Unintended Consequences of Matrimonial Agreements

Though seemingly a ceremonial tempest in a teapot, failure to make the oral declaration serves as the basis for a will contest brought on by the surviving spouse seeking to assert a right of election. The right of election (EPTL § 5-1.1A) is a statutory right acquired upon marriage whereby upon the death of a spouse, the surviving spouse is entitled to the greater of one third of the estate of the decedent spouse or $50,000. Frequently, this right is waived in prenuptial agreements as well as final settlement agreements. A valid waiver must comply with the provisions of the EPTL § 5-1.1-A(e)(2), that is:
• it must be in writing,
• subscribed by the maker thereof, and
• acknowledged or proved in the manner required by the laws of the state of New York for the recording of a conveyance of real property. An acknowledgement sufficient for a recording of a conveyance of real property requires a written certificate of acknowledgement endorsed by one of a number of public officers attesting to the signer’s oral declaration. Failure of a party to utter the “magic” words may be that all that stands between the disinherited spouse and the right to elect against an estate worth millions.

Some litigants have successfully argued that there is “substantial compliance” with the acknowledgement re-quirement even absent the oral declaration. The Nassau Surrogate’s Court in Matter of Cerrito upheld the validity of the prenuptial agreement for this proposition. Whether this decision and its progeny will survive a review by the Court of Appeals is unknown, in the meantime, best practices would have the practitioner err on the side of caution: observe ceremony and have both parties make the oral declaration to ensure validity of the agreement and the waiver of the right of election.

“The parent giveth and taketh away”
Parents have an obligation to support children to age 21 in New York. Basic support includes food, shelter and clothing. In addition there are statutory mandated “add on” contributions to childcare and health insurance; contributions to private and/or college education are within the discretion of the Court (Domestic Relations Law § 240 and Family Court Act § 413). Drafting provisions regarding parental college contributions is often complicated by a credit to be given to the noncustodial parent for room and board presumably duplicative of the “shelter” expense of the basic support obligation. By case law, a noncustodial parent is entitled to a dollar for dollar reduction of the basic support obligation paid for the “room and board” contribution for a child attending college. The formula’s application is simple if only one unemancipated child is involved. Presuming the application of the Child Support Standards Guidelines for the basic support obligation, (Family Court Act § 413), the noncustodial parent’s room and board credit cannot exceed his/her prorata share of the basic support obligation. If the room and board expense is $10,000 per year, and the noncustodial parent’s share is 50% either by agreement or application of the prorata calculations pursuant to CSSA, the noncustodial parent’s maximum credit is $5,000 against his/her basic child support obligation. However, this credit may not reduce the basic support obligation of the other children. If for example, there are three children, the noncustodial parent may not receive the full $5,000 credit if this reduces the basic support obligation for the other two children. This is a case where the intent of the language may be clear, however, unless care is taken in the drafting of the provision, effectuating the provision is fodder for future litigation. Best practices: Avoid ambiguity and provide an example of the application of the provision to the particular circumstances.

“The Porsche versus the B.A.”
Frequently overlooked by drafters are the dissemination of the proceeds of UTMA accounts and 529 plans, often made a part of the parental contribution for college expenses. UTMA accounts are usually titled to one parent for the minor child. Upon attaining age 21, the child obtains control of the UTMA account. If the child chooses not to use the funds for college (as may occur with a UTMA) or does not attend college, to whom the funds revert and when are governed by the account terms notwithstanding the presumed intent of each parent. Unlike the UTMA account, a parent may be surprised to learn that the 529 contributions made to the account during the marriage presumably for the child revert to the party in title if the funds are not utilized for college.

Drafters should address the particulars of these accounts in utilizing the proceeds as part of a parental contribution. The plan administrator/custodial institution is not bound by the contractual obligations under taken by the parents in a settlement agreement. Your client may be unaware that a child attaining age 21 is now entitled to the funds of the UTMA account and the parent is without recourse should junior show up with a new car rather than a college curriculum.

“No good deed goes unpunished”
Pursuant to Domestic Relations Law § 236B(8), the Court has the authority to require a spouse to secure his/her support obligation with life insurance. Typically, the insurance benefits will terminate at the emancipation of all the children or in the case of a spouse, termination of maintenance. However, the death benefit may continue beyond emancipation of the child by agreement of the parties. Be aware of the tax consequences to the estate of the payor spouse if as in the case of minor children, the death benefit exceeds the support obligation. The death benefit is not taxable to the recipient. The death benefit is included in the decedent’s estate for which he will also receive a tax deduction but only to the extent it satisfies a support obligation.3

Agreements frequently provide that the benefits for the children be paid to the spouse as “trustee” or “irrevocable beneficiary” or “guardian.” If benefits are to be paid to a spouse as a trustee, it behooves the drafter to insure that there is in fact a “trust” established or will be established to receive payment of the proceeds of the policy at death. In addition, it is important to specify that the “current spouse” be the trustee lest a trust established for the children of the first family find their financial well-being in the charge of the “second” or “third” spouse as the case may be.

“It’s the practice, not the ‘perfect’ of law”
The genesis of this article is a seminar presented recently at the Nassau County Bar Association entitled “Till Death or Divorce Do Us Part.” For more on this topic, you may obtain materials from the NCBA Academy of Law. Credit and thanks to my co-presenters: Mary Ann Aiello, Tricia Marcin and Frank Santoro and our host Dee Barcham, Dean of the Academy in providing insight and research support.