Premarital Agreements as a Tool to Protect Family Wealth by Jessica L. Broderick Sherman & Howard L.L.C. 633 17th Street, Suite 3000 Denver, CO 80202 jbroderick@shermanhoward.com Tel. 303-299-8446 April 21, 2017

Why a Premarital Agreement? Protects family business or other family wealth from disruption and depletion in event of divorce or death. Allows family wealth to pass to descendants from prior marriage at death. Provides certainty and protection to less wealthy spouse. Avoids protracted disputes at divorce or death.

Uniform Premarital and Marital Agreements Act C.R.S. § 14-2-301 et seq. In effect in Colorado since 2014. Applies to “premarital agreements” (agreement or amendment signed before marriage or civil union) and “marital agreements” (agreement or amendment signed after marriage or civil union). Does not apply to separation or cohabitation agreements. Allows prospective spouses or current spouses to affirm, modify, or waive marital rights or obligations.

Uniform Premarital and Marital Agreements Act – Formation Must be in a record (tangible or electronic) and signed by both parties. Consideration not required. Effective upon marriage (premarital agreement) or on signing by both parties (marital agreement). (C.R.S. §§ 14-2-306 & 14-2-307)

Uniform Premarital and Marital Agreements Act – Terms Marital rights or obligations that may be addressed in agreement: Maintenance. Right to property, including characterization, management, and ownership, during marriage. Responsibility for liabilities during marriage. Right to property and responsibility for liabilities at legal separation, marital dissolution, or death. Allocation of attorney’s fees and costs. (C.R.S. § 14-2-302(4))

Uniform Premarital and Marital Agreements Act – Terms Unenforceable terms in agreement: Adversely affecting child’s right to support. Restricting remedies available to victim of domestic violence. Modifying grounds for legal separation or marital dissolution. Penalizing party for initiating legal proceeding for legal separation or marital dissolution. Violating public policy. Defining rights or duties regarding custodial responsibility. (C.R.S. § 14-2-310)

Uniform Premarital and Marital Agreements Act – Enforcement Agreement itself is unenforceable if: Party’s consent was involuntary or result of duress. Party did not have access to independent legal representation. If party did not have independent legal representation, notice of waiver of rights or plain language explanation of rights and obligations being modified was not provided. Party did not receive adequate financial disclosure. Agreement not in a record and signed by both parties. (C.R.S. § 14-2-309)

Uniform Premarital and Marital Agreements Act – Enforcement Statutory notice of waiver of rights (premarital agreement): If you sign this agreement, you may be: Giving up your right to be supported by the person you are marrying. Giving up your right to ownership or control of money and property. Agreeing to pay bills and debts of the person you are marrying. Giving up your right to money and property if your marriage ends or the person to whom you are married dies. Giving up your right to have your legal fees paid. (C.R.S. § 14-2-309(3))

Uniform Premarital and Marital Agreements Act – Enforcement Access to independent legal representation: Party has reasonable time before signing to decide whether to retain a lawyer and then to locate a lawyer, obtain lawyer’s advice, and consider advice provided; and Party has financial ability to retain a lawyer or other party agrees to pay reasonable fees and expenses of independent legal representation. (C.R.S. § 14-2-309(2)) Practice pointers for negotiating agreement: Better for both parties to have legal representation. Wealthier spouse (or his or her family) should offer to pay fees of other party.

Uniform Premarital and Marital Agreements Act – Enforcement Adequate financial disclosure: Reasonably accurate description and good-faith estimate of value of property, liabilities, and income of other party; or Has adequate knowledge or reasonable basis for having adequate knowledge of information described above. (C.R.S. § 14-2-309(4)) Practice pointers for negotiating agreement: Consider including financial statement even if other party has adequate knowledge of finances. Disclose irrevocable trusts created by third parties of which a party to the agreement is a beneficiary. Mention potential of substantial inheritance.

Uniform Premarital and Marital Agreements Act – Enforcement Wild card – maintenance and attorney fee provisions These may be unenforceable to the extent they are unconscionable at the time of enforcement. Unconscionability decided by court as matter of law. (C.R.S. § 14-2-309(5)) Practice pointers for negotiating agreement: Inform client that these provisions may be unenforceable. Tie to property settlement in agreement?

Typical Client Profiles First marriage. Husband expects to inherit substantial assets from parents. Husband already is a beneficiary of several irrevocable trusts, although he has minimal assets in his own name. First marriage. Wife’s family has a successful family business. Wife works full-time in the business and may take over someday. First marriage. Wife is entrepreneur and owns successful business. Second marriage. Both spouses will retire soon. Husband has greater assets that he wants to pass on to his children.

Typical Client Profile #1: Beneficiary of Family Wealth With first marriages, young couples typically don’t want a “what’s mine is mine” agreement. Minimally-invasive agreement. “What’s mine is ours, with a few exceptions.” Expand Colorado definition of separate property to include income from and appreciation of separate property (including family property) during marriage. Broad definition of “family property”: include trusts, distributions from trusts, closely-held businesses, other gifted or inherited assets. Prevent application of Balanson II line of cases Everything else is marital property. Consider whether to include death provisions. Maintenance waivers?

Typical Client Profile #1: Beneficiary of Family Wealth Example of “Family Property” Definition “Smith Family Property” means all property Sam now owns or may hereafter acquire (a) by gift, devise, or inheritance from a member of the Smith Family, (b) as a result of a beneficial interest in any trust created by a member of the Smith Family, (c) as a result of the death of any member of the Smith Family, or (d) as a result of the exercise of any power of appointment by any member of the Smith Family. For this purpose, Smith Family Property shall include any Property held at any time in a trust created by a member of the Smith Family in which Sam has any beneficial interest, vested or contingent (including, but not limited to, the trusts listed on the attachment to Exhibit A), or Property at any time received by Sam as a distribution from any such trust, for any reason, whether or not such trust is now in existence or created after the effective date of this agreement. Smith Family Property shall also include any ownership interest in any corporation, limited liability company, partnership, or other entity that is majority owned or controlled, directly or indirectly, by members of the Smith Family. For purposes of this agreement, the “Smith Family” means all of the ancestors of Smith and all of the descendants of any such ancestor, excluding Sam himself.

Typical Client Profile #1: Beneficiary of Family Wealth Prevent application of In re Marriage of Balanson, 25 P.3d 28 (Colo. 2001) (Balanson II) and subsequent cases. In Balanson II, the Colorado Supreme Court held that a spouse’s remainder interest in a trust (subject to depletion during her father’s lifetime and divestment if she predeceased him) was a property interest for purposes of dissolution of marriage. Case law in this area is slim, so effect of Balanson II and subsequent cases on particular trust is hard to predict. Premarital agreement can provide that all trust interests are separate property.

Typical Client Profile #2: Employee of Family Business First marriage. Beneficiary of family wealth + involved in family business. Complicates protection of “family property” because “family property” is also primary source of earnings. But want to prevent disruption to family business in case of divorce/death. Consider marital property as including salary and actual distributions/dividends from family business. Or certain amount of income imputed as marital property.

Typical Client Profile #3: Entrepreneur First marriage. Entrepreneur who has interest(s) in closely-held business or businesses. Again, want to prevent disruption to business in case of divorce/death. Often in between “what’s mine is mine, with a few exceptions” and “what’s mine is ours, with a few exceptions” Marital property including salary and actual distributions/dividends. Jointly titled assets as marital property, plus property distribution at divorce/death to less wealthy spouse.

Typical Client Profile #4: Retiring Couple – Kids from Prior Marriage Second marriage. Want to preserve assets for own descendants. Usually “what’s mine is mine, with a few exceptions.” Property distribution to less wealthy spouse at divorce/death. May provide for limited amount of maintenance. May include gift transfers to less wealthy spouse during marriage. Jointly titled assets as marital property, or divided according to contribution?

Premarital Agreements and Estate Planning Parties can waive rights as surviving spouse in agreement to preserve estate for descendants. Elective share. Intestate share. Family allowance and exempt property allowance. Priority to serve as personal representative or administrator. Agreement can provide for surviving spouse in other ways. Provisions of agreement establish floor, not ceiling.

Premarital Agreements and Estate Planning – Providing for Survivor Disposition of primary residence. Liquid assets for survivor’s support. Amounts can escalate based on length of marriage. No waivers of rights at death, except with respect to “family property.” Form of disposition for survivor. Outright. Marital trust to qualify for estate tax marital deduction. Survivor receives all income and discretionary principal. At death, remaining assets can pass to decedent’s descendants. Through life insurance or other non-probate assets.

Premarital Agreements and Taxes (If Spouse Has Taxable Estate) Gifts between spouses qualify for unlimited marital deduction. Agreement should be effective upon marriage (not before) to avoid a taxable gift. Be cautious about provisions requiring gifts to third parties (children), which may be taxable gifts. Provisions at death should be consistent with spouse’s estate tax planning (for instance, avoiding trust for survivor that does not qualify for marital deduction). Negotiate to utilize less wealthy spouse’s estate/GST exemptions and portability amount. Involve estate planner in preparation of agreement.

Premarital Agreements as a Tool to Protect Family Wealth by Jessica L. Broderick Sherman & Howard L.L.C. 633 17th Street, Suite 3000 Denver, CO 80202 jbroderick@shermanhoward.com Tel. 303-299-8446 April 21, 2017