trustee without petitioning any Probate of Surrogate's Court. To repeat, no notice has to be given to relatives who might cause trouble. No Will; No Probate; No Notice.

The trust, during the life of the Grantor, provides "income to the Grantor and so much of the principal as may be necessary for the Grantor's care, comfort, etc." Upon death of the Grantor, the remainder of the Trust goes to the Grantor's named beneficiaries, after expenses, debts and taxes.

It is very hard for a surviving blood family member to set aside a trust which has been in existence for several years, and has been functional for the benefit of the Grantor and which remains in force, unrevoked, at the Grantor's death. Even if an attack is made on the trust by a surviving family member, the trust still operates while the litigation moves along. Were there an attack on a Will, the attack could unduly delay the administration of the estate. Finally, the odds that an attack will be commenced against a trust becomes a little less likely when the intestate distributees do not need to be given notice of the Grantor's death because the successor trustee does not need a Court appointment to take over the administration of the trust as opposed to the necessity of the appointing a personal representative for a Will.

4. Life Insurance

Life insurance passes to a named beneficiary outright, including a trust it is was named as a beneficiary, immediately upon the death of the insured. There is no probate of a life insurance asset if the insured has named the beneficiaries. If the insured has not named a beneficiary, then the policy proceeds are payable to he insured's estate. Thus, by the effective use of life insurance, a life's companion can receive insurance proceeds directly upon proof of the death of the insured and without the proceeds going through probate.

Ownership of the Life Insurance Policy and Attendant Problems

If the life companion is the initial owner of the life insurance on the life of his ot her companion, there is a possible problem. Under New York State law, if life insurance is procured, directly or indirectly, on the life of another by one who does not have an insurable interest, then the executor or administrator of the estate of the deceased and not to the life companion (Insured Law Sec3205(b)(2) and (3)). If the insured takes out a policy on his or her own life and immediately transfers the ownership to the named beneficiary, it might be alleged that the owner-beneficiary procured the insurance indirectly on the life of another in which life he or she had no insurable interest.

The way around this is two-fold:

1) An insured can initially take out a policy of insurance on his life, retain ownership and name any beneficiary he or she wishes. After a year or two, the insured can transfer the ownership of the policy to the beneficiary companion.

2) The insured can create an irrevocable life insurance trust to be the owner of insurance on his or her life; name independent trustees, and name his to her unmarried life companion as the primary beneficiary of the trust and provide alternate beneficiaries if the unmarried life companion ceases to be a life's companion.

Estate Taxes

1. Jointly Held Property: Keep Detailed Records

Jointly held property is included in the estate of the first joint tenant to die unless the survivor can prove contribution to the joint asset. If two life companions actually contributed to the jointly held asset which either the State of Federal taxing authority is seeking to include in the gross estate of the first joint tenant to die, the surviving joint tenant will have to prove his or her contribution to the property - usually by "tracing" the property back to the source from there it was contributed. This is a virtual impossibility unless good records are kept.

As often happens, life companions simply build up bank or brokerage accounts and the accounts grow like topsy. The best way to handle this is to clearly delineate who made the contributions. Memoranda should be kept with the bank or brokerage account records. Keep all (not just six years) income tax returns filed by each life companion. When death occurs, the IRS or the State will want to look at the tax returns to see the allocation of the income in the returns and, most significantly, that both joint tenants had earned income of equal, or nearly equal, amounts which could support equal, or substantial, contributions to the joint account.

Because of this jointly held estate tax problem, if you are not good record keepers it is almost advisable to avoid joint tenancies in favor of two side by side, living trusts, one for each life's partner.

2. Life Insurance Should Be Owned By a Trust

Life Insurance should never be taxed un the estate of the insured if you do not want it to be. If the policy, subject to the caveats above, is owned by an unmarried partner on the life of the other, and if the partnership breaks up, the policy goes with the owner and not the insured. Thus, not only for the purpose of keeping the policy out of the taxable of the estate of the insured but for making sure the policy will remain in the control of the insured if the companions break up, it is advisable to have a trust own insurance on the life of an insured life companion. The trust could provide that the policy proceeds be paid to the life companion if he or she survives the insured and at the death of the insured, the life companion/beneficiary is "in full residence with the insured sharing housekeeping functions and finances" and if not, the proceeds may be made payable to alternate named beneficiaries.

Summary and Conclusion
Protecting Financial Interests of Life's Companions

We have all heard from friends, widows and widowers alike, that "Living alone is Hell." The joys of living with another person, sharing laughs, visiting a museum, traveling, and eating together (beating them at tennis and/or bridge) can be superific. This accounts for the proliferation of the "live-together" life styles that have been spawned in this last half-century. It is also obvious that each life companion has interests beyond fun and games - the financial interest - and if there is a caring relationship, then unmarried companions, living together have to take special care in planning their estates so that the surviving life companion will inherit what the two companions have agreed is the proper amount (portion), and the surviving companion will inherit with a minimum of estate taxes and disputations from survivors of the deceased life companion.

In estate planning for unmarried life companions, it is imperative that their work be done with a high degree fo speed (don't sacrifice accuracy!). The reason for the alacrity is that if either companion dies during the planning process, while the instruments are being drafted and redrafted, for all the reasons stated above, the surviving companion could be frozen our of the deceased companion's estate because he or she is not statutory inheritor under 4-1.1 and 5-1.1A of New York's EPTL.

Estate Planning For Second Marriages

Second marriages are more prevalent than at any previous time in American history and first marriages are terminating at the most rapid rate in our nation's history, by divorce and death. The remarriage of a once-married individual to either a once-married, or never before married, new spouse brings with it emotional strains, born of comparisons to, and expectancies from, first marriages. In addition, second marriages almost always have financial strains from obligations imposed from divorces and loves and loyalties to the new spouse and to the children of the prior marriage.

Estate and Asset Availability Problems in Second Marriages

1. Estate: Absent a specific agreement to the contrary (antenuptial, or pre-nuptial agreements), at the death of one spouse, the surviving spouse has a right of election against the assets passing under the Will of the deceased spouse to any persons ("testamentary substitute" see below) equal to the greater of $50,000, or one-third of the net estate of the deceased spouse (Estates Powers and Trust Law "EPTL" Section 5-1.1A.)

2. Pension: The normal mode of retirement benefit where a participant has been married for one year next proceeding the commencement of benefits, or before the participants death, is a joint and survivor annuity, or pre-retirement annuity, equal to one-half of the annuity the participant would receive if he or she were not married. This federal law - Retirement Equity Act(REA) - became effective August 1984. ( See "Spousal Consent..." below)

3. Duty To Support: A husband and a wife each owe the other the duty of support and they cannot contract away this duty of relieve the other of liability if this would result in the non-supported spouse becoming a public charge. This is provided in Section 5-311 of the New York General Obligations Law and it app lies to ante-nuptial agreements. To the extent that an ante (pre) nuptial agreement eliminates a duty to support, that provision will be unenforceable (HAAS vs. HASS 298 NY 69-1948; LEEDS vs. LEEDS 134 NYS 2nd 123-1954). Of course, this duty will usually be terminable in a divorce and the separation agreement or divorce decree will then set the support rights (Section 236 of domestic Relations Law). However, even in divorce a separation agreement cannot be written in such a manner that would provide no maintenance for a divorced spouse if at the time of the agreement it was likely that one of the spouses would become a public charge. (Propp vs. Propp 493 NYS2d 147; 1985) (See "Medicaid Reimbursement", below)

4. Medicaid Reimbursement To State: Obligation of Community Spouse. In the State of New York, the assets (resources) of one spouse are counted (considered) in the calculation as to whether or not a prospective recipient of Medicaid meets the asset qualification to obtain aid unless the spouses are separated and living apart for certain periods. If one spouse refuses to contribute towards the medical needs of the other spouse, then the county Social Services Department may bring an action to compel the estate of the other spouse is subject to a lien for reimbursement (Social Services Tax Section 101). The countries, since the Omnibus Budget Reconciliation Act fo 1993 ("OBRA ‘93") have become very aggressive in pursuing spousal contribution and thus it is mandatory, in second marriages, with one wealthy spouse and one not-so-wealthy spouse, that a long term care policy with all the bells and whistles be purchased. A "Cadillac" long term care policy should provide a minimum of six years with an annual adjustment for inflation. A "Tiffany" long term care policy for a 65 year old in good health could cost $4,750, annually. If you believe the policy is "too expensive" then do not even think of marriage.

Under all circumstances, the long term care policy covering the less wealthy spouse is a predicate, nay, the sine qua non, to the marriage. If the financially disadvantage spouse has to go to a nursing home, with a six year long term care policy in place, it is not likely that the nursing-home bound spouse will become a public charge (See PROPP vs.PROPP above, under "Duty To Support".) Were a divorce proceeding commenced the moment ti was determined that the poorer spouse (albeit covered with a solid long term care policy) was going into a nursing home, then a provision for very little or no maintenance in a divorce proceeding should stand up because, at the time of the divorce, there is little likelihood that the nursing home bound spouse will become a public charge.

Methods To Protect Estates and Assets

There are a number of steps that can be taken to preserve assets in a second marriage.

1. Antenuptial (pre Marital) Agreements:
The most frequent manner of preserving assets for children of the first marriage is through the execution of a pre marital agreement. The ante (not anti) nuptial agreement can often be distasteful and especially in a situation where the marriage is the first marriage for one of the spouses. The maiden, of bachelor, spouse to be is suddenly confronted with a written agreement (with a schedule of assets annexed) describing the financial foul lines, the maximum amount he or she will share in the estate of the once-married spouse. In marriages of younger persons, this form of agreement may be more distasteful than where both individuals have either been married before, or have reached an age of understanding that there are accommodations in life. The ante nuptial agreement will almost always provide for a surrender of each spouse's right of election (Spousal Right of Election, 1/3rd of estate and certain testamentary substitutes) and each spouse' right to intestate distributions. To the extent this si accomplished, (with variations in the theme such as specific gifts being agreed to by each contracting party) substantial amounts of assets can be protected for the children of one, or both, contracting parties.

Caveat: To be an enforceable agreement, each party should be represented by a separate attorney; each should pay his or her own attorney; and each should fully disclose assets with the schedules annexed being signed by each party. (To avoid grief, see the Matter of GREIFF discussed below.)

Observations: Notwithstanding an ante nuptial agreement, either party may, during lifetime, or at death by a Will, give more than the ante nuptial agreement provides.

2. Testamentary Substitutes Created Before Marriage:
"Testamentary Substitutes" are transfers of assets which take effect at death. The transferred assets pass outside of a Will. These substitutes are:

(a) Revocable Living Trusts
(b) Irrevocable Living Trusts
(c) Jointly held property
(d) In trust for bank accounts
(e) US Savings Bonds payable on death to a named beneficiary
(f) Pension death benefits payable to a named beneficiary (Subject to the Retirement Equity Act of 1984 -REA)
(g) Life insurance payable to a named beneficiary

If the testamentary substitutes (excluding irrevocable trusts) are created AFTER MARRIAGE, then the capital value of the testamentary substitutes listed immediately below will be added back to the testamentary (probate) estate for the purposes of calculating the surviving spouse's right of election:

Add Backs to Decedent's Estate For Spouse's Elective Share

Revocable Living Trusts
Jointly Held Property (To the extent it was decedent's contribution)
In-Trust-For Bank Accounts
Irrevocable Living Trusts, if decedent created the trust after marriage

Savings Bonds payable on death to a named beneficiary, pension death benefits (if beneficiaries were named before September 1, 1992 and not changed) and life insurance proceeds payable to named beneficiary CANNOT be elected against by a surviving spouse (except as to Pensions - see below "Spousal Consent to other Joint and Survivor Option")

If an Irrevocable Trust was created BEFORE marriage, then despite the fact that the decedent can receive income from the trust, the trust will not be subject to the spousal right of election (1/3 of the net estate).

OBSERVATION: If a discussion of marital agreements is distasteful to either, or both, spouses, and nothing but rancor will come of it, then the asseted spouse-to-be should consider the creation of a testamentary substitute before marriage and avoid the unpleasantness of discussing an ante nuptial agreement. There is a special problem, however, with a waiver of right of election against a qualified pension or profit sharing plan (See "Pre-nuptial Spousal Waiver" below).

CAVEAT: Once property that was placed into a testamentary substitute vehicle is withdrawn from a) a joint tenancy; b) an in-trust for bank account; c) an irrevocable trust, it becomes subject to the spousal right of election.

3. Qualified Terminable Interest Property Trust (Q0Tip) Or Credit Shelter Trust Cannot Prevent Spousal Right of Election.

Before September 1, 1994, if a spouse-to-be wished to forego an ante nuptial agreement and did not want to convey assets in such a manner that control is even partially lost in a revocable testamentary substitute, the Qualified Terminable Interest Property Trust ("QTIP") was a new spouse's right of election while giving the new spouse the right to the income from the assets in the trust. Since September 1, 1994, the spouse's right of election is a right to take "outright" and "free of trust" one-third of the deceased spouse's assets.

Historically, in New York State, the minimum right of election could have been partially defeated by a provision in a Will which created, for the surviving spouse, a trust of one-third of the decedent's assets (probate and non probate). The trust had to provide that the spouse received all of the income from the trust annually and no other person could share in the income of the principal of the trust and the surviving spouse did not have to receive any principal form the trust. This "elective share trust" could have been a QTIP trust qualifying for that marital deduction, or it could have been a credit shelter trust. The QTIP trust was most frequently used because it avoided estate taxation on the death of the first spouse.

Current Spousal Right of Election Not Satisfied By Elective Share Trust After September 1, 1994

The "elective Share Turst", pre-1994, was the best of all worlds for second marriages. The spouse with assets could provide substantial income in a trust for the benefit of the surviving spouse and when the surviving spouse died, the principal would go over to the decedent's Will. The New York State elective Share Trust also satisfied the Federal tax law as a QTIP trust qualifying for the unlimited marital deduction.

Under the new Section 5-1.1A of the EPTL, after August 31, 1994, the Spousal Elective Share cannot be satisfied be an "income only" trust. The surviving spouse has, as stated above, an absolute right to one-third of the capital value of testamentary substitutes (joint bank accounts, Totten trusts, etc. - see above for a full list).

Surviving Spouse Can Now Elect Against QTIP Trusts and Credit Shelter Trusts

Since September 1, 1994, is a deceased spouse leaves a QTIP trust and/or a credit shelter trust as the sole means of satisfying a surviving spouse's share in the estate of the decedent, the surviving spouse has the right to elect against the trusts created for his/her benefit and take one-third of the net estate of the decedent outright and free of the trust(s) created for the survivor's benefit under the Will of the decedent.

A Little Protection Against The Spousal Election

New York law did make this a true election. If the surviving spouse makes an election against the testamentary trust(s), the electing spouse will forfeit the balance of the trust provisions made for him or her unless the deceased spouse provided that there would be no forfeitures.

Example of the Election and the Forfeiture

"A" dies leaving an estate of $3,00,000: $650,000 in a credit shelter trust, income to the wife, remainder to kiddies; and $3,350,000 in a QTIP trust, all income to "my wife", remainder to the kiddies. The wife files a timely election to take one-third of the assets outright and free of trust.

If the wife did not elect, she could get the income from the $3,000,000 (or $150,000, more or less) annually, but with no right to direct where the $3,000,000 goes at her death. After the election, the wife gets the income on $1,000,000 (her $1,000,000 election) or $50,000. The wife has one-third of the income but now the surviving spouse can absolutely direct where the $1,000,000 elective share goes. This is a true election. If the surviving spouse wishes to control real assets - have his or her fingers on the plunger of the money bottle - then the right of election will be exercised. If the surviving spouse is content with the income flow and does not have a need for the principal, no election will be made.

4. Spousal Consent To Lump Sum or Single Life Annuity Can Be Avoided

The Retirement Equity Act of 1984 (REA) created a national or Federal right of election in all spouses in the pension benefits of plan participants. The normal mode of retirement benefit is now a joint and survivor annuity for the Employee Plan Participant and his or her spouse of one year preceding the benefit selection date. The right to choose a lump sum, installments, or a single life annuity starting date. To elect out of the joint and survivor annuity (or the pre-retirement annuity) the Plan Participant must elect out and the spouse of one year must consent out to the election out, in writing.

The requirement for the spousal consent can be handled in two ways:

1) There can be a condition in the anti nuptial agreement that the spouse of the Plan Participant will execute the necessary consents to the election out and will sign all necessary waiver documents presented to him or her during the election period.

a) Loss of benefits, if any, given to non-consenting spouse under the ante nuptial agreement;

b) The Plan Participant Spouse can disregard the ante nuptial agreement in making arrangements of his or her assets and can, probably, be permitted to elect against the non-consenting spouse's Will. (This may be small, or cold, comfort if the breaching spouse has very few assets.)

c) The Plan Participant Spouse can bring an action to recover the benefits lost to him or her.

2) Prior to marriage, the plan Participant Spouse can, if he or she is at retirement are, commence receiving benefits to an IRA, which does not have a joint and survivor annuity as its normal retirement benefit.

3) After marriage, if the spouse who was to execute the waiver as to plan rights refuses to do so, the spouse who has the plan can start immediate distributions without the consent of the non-waiving spouse provided the distributions are commenced before marriage is one year old.

Pre-nuptial, Spousal Waiver of Pension Rights in Ineffective

While many spousal rights of inheritance can be waived in a pre-nuptial agreement, the spousal pension rights are not among those that can be waived. The waiver of pension rights can only be waived by a spouse. A pre-nuptial agreement is executed before marriage and the waiver of pension rights in a contracting party in a pre-nuptial agreement will not prevent the surviving spouse from electing against the pension provisions of the deceased spouse.

Protecting the Pension

The simplest manner to protect the pension asset of one, or both, spouses for children of prior marriages is to "roll over" the pension, or profit-sharing balance, to an Individual Retirement Account and name your beneficiaries under the IRA. While a prospective spouse cannot waive his or her rights in a pension before marriage, he or she can waive eights to an IRA in a pre-nuptial agreement.

A second method of protecting a pension benefit against spousal election is to go into "pay status" - start drawing down pension. The spouse's consent to elect out of a joint and survivor annuity or pre-retirement annuity only applies to a spouse of one year preceding the benefit selection date (or date of death). If a plan participant starts to draw down his or her retirement benefit prior to marriage (or within one year of the marriage) to the second spouse , then no spousal waiver is required by REA of 1984 and, thus, a waiver against all assets and testamentary dispositions in a pre-nuptial agreements will be waived to elect against retirement benefits which had commenced before marriage.

Life Insurance

As many who have read my past articles know, I am a great believer in life insurance. It is my belief that there is no financial problem - from corporate and business buyouts to marital agreements - that are not solvable with and soluble in, insurance dollars.

Life insurance has the patina of being a testamentary substitute. The insurance proceeds are received because of death of an insured and the insurance proceeds almost always pass outside the probate estate. However, New York's Spousal Right of Election Law (EPTL 5-1.1A) does not include life insurance as a testamentary substitute against which a surviving spouse may exercise his or her right of election to take one-third of the new estate of a deceased person.

Life Insurance, a Janus Faced Tool in Second Marriages

Life insurance can be a valuable financial tool in second marriages. It is Janus faced because it can be used both offensively and defensively (as a sword or a shield).

Offensive Use. In many pre-nuptial discussions, we have found that the purchase of a substantial amount of life insurance naming he less financially endowed spouse as the irrevocable beneficiary as a method to smooth the pre-nuptial agreement negotiations.

Defensive Use. Assume the pre-nuptial agreement results in the asseted spouse having to provide a significant amount of assets for the new spouse. The assets may be set aside permanently for the new spouse and therefore lost for the children of the asseted spouse's first marriage, or the assets may be placed in a trust for the second spouse deferring the time when the children of the asseted spouse's first marriage can enjoy the assets. Once again, life insurance for the children of the fist marriage can replace the assets lost, or deferred, tothe spouse of the second marriage.

Second To Die Insurance

In substantial estates where the monied spouse is going to provide a QTIP trust for the benefit of the less asseted spouse, upon the death of the QTIP trust beneficiary, the assets will be subject to estate taxation in his or her estate (unless a special provision is set forth in the QTIP trust providing for the tax to be paid from the QTIP trust assets.) In either case, estate tax will be due on the death of the second spouse to die and "survivorship" or "second to die" life insurance should be on the financial discussion table at the time the agreements are negotiated.

The Pre-Nuptial Agreement

The pre-nuptial agreement (often referred to as the ante-nuptial agreement and some feel isthe anti-nuptial agreement) is the most vital document to be executed between a prospective bride and groom who wish to preserve his or her assets in the event of a divorce or in the event of death. Pre-nuptial Agreement Requires Full Disclosure and Separate Representation. A pre-nuptial agreement is a waiver of rights that one party has in the assets of another. To be valid, a pre-nuptial agreement must have full disclosure of each party's assets (most practitioners use separate schedules for each party's assets). Without a full disclosure, one cannot have a true waiver. To waive a right one must know what rights one is waiving. Each party should sign both schedules.

Separate Legal Representation Means Really Separate
If One Does Not Wish to Come to Grief

In the Matter of Herman Greiff, deceased, the New York Court of Appeals remanded the case back to the Appellate division ordering the Appellate Court to examine whether the nature of "the relationship of the couple at the time they executed their pre-nuptial agreement shifted the burden of proving freedom from fraud, deception and undue influence to the proponents of the pre-nuptial agreement."

Normally, the burden of proving fraud, deception and/or undue influence falls upon the party attacking the validity of a pre-nuptial agreement. In Greiff, Herman Greiff, age 77 and Helen Greiff, age 65, entered into reciprocal (two separate) pre-nuptial agreements and each waived his/her right of election in each other's estate. [The spousal right of election under 5-5.1A of the New York State Estates, Powers and Trusts Law provides, in essence, that a surviving spouse, absent a valid pre-nuptial agreement, will have the right to a minimum share of a deceased spouse's estate equal to Fifty Thousand ($50,000) Dollars plus one-third of the capital value of assets passing under Will plus certain testamentary substitutes - of this, more later.]

Separate Counsel

All estate and financial planners, accountants and attorneys know that separate legal representation is a sine qua for upholding the ultimate validity of a pre-nuptial agreement.

Where did Greiff come to grief? Herman, the husband, took Helen, the wife, to Herman's attorney's office. Herman's attorney turned Mrs. Greiff over to another attorney in his suite (an attorney with whom Herman's attorney had very little contact). The designated attorney readthe agreement to Helen and explained that she was signing an agreement to "protect Herman's children from her children." Helen also signed a letter stating that the attorney designated by Herman's attorney was chosen by Helen, herself. That was not true, not, it appears, did Helen receive a fulsome explanation of what the waiver meant. Finally, it appears that supplementing all this legal obfuscation, Herman was in the wings misleading Helen as to what she signed and assuring her that he was a man of wealth and he would take care of her.

The Lessons of Greiff

1. There must be separate, unrelated, counsel operating our of different offices for each contracting party.

2. Counsel for the asseted (monied) spouse must not recommend counsel for the less affluent spouse. Each spouse must chose his or her own counsel: no recommendations, please!

3. Pre-nuptial agreements should not be discussed and/or executed on the "eve" of marriage.

Fairness dictates that each prospective spouse have adequate time to review the pre-nuptial agreement with his or her separate counsel not under the certified time frame of marriage impending in a week, two weeks, nay not even a month. (The Greiff time period was a few short weeks)

In May 1998 two asseted clients came to the office for pre-nuptial agreements for marriages to take place in October, 1998 and November, 1998 - five and six months away. Not only does it give the less asseted (more financially disadvantaged) prospective spouse adequate time to review the document but it does not cast a pall over a wedding that is but a few weeks away., which at some time in the future, we may hear a court opine that this shortness of review time is manifestly unfair and thus the Court must void the pre-nuptial agreement. Believe me, this will happen soon.

Things To Watch On Terminating Marriages

If a marriage is on the way to terminating and a divorce has been decided upon, or is likely, and one wishes one's children (or others) and not one's soon to be ex-spouse to be the beneficiary of one's assets, then:

1. Run, do not walk to two separate attorneys
2. Bring your asset lists to your respective attorneys
3. Negotiate and sign a separation agreement as soon as possible
4. Insurance policy proceeds are payable to the named beneficiary. If the policy beneficiary named as "Mary Monroe," my wife, or "Marty Monroe," my husband, and there is a death before a separation agreement has been executed, which agreement specifically relinquishes spousal rights in an insurance policy, the proceeds will be payable to the soon-to-br-ex-wife, or ex-husband. If the separation agreement is silent as to any existing insurance policies, and there is a death, even after a divorce, the former wife or husband will get the insurance proceeds.

Remember, if the beneficiary is changed, life insurance is not a testamentary substitute which can be elected against.

5. Jointly Held Property must be severed. In the Estate of John Kubic, the parties had a written stipulation of settlement and one spouse died. It was held that the jointly owned property passed to the surviving, undivorced, spouse. The reasoning:

a) The parties were not divorced; and
b) The parties did not have a written separation agreement dividing assets and surrendering rights.
c) The jointly owned property was not severed.
d) Remember, either joint tenant can clean out a bank account, subject to the other joint tenant's moiety - the right to get back to one-half. This writer's recommendation is to "split" the account into two separate names as soon as it is ascertained that the marriage is coming to an end.

Summary and Conclusion

Marriages can be beautiful. This writer had one that lasted 37 years before my wife went "poof to Valhalla Farms" and I am about to embark upon another 37 year marriage. I only do things in 37 years time blocks. Notwithstanding, this writer's good fortune , anecdotally (and some of us experientially) we know that fifty percent of all marriages end in divorce. In addition, there are many warm loving relationships that are not consummated with a legal marriage. Marriage does not make a family. Two unmarried "life's-companions" or "live-togethers" can have a warm loving relationship, while married couples can live hundreds, sometimes thousands, of miles apart, across a State or Nation, or they can live apart in a shoe box apartment. It is therefore necessary to protect one's own vital financial interests in estate planning for second marriages, terminating marriages and unmarried living situations. Planning is necessary to make sure that interest of children of first marriages are protected and the interest of a life's companion or partner are protected. Hopefully, the forgoing article will aid you in that direction.