PLANNING FORNON-TRADITIONAL FAMILIES

Ryan M. Holmes & Ray J. Koenig, III

Date: April 12, 2017

DuPage County Estate Planning Council

This presentation and outline are limited to a discussion of general principles and should not be interpreted to express legal advice applicable in specific circumstances.

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Then: Leave it to Beaver

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Now: Modern Family

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How we got here

Windsor (2013) held that Section three of DOMA was

unconstitutional and that the federal government could not

discriminate against married lesbian and gay couples in

determining federal benefits and protection.

Obergefell (2015) held that same-sex marriages that had

once been ignored, disregarded, or deemed illegal were

immediately granted the same full faith and credit as

opposite-sex marriages throughout the U.S. under the 14th

Amendment.

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LGBT

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Second Marriages/Blended

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Adoption and Advanced Reproductive Technique Issues

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DINKS (Double Income, No Kids)

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Why It’s Important?Non-Traditional Planning is becoming a bigger percentage of a professional’s practice

Facts & Statistics:• People are getting married later in life. The median age for first

marriage is 28.3 for men and 25.8 for women Compare this to the

numbers from 1960, when the median age was 23 for men and 20 for

women.

• United States Divorce Statistics

o Most people already know that around 50 percent of marriages in

the United States end in divorce.

o Americans also like to marry. Three quarters of people who

divorce remarry.

o When you break that down by number of marriages:

▪ 41 percent of first marriages end in divorce.

▪ 60 percent of second marriages end in divorce.

▪ 73 percent of third marriages end in divorce.

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Facts and Statistics Continued

• Nearly 1.5 million babies a year are born to unmarried women (1/3 of

all births). This can complicate matters, especially when the father is

not identified or, in the case of donated sperm, does not exist.

• 9 million LGBT Americans

• 251,695 -- Same-sex married couples in the United States in 2013,

according to the Census Bureau's American Community Survey.

• About 135,000 children are adopted in the United States each year.

• Baby Boomers and the Great Wealth Transfer. 30 TRILLION (with a

T) over the next 30 years.

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Applicable to All Nontraditional Planning

• Prepare your Last Will & Testament.

• Create a Trust.

• Check Beneficiary Designations.

• Establish a Durable Power of Attorney.

• Establish Health Care Proxy and Living Will.

• Establish a Designation for the Disposition of Remains.

• Establish a Cohabitation Agreement (if necessary).

• Establish a Joint Custody Agreement (if necessary).

• Property Considerations.

• Retirement Planning.

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LGBT

• Question 1- whether the couple is currently married or

has plans to get married in the near future.

• But what if the same-sex clients are not married and do

not intend to get married?

• Regardless of the reason for not getting married, same-

sex couples face estate planning challenges.

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Intestacy

• Every state has created a last will and testament for each of its residents.

• Each state's intestacy statutes designate how an individual who has not prepared

his or her own will would have his or her estate divided upon death.

• While the intestacy statutes are not as terrible as some would suggest ("if you

don't have a will, the state will get all your property"), pitfalls still exist.

• For instance, parents and other family members may not condone the

relationship or actively exclude lesbian, gay, bisexual, and transgender (LGBT)

family members from the family dynamic.

• Relying on intestacy statutes for an LGBT estate plan could automatically make

those non-approving family members heirs of the deceased's estate, or worse,

completely exclude a partner or committed advocate.

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Health and End of Life Decisions.

• Health and end-of-life decisions must be made.

Similarly, when court-appointed guardianships

are required, those same statutes can mandate

the order in which a court will consider who

should be appointed.

• The relationship status of non-married same-sex

couples to each other often will fall outside the

scope of those enumerated appointees.

• Many same sex couples will fall into the “close

friend or family member” category, which is last

on the list.

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Inheritance from other family members

• What happens if grandparents want to leave a portion of their estate to a grandchild to whom they

are not biologically related?

• Fortunately for the grandparent (or aunt, uncle, etc.) who plans, this should not be an issue.

• By specifically bequeathing money or property to the named or identifiable child of a same-sex

couple, such a gift will be effective to ensure the bequest is completed.

• But, what if the grandparent has not created a will or has not updated a will that left a portion of the

estate to a predeceased child? It is very common for wills and trusts to designate that the property

that would pass to a son or daughter should pass to that deceased son's or daughter's "issue."

• Will the child of a same-sex couple, not biologically-related to one spouse, be deemed "issue"? The

answer will again depend on the situation.

o If both names of the same-sex couple are on the birth certificate, the question should be easily

answered: The child should inherit from the grandparent.

o Additionally, many wills and trusts include express language that adopted children are to be

treated in the same manner as biological children for estate purposes.

o Thus, in situations where one same-sex parent adopts the biological child of his or her spouse,

the grandparent's intended gift should be honored.

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General Federal Estate and Gift Tax Considerations

• The marital deduction, allowing most

transfers between U.S. citizen spouses to

avoid gift or income taxes does not apply to

unmarried couples.

• Accordingly, any transfers between partners

will be treated as taxable gifts (subject to

the IRC §2503(b) annual exclusion, the

donor’s available applicable exclusion, and

the exclusion from gift tax for tuition and

medical expenses under IRC §2503(e)).

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Indirect Gifts Arising From Pooled Expenses

• The value of taxable gifts between unmarried partners becomes difficult to quantify in the context

of shared living expenses.

• When partners pool income and one party receives more income than the other, pooling may

cause a net transfer to the party with less income, resulting in a taxable gift.

• This result may be partially ameliorated by entering into a contractual arrangement between the

partners providing for mutual and adequate consideration.

• The amount of the gift is the difference between the value of the property transferred and the

consideration received.

• However, the exchange of consideration sufficient to make a promised transfer enforceable for

state contract law purposes will not necessarily prevent some part of the transfer from being a gift

for federal tax purposes, unless the transferor receives consideration having an economic value

equal to the property transferred.

• To the extent a net transfer from the greater income earner to the lower income earner is viewed

as being paid in consideration for the lower income earner’s love, emotional support, or other

services upon which a monetary value may not be placed, the transfer is a gift.

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Indirect Gifts Arising From Pooled Expenses Continued

• If the contractual arrangement provides that the net transfer from the higher income

earner to the lower income earner is an advance to be repaid upon the happening of

some event, e.g., the lower income partner finishing school, or becoming gainfully

employed, or the higher income partner retiring, the couple will be treated as being in

a debtor-creditor relationship.

• These types of arrangements should be avoided unless the arrangement provides for

adequate stated interest and the advanced sums will actually be repaid.

• Sections 163(h), 1274 and 7872 of the Code address below-market interest and gift

loans by imputing interest income in the amount of the applicable federal rate to the

creditor, taxing the creditor as making a gift of the interest, and denying the debtor’s

interest deductions.

• If the debt is never repaid, IRC §61(a)(12) treats the amount advanced as income to

the debtor from the discharge of indebtedness.

• Section 7872(c)(2)(A) of the Code provides a de minimis exception for gift loans

between individuals for amounts of $10,000 or less. Thus, generally, for smaller loans

there is neither imputed interest nor a taxable gift.

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Joint Tenancies

• Joint tenancy ownership of assets is one popular estate planning devices

for unmarried couples.

• When contributions by both parties are equal, and where the intentions of

both parties with regard to management and disposition of the assets are

identical, joint tenancy is an efficient and economical estate planning tool.

• Joint tenancy in the nontaxable estate may avoid the need for disclosure to

family members at the time of the disposition.

• If a joint tenancy is challenged, the presumption of a gift of funds in joint

tenancy must be rebutted by clear and convincing evidence of a contrary

intent, which is typically difficult to overcome.

• Must compare and contrast with Transfer on Death (discussed later) to

determine which is best for client based upon circumstances.

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Joint Tenancy May Result in an Unintended Gift

• For the client with a taxable estate, joint tenancy can result in unintended consequences.

• When an asset, such as a house, is purchased in joint tenancy, if the parties contribute equally to

the purchase, then acquiring the asset in joint tenancy is not a taxable event.

• However, if one partner purchases or contributes to an asset (other than a bank account or U.S.

bonds), and has it conveyed to himself and his partner in joint tenancy with right of survivorship,

then the purchase constitutes an immediate gift of the value of the transfer in excess of the annual

exclusion.

• Upon the death of one joint tenant, the entire value of the jointly held property is included in the

decedent’s gross estate, unless it can be shown that the surviving joint owner actually contributed

to the acquisition of the asset.

• The burden of proof is on the taxpayer and may be difficult to sustain without meticulous record

keeping.

• If clients intend to own real property in joint tenancy, they should document their intentions, their

contributions to points and the down payment, mortgage payments, and home improvements.

• There is an exception to the present gift rule for joint bank accounts and U.S. bonds: The transfer,

and thus a completed gift, does not occur until the joint holder withdraws money from the account.

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Non-Tax Disadvantages of Joint Tenancies

• In addition to the tax disadvantages, there are other problems with

joint tenancies.

• A joint owner of a bank account can withdraw the other party’s

money from the account without the party’s consent or knowledge.

• This could be avoided by requiring two signatures on an account.

• Assets titled jointly, such as real estate, stock, or a motor vehicle,

cannot be sold without the consent of both joint owners.

• This protects the owners, but it also often results in a deadlock

between partners on the appropriate disposition of an asset.

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Entity Options

• Some practitioners recommend that partners establish a partnership or

limited liability company to take title to a home, to facilitate accurate record

keeping, and also to provide protection against a creditor or a partner forcing

partition.

• Using an entity for a principal residence acquisition, however, will prevent

the partners from using the exclusion for capital gain on sale under IRC §121

unless it is treated as a disregarded entity. This exclusion is available to

persons, but not entities.

• Alternatively, legal title could be held in a revocable title holding trust with a

separate schedule of beneficial interests. The trust agreement could further

define how the beneficial interests are to be adjusted over time based on the

relative financial contributions of the partners.

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Partnerships and Limited Liability Companies

• One way to leverage transfers from one partner to the other is to establish a partnership

or LLC for federal income tax purposes.

• If a couple can show they are a “syndicate, group, pool, joint venture, or other

unincorporated organization through or by means of which any business, financial

operation, or venture is carried on,” they may establish a partnership under Subchapter K

of the Code.

• An arrangement may be classified as a partnership for federal income tax purposes even

if it does not qualify as a partnership for state law purposes.

• Given a good faith business venture, an unmarried couple could enter into a

partnership/LLC agreement, open a joint partnership/LLC account, acquire an

employer’s identification number from the Service, and file income tax returns for the

entity.

• Partnership/LLC agreements allow for great flexibility and, assuming certain conditions

are met, the couple can take advantage of the non-recognition provisions contained in

Subchapter K, such as the ability to distribute out partnership/LLC assets without the

recognition of gain or loss, so long as the value of the assets received by a

partner/member do not exceed his or her basis in the entity.

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Partnerships and Limited Liability Companies Continued

• Note, however, a joint undertaking merely to share expenses is not a partnership

absent a business purpose.

• In addition to the opportunities discussed above, a partnership/LLC can provide asset

protection. The creditor of a partner or member may receive an assignee interest in

any distributions from the entity to the partner/member.

• But assuming the entity is treated as a partnership for income tax purposes, when

income is not actually distributed, the potential for the receipt of “phantom income”

often serves as a deterrent to creditors. An entity may similarly serve as a deterrent to

hostile family members.

• Partnerships and LLCs can be advantageous where one partner/member wants to give

property to the other without giving up control over that property. Gifts of partnership

or LLC interests from one partner/member to the other, if structured properly, may be

discounted for lack of control and lack of marketability to leverage the amount of

property that may be transferred within the IRC §2503(b) annual exclusion amount.

• Furthermore, as discussed below, unmarried partners are not subject to the limitation

on restrictive agreements imposed by IRC §2703.

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Miscellaneous Strategies To Transfer Wealth Between Partners

1. Annual Exclusion and Similar Gifts.

•In addition to annual exclusion gifts from the wealthier partner to the less

wealthy one, unmarried couples can take advantage of the exclusion for the

payment of educational, health and dental expenses (including health

insurance premiums), so long as they are made directly to the provider.

•Educational expenses may include tuition (but not books, supplies, room,

board or other living expenses) and medical expenses may include doctor

and hospital bills, medically necessary home improvements, costs of

necessary home health care providers and anything else that an individual

would be allowed to deduct on an income tax return as an unreimbursed

medical expense under IRC §213.

•One person can also pay another’s long-term health care insurance

provided that the “eligible long-term care premiums” limits of IRC

§213(d)(10)(B) are not exceeded.

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2. Sale to Recognize Loss.

•The disallowance of losses on sale or exchange of property to another

family member under IRC §267 does not apply.

•Thus partners may sell stock to each other to recognize losses so long as

there is adequate consideration. As a result, the purchase price becomes

the transferee’s basis.

Miscellaneous Strategies To Transfer Wealth Between Partners

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Miscellaneous Strategies To Transfer Wealth Between Partners

3. Hiring Partner as an Employee

• One partner may own a professional services corporation that the other

partner provides services for.

• This avoids the high tax rate professional service corporations are subject to

when the services are provided by an owner.

• In many instances, one partner may be able to employ the other for services

for which they would otherwise have to pay an outside party.

• Of course, the income received must be reported by the recipient partner.

• Business owners who hire their partner can deduct a portion of the cost of

health insurance and long-term care insurance as a fringe benefit.

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Miscellaneous Strategies To Transfer Wealth Between Partners

4. Installment Sales

• To create a stream of income for the wealthier partner and

transfer assets to the less wealthy partner, one partner may sell

rental property to the other in return for a promissory note

under IRC §453.

• This has the effect of transferring income from one partner to

the other, while preserving a stream of income to the former

owner of the rental property in the form of interest income on a

note, which may be recognized over time.

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Miscellaneous Strategies To Transfer Wealth Between Partners

5. Private Annuities

• Another way to create a stream of income for the wealthier partner and

transfer assets to the less wealthy one is to have one partner sell property to

the other in exchange for a private annuity.

• A private annuity is a contract that provides for specified payments to the

named annuitant during the annuitant’s lifetime.

• This is similar to the installment note arrangement, but under a private

annuity, the payments never cease so long as the annuitant is alive, even if

the annuitant outlives his or her life expectancy.

• The disadvantage of the private annuity is that, unlike promissory notes

used with installment sales, private annuities cannot be secured, putting the

annuitant at risk that the buyer may default.

• Furthermore, gain or loss must be recognized at the time of the exchange

rather than deferred.

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Miscellaneous Strategies To Transfer Wealth Between Partners

6. Stock Redemptions

• IRC §302(a) provides that a redemption of stock “shall be treated as a distribution in part or full payment in exchange for

the stock,” if any of the exceptions set forth in IRC §§302(b)(1)-(4) apply.

• The exceptions apply if the redemption is not essentially equivalent to a dividend (with no reduction for basis), and the

redemption proceeds will therefore be taxed as ordinary income, rather than capital gain.

• Typically, a complete redemption of a shareholder’s interest in a company will fall under the exception of IRC §302(b)(3),

and result in the proceeds of the redemption being subject to capital gain treatment.

• Where a member of a family group is redeemed, and other members of the group of related parties owns stock in the

company, the attribution of stock ownership rules under IRC §318 prevent the exiting shareholder from falling under the

exception of IRC §302(b)(1) (because the redeemed shareholder’s stock will continue to be attributed back to the exiting

shareholder).

• However, where unrelated partners own a closely held business together, the attribution of stock ownership rules do not

apply.

• Thus, the ability to accomplish a substantially disproportionate redemption of stock or a complete liquidation of a

shareholder’s interest under IRC §302(b) may be available.

• As a result, the value of the stock redeemed may be treated as capital gain, rather than a dividend.

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Miscellaneous Strategies To Transfer Wealth Between Partners

7. Retirement Benefits

• Most pension plans cease payments at the death of an unmarried employee.

• However, some plans may provide for a “term certain” form of benefit payout,

which allows a set amount to be paid out to the employee, and if not then

living, named beneficiaries, over a predetermined number of years.

• This election is typically less favorable as one for an employee and a surviving

spouse.

• But, it can provide some benefit to an unmarried surviving partner where no

other benefits would be available if the employee partner were to die earlier

than expected.

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Miscellaneous Strategies To Transfer Wealth Between Partners

8. Transfer on Death and Community Property Agreements

• Transfer on death security registration has been widely adopted, and

allows for the transfer of a security or brokerage account by

beneficiary designation.

• These forms of property ownership avoid probate, do not require an

immediate transfer, and one partner may continue to control his or

her property during life.

• Transfer on Death avoids probate, but not estate taxes.

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Miscellaneous Strategies To Transfer Wealth Between Partners

9. GRITs

• GRITs were very popular prior to the enactment of Chapter 14.

• But Chapter 14 eliminated their use if the remainder beneficiary was a

“family member.”

• Because an unmarried partner does not fall within the definition of

family member as defined in IRC §2702(e), a GRIT can be an

excellent way to allow a wealthier partner to provide an income

stream during the retained trust term and allow the principal to pass at

a reduced transfer tax value at the expiration of the term.

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Checking Tax Status and Amending Returns

• Determine if there is any benefit to filing amended income tax returns

using “married” status.

• Taxable Fringe Benefits: Consider amending income tax returns to

exclude previous taxable income which was used to purchase job-related

benefits for your spouse, such as health insurance, life insurance, and

other fringe benefits.

• Employer Spousal Benefits: Take advantage of all non-taxable fringe

benefits available to your spouse.

• Retirement Accounts: To save taxes your beneficiaries will pay after your

death and allow the pay out to be stretched out as long as possible, check

your IRA/401K plan designations.

• Payroll Tax Withholding: Update your Form W-4 with your employer to

change your status to married and increase or decrease your exemptions.

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Cohabitation Agreements

• Cohabitation agreements may be oral in some states.

• Even when a couple is willing to rely on a state’s default rules,

because of the migratory nature of individuals, the potential

applicability of the laws of multiple states, and difficulty in proving

and enforcing oral agreements, the couple’s intent should be clearly

stated in a written agreement.

• Because the goal of the domestic partnership agreement or

cohabitation agreement is to eliminate any factual disputes and

ambiguities about what the parties intended, a written agreement is

preferable.

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The following are some of the more important issues that should be addressed in the cohabitation agreement

1. Recitals.

• The agreement should contain recitals that document the

circumstances of the parties at the time the agreement is entered

into and outline their intention with respect to creating the

agreement.

• The recitals should set forth the date the parties began living

together and a brief history of the couple’s relationship together.

• The recitals should demonstrate, based on the facts, and not on

boilerplate provisions, that an enforceable contract with good

and valuable consideration exists between the parties.

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Cohabitation Agreements (Continued)

2. Disclosure of Assets and Liabilities.

• As with prenuptial agreements, both parties must

disclose the nature and value of their property.

• Depending upon the applicable state law, it is possible

that the same principles applicable to prenuptial

agreements may also apply to cohabitation agreements,

including the ability to set aside the agreement in the

absence of full and fair disclosure.

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Cohabitation Agreements (Continued)

3. Expenses While Living Together.

• The agreement should address how expenses will be

handled during the relationship, how assets purchased

will be titled, and any post-termination support

commitments.

• Many of these issues can and should be provided for

in the wills of the partners as well as in the

cohabitation agreement.

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Cohabitation Agreements (Continued)

4. Dispute Resolution.

• It is advisable to include dispute resolution provisions.

• If the parties agree to mediation or arbitration, the agreement

should specify who would pay the mediator/arbitrator.

• The agreement should also indicate when the parties might

abandon mediation for either arbitration or going directly to

court.

• In addition, if attorneys or court costs are involved, it should

cover how these costs will be paid for as well.

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Cohabitation Agreements (Continued)

5. Parenting.

• Agreements regarding parenting that recognize the roles, affections and

responsibilities that have developed between the child and a non-

biological child, may violate public policy and therefore would not be

enforceable.

• But may be useful in establishing the terms of a parent-child

relationship that has been formed if it is later called into question and

may still carry some weight with the court.

• Accordingly, the couple may want to try to agree in advance, and

document, how they will handle issues such as primary parent/custody,

visitation and how the children will be raised, keeping in mind that the

best interest of the children, as determined by the court, will ultimately

prevail.

• Similar provisions for pets may also be documented.

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Cohabitation Agreements (Continued)

6. Assisted Reproductive Technology.

• If a couple has or plans to store genetic material it is important to

deal with its use and/or disposition in a written agreement.

• The couple should document their plans to use that material to

conceive children, and whether those plans should be altered if the

couple does not stay together or if one member of the couple dies.

• If genetic material is received from a donor, the parties should agree

in writing that the donor will not have any parental rights and will

agree, if necessary, to having any parental rights terminated (which

may not be binding, but does memorialize the intent of the parties at

the time of the agreement).

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Cohabitation Agreements (Continued)

7. Marriage.

• If marriage is a legal option for a couple, they should indicate

whether they intend the agreement to remain in effect should they

marry.

• Alternatively, the agreement may terminate upon marriage, at which

time the couple would be required to enter into a new agreement or

rely on the state default rules applicable to married couples.

• The Agreement should contemplate what the parties will provide for

the other in the event the relationship terminates or one party dies.

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Cohabitation Agreements (Continued)

8. Choice of Law.

• Because of the mobile nature of couples in our society, a choice of law

provision is also advisable.

• Confirm that the state law where the parties reside at the time of execution

allows such agreements and its particular provisions.

• Assuming that the agreement is enforceable in the state where executed, the

parties may want to include a provision such as the following: “To establish

reasonable certainty in their respective financial affairs, the parties agree

that, without regard to where they may reside or be domiciled in the future,

or where any or all of their real or personal property may be located, all

property rights of the parties and their rights under this Agreement shall be

determined according to the substantive laws of [state where executed],

without regard to conflict of law rules applicable in [state where executed]

or in any other state.

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Assisted Reproductive Technology (ART)

• Lesbian and gay couples use assisted reproductive technology procedures at a

consistently high rate.

• Gay male couples enlist an egg donor and a gestational surrogate.

• Lesbian couples use sperm donors and frequently have one woman contribute the

ova for implantation in her partner’s uterus. This is called “ovum sharing.” That

gives both women a genetic connection to the child.

• The couple’s marital status will now become an issue in determining parental

rights and inheritance rights.

• Most people believe there is a marital presumption concerning parentage for

children born during a marriage.

• Not all states recognize a marital presumption. And, even in those that do, it is a

rebuttable presumption.

• There is no reason to assume those states that have the marital presumption will

apply it to same -sex married couples.

• That issue will be litigated and it is likely that states recognizing the marital

presumption will apply it.

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Assisted Reproductive Technology (ART) (Continued)

• Lawyers representing lesbian and gay parents usually advise the couple to obtain

a second parent adoption because a court order will establish parental rights.

• A birth certificate does not establish parentage, but an adoption order is entitled to

recognition under the U.S. Constitution’s Full Faith and Credit Clause.

• Unless both parents are recognized by the state, the child has no intestate

succession rights in the estate of the unrecognized parent.

• Children born after the non-legally recognized parent dies may also be ineligible

for Social Security Administration (SSA) survivor benefits.

• ART includes genetic materials that are stored by individuals and couples. Some

estimates place the number of stored “leftover” embryos at more than 1 million

nationwide.

• ART does not treat infertility and it is not the primary reason individuals and

couples resort to it, but is used by prospective parents use ART procedures to

have genetically and biologically related children.

• The three primary procedures used in ART are in vitro fertilization (IVF), assisted

insemination and surrogacy (traditional and gestational).

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Adoption

Code Section 750 ILCS 50/1 to 50/24;

Who May Be Adopted Any child; any adult residing in home 2

years, or a relative.

Age that Child's Consent Needed 14 years and older

Who May Adopt Any reputable person of legal age who has

resided continually in Illinois for at least 6

months. Residency requirement waived in

adoption of relative. If petitioner is married,

husband or wife must join in petition. Minor

may also petition by leave of court upon

good cause shown.

Home Residency Required Prior to

Finalization of Adoption?

6 months unless waived by court

State Agency/Court Department of Children and Family

Services/Circuit Court

Statute of Limitations to Challenge 1 year after entry of order

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CO-GUARDIANSHIP & CO-PARENTING AGREEMENTS

• If you live in a state where you cannot get a second-parent or step-parent

adoption or a parentage judgment, create what protection you can for your

child through a more limited court order of co-guardianship or through an

agreement.

• Depending on where you live this may be called a co-parenting, shared

custody, or guardianship agreement.

• How it works: Though the process and requirements for co-guardianship

differ from state to state, it allows a legal parent to ask the court to name the

non-legal parent as a co-guardian, giving him or her the ability to act with

the legal authority of a parent, including in educational and medical contexts.

• The court will assess whether the appointment is in the child’s best interests,

and it is a temporary status that can be terminated upon the request of any

person, including the legal parent.

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Co-Parenting

• A co-parenting agreement sets out the parties’ intentions to co-parent to the fullest

extent possible. It will not have the legal effect of an adoption or parentage

judgment, but depending on the state you live in, it may be enforceable; at the

very least, it can give important guidance to the court about your shared intentions

should you later have a serious dispute.

• You should have an attorney help you draw up any kind of parenting agreement.

You may want to consider the following elements for the agreement:

1. A provision stating that, although only one of the parents is recognized as a

legal parent, both parties consider themselves and each other to be equal co-

parents to the child with full parental rights and responsibilities.

2. A provision stating that the non-legal parent has the authority to agree to

medical care for your child or children.

3. A provision stating that both parents have joint financial and other

responsibilities for your child or children.

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Co-Parenting Continued

4. A provision stating that both parents will name each other as a guardian in

any will or other estate planning document. Make sure you take the time to express your

wishes in legal documents, so your child or children are not left in the care of the state or

relatives if you both die.

5. Provisions to safeguard the best interests of your child or children if your

relationship with your partner dissolves, including your intention to continue co-parenting

and your desires regarding custody, visitation and financial support.

6. Consider including a statement such as the following from the legal parent:

“As the legal parent of [child or children], I am hereby exercising my constitutional right to

share permanently all my parental rights and responsibilities existing under state and

federal law with my spouse/partner [name], and to establish to the maximum extent

permissible by law this family that I believe to be in my child’s [or children’s] best interest.

Intending to provide permanent protection and stability to my child [or children], I hereby

waive my right to revoke this agreement and statement in the future.” Such a statement

should make clear that the legal parent is waiving his or her exclusive right to care and

control of the child in favor of co-parenting with the other parent.

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Extra Tools in the Toolbox

• Walking proof: Even if you have legal authority to make decisions for your

child(ren), it may be questioned by school, medical or law enforcement

officials, or by airline and customs personnel when you travel. Have your

documents with you at all times, consider leaving copies with your

child(ren)’s school and doctor’s office, and check what additional documents

might be required for travel.

• Authorizations: If one of you is a non-legal parent, consider having your

attorney draft two stand-alone documents:

o A document that authorizes the non-legal parent to agree to medical

treatment for the child so health care staff will not have to sift through

everything in a lengthier, personal agreement addressing multiple

subjects.

o A similar, context-specific document that authorizes the non-legal parent

to act whenever school officials require parental involvement or

approval (such as for parent-teacher discussions, extracurricular

activities, disciplinary hearings).

51

TAX ISSUES TO THINK ABOUT WHEN MARRIAGE IS BEING CONTEMPLATED

Not permitted when married filing separately

• The standard deduction when the other person itemizes

• Child and dependent care credit in most cases

• Credit for elderly or disabled

• Student loan interest deduction

• Education credits

• Child tax credit

• Adoption credit

• Head of household filing (other than when live apart for 6 months)

52

TYPICAL SITUATIONS WHEN MARRIED FILINGSEPARATELY MAKES SENSE

• The lower income earner has deductions subject to a

% of income

o Medical (sick spouse)

o Misc. itemized deductions

• Other spouse is in or is getting into trouble with the

IRS

o Minimizes liens on jointly owned property

o Minimizes exposure to non-trouble spouse

personally

53

TAX – To Do’s in Year of Marriage (and Divorce)

• Adjust withholdings

• Coordinate fringe benefits

• Inform social security of name change

• Notify IRS of change of address

• Report change in status to Healthcare.gov

• Determine child dependency considerations (e.g.

adoption in marriage or custody in divorce)

• Consider income tax implications. For divorces -

deductible alimony, child dependency deductions.

54

Other To Do’s in the year of marriage or divorce or ANY change of relationship status

• Review Estate Plan

• Review wills and living trust documents

• Examine retirement plan beneficiary designations

• Look at property title designations (investments,

real estate)

• Review insurance needs (property, life, umbrella,

medical)

• Consider potential gift tax implications

55

Blended Families

• Married vs. Unmarried.

o Recommend a Prenup if not married.

o Discuss Postnup if married.

• Prenups/Postnups in Illinois.

• Prenuptial agreements, signed before two people marry, and

postnuptial agreements, signed after marriage, are contracts that

determine what happens to each party’s individual assets and any joint

assets in the event of divorce, legal separation or death. While the

contents of these agreements can vary, they typically include

provisions regarding property division and spousal support.

• One area in which the effect of premarital agreement is limited is in

regard to child custody and child support. The Uniform Premarital

Agreement Act states that a premarital agreement may not adversely

affect the right of a child to support. The court also will not be bound

by premarital agreements where they involve child custody.

56

Blended Families

Under Illinois' new divorce law, the assets and debts acquired prior to the

marriage are non-marital property and not subject to division in divorce. The

law says:

Disposition of property and debts.

(a) For purposes of this Act, "marital property means all property, including

debts and other obligations, acquired by either spouse subsequent to the

marriage.

. . .

Property acquired prior to a marriage that would otherwise be non-marital

property shall not be deemed to be marital property solely because the property

was acquired in contemplation of the marriage.

750 ILCS 5/503.

57

Blended Families

This makes prenups or postnups important for just about everyone. With a simple prenuptial

agreement, a couple can agree that property acquired prior to the marriage is marital (or non-marital)

property and how it should (or should not) be divided in the event of a divorce or legal separation.

Debts: A lot of first time finaces /ees come into a marriage with a fair amount of debt -- whether

from stuent loans, credits cards or what have you. That's all non-marital debt. After the marriage,

they're going to pay those loans down with marital money. If there is a divorce, the marital estate as

a right to be reimbursed for the marital money paid against the non-marital debt. A prenuptial or

post-nuptial agreement is an excellent way to memorialize the amount of debt to be paid and to help

the couple realize the financial implications of the marriage.

Basics: Illinois’ divorce laws define “marital property,” but spouses (before or after the marriage)

may agree to a different definition. They may identify certain properties as marital or non-marital.

They may agree that one spouse’s pre-marital homestead be considered to be marital property; or

that any businesses created during the marriage be considered the entrepreneurial spouses non-

marital property. The spouses agree to a specific division of property (say, 50/50) or to the allocation

of a particular item (“the ______ shall receive a new, full-size, automobile and cash equal to four-

year’s tuition at Northwestern University). Likewise, they may agree on maintenance (alimony)

payments (both amount and duration) and lump sum payments (“if we divorce within five years of

the date of marriage, husband shall pay to wife one million dollars; if we divorce after five but

within ten years of marriage, husband shall pay to wife five million dollars”).

58

Blended Families

Effective Date: Illinois law (750 ILCS 10/5) says that prenuptial agreements become effective

upon marriage. If you sign a prenuptial agreement, but the marriage is called off, the prenup

has no effect.

Legal Representation: Illinois law does not require that a fiancé/ée consult with an attorney

or that an attorney approve a prenuptial agreement for the agreement to be valid.

Nevertheless, when asked to invalidate an agreement, courts routinely consider whether the

disadvantaged spouse had adequate legal representation during the negotiation of the

agreement. Courts are far more willing to find “duress” – and invalidate a prenuptial

agreement – where a fiancé/ée lacked legal representation and where the fiancé/ée was not

informed of his or her right to consult an attorney prior to signing the agreement. For

example, in In re: Estate of Gigele, 64 Ill.App.3d 136, 20 Ill.Dec. 935, 380 N.E.2d 1144 (1st

Dist., 1978) the wife was not informed of her right to consult an attorney, she had not read the

instrument, it was not explained to her, her husband told her it was for her protection, and she

had no knowledge of her husband’s finances.

59

Blended Families

Duress and Coercion: Illinois law says that to be valid, a prenuptial agreement must be signed

voluntarily by both parties. A signature obtained by duress or coercion will invalidate a prenuptial

agreement. In 1962 the Illinois Supreme Court defined duress as “a condition where one is induced

by a wrongful act or threat of another to make a contract under circumstances which deprive [the

individual] of the exercise of free will.” Kaplan v. Kaplan, 25 Ill.2d 181, 185, 182 N.E.2d 706, 708

(1962). The bar is not set low. In Kaplan, the bride-to-be threatened to expose the groom’s

adulterous affair – and that was insufficient to prove his “duress.” Kaplan v. Kaplan, 25 Ill.2d 181,

185, 182 N.E.2d 706, 708 (1962). In another case, the court refused to find coercion where the

groom adamantly demanded a prenup and made a prenuptial agreement a precondition to marriage.

In re: Marriage of Barnes, 324 Ill.App.3d 514, 258 Ill.Dec. 139, 755 N.E.2d 522 (4th Dist., 2001).

Unconscionability: Gross unfairness (“unconscionability”) of a prenuptial agreement is not enough

to invalidate it. Other factors (see below) must be present in addition to the alleged

unconscionability in order to set aside a prenuptial agreement. Unconscionability has been defined

as “an absence of meaningful choice on the part of one of the parties together with contract terms

which are unreasonably favorable to the other party . . . . A contract is unconscionable when it is

improvident, totally one sided or oppressive.” In re: Marriage of Gurin, 212 Ill.App.3d 806, 815,

156 Ill.Dec. 877, 84, 571 N.E.2d 857, 864 (1st Dist., 1991).

60

Blended Families

When asked to consider the “conscionability” of a prenuptial agreement the court considers the

circumstances that existed when the agreement was signed; not circumstances that may have

arisen since the agreement was executed. For the court, the question is “regardless of how the

agreement looks or works at the time of divorce, was it unconscionable when executed?”

Besides oppressiveness or one-sidedness, to invalidate a prenuptial agreement on grounds of

unconscionability, a spouse must also prove that he or she:

did not receive a fair and reasonable disclosure of the property or financial obligations of the

fiancé/ée,

did not voluntarily waive the right to disclosure, and

lacked an adequate knowledge of the fiancé’s assets or obligations.

In other words, if the court concludes that the agreement was conscionable at the time it was

executed, the requirements about disclosure are not considered. If, however, the divorce court

concludes that the prenuptial agreement was unconscionable when signed, it will still be

enforceable if either financial disclosure was made, financial disclosure was waived, or the

challenging spouse knew the finances even without financial disclosure.

61

Blended Families

Concealment of Assets: An otherwise valid prenuptial agreement may be rendered void

if one of the parties conceals assets during the negotiation of the agreement. The

Illinois Supreme Court has said: “specific knowledge is required before a prospective

wife can intelligently choose to take a small sum in payment for a release of her rights

and interests in her prospective husband’s property.” Watson v. Watson, 5 Ill.2d 526,

126 N.E.2d 220 (1955).

62

Blended Families

Waiver of Disclosure of Assets: Illinois law (750 ILCS 10/7(a)(2)(ii)): the parties may waive

the required disclosure of assets. That waiver, however, must be in writing.

Waiver of Spousal Rights in Retirement Benefits: All qualified retirement plans are regulated

by the Employment Retirement Income Security Act of 1974 (“ERISA”). The federal law

requires that benefits be payable in either a “qualified and joint survivor annuity” or a “qualified

pre-retirement annuity.” Those forms of benefit may be waived, but only with spousal consent;

and spousal consent is effective only if certain requirements are met. A spousal waiver must:

be in writing;

must designate a beneficiary or a form of benefits that may not be changed without spousal

consent or expressly permits changes in designations without further spousal consent;

acknowledge the effect of the waiver;

be witnessed by a plan representative or notary public;

be made within the applicable election period.

63

Blended Families

When spousal rights in retirement benefits are waived in a prenuptial or

postnuptial agreement, the waiver will not be effective – and will not be

recognized or honored by the plan – if the waiver fails to follow the requirements

of ERISA. Failure to satisfy ERISA requirements – contrary to the terms of any

prenuptial agreement -- will cause the spousal share of the plans at issue to be

awarded to either the divorced spouse of the participant or the participant’s

surviving second spouse.

Perhaps the most frequent mistake is to have a soon-to-be-spouse sign a prenuptial

agreement and the spousal waiver. The waiver will be found to be ineffective as it

was not signed by a "spouse;" because it was signed prior to the marriage -- when

the "spouse" was not yet a spouse, but merely a betrothed. The proper way to

achieve an effective spousal waiver of retirement benefits is to have the prenuptial

agreement signed prior to the marriage and the spousal waiver executed after the

marriage.

64

Blended Families

Amendments: Prenuptial agreements may be amended, but any amendment must be in

writing and signed by both parties. Amendments do not require consideration to be

valid.

Revocation: Prenuptial agreements may be revoked, but any revocation must be in

writing and signed by both parties. Revocations do not require consideration to be

valid.

Confidentiality of prenuptial Agreements: Prenuptial agreements are not protected by

the “marital privilege.” In one case, a former husband was forced to reveal to his

former wife the terms of his prenuptial agreement with his second wife. Although

prenuptial agreements “address intimate aspects of marriage, they are not protected

under a right to privacy because their confidentiality is not a fundamental right

necessary to the concept of ordered liberty.” Puterbaugh v. Puterbaugh, 327 Ill.App.3d

792, 764 N.E.2d 582 (3d Dist., 2002).

65

Blended Families

Declaratory Judgments: When a married couple with a pre- or post-nuptial

agreement heads to divorce court, the first thing to do is seek a "declaratory

judgment" on the validity of the agreement under Article 2 of the Code of Civil

Procedure. A declaratory judgement operates just like a final judgment. A

declaratory judgment may be sought if it will terminate at least some part of the

divorce case. This can help shorten divorce cases and potentially shave off tens

of thousands of dollars in litigation expenses.

66

Blended Families Continued

• Is there a business involved?

• If so, check for estate planning and succession

planning.

• Want to avoid a “Tommy Boy” situation.

• Want to make sure business documents do not lose

value or go under.

67

DINKS

• Double Income No Kids.

• Generally, the same rules and checklists apply as above.

• More likely to NOT have an estate plan.

• More likely to desire charitable and “incentive trust” planning for

nieces, nephews, and more remote relatives.

• Using plan to prevent exploitation. Employ trusted advisors.

68

Conclusions and Take-Aways

1. Listen. Goals First, Planning Second. No planning can take place in a vacuum or based on

assumptions without asking questions. Anyone considering planning for themselves and for

loved ones, whether in a traditional or non-traditional relationship, needs to start by listing her

goals. Is her primary concern providing for herself? Leaving an inheritance to children?

Protecting a spouse or partner? Or a pet? Making sure children are independent, but have a

safety net if necessary?

2. Issue spot.

3. Check for Basic Estate Planning Documents:

➢Last Will & Testament.

➢Trust.

➢Beneficiary Designations and Retirement Planning.

➢Establish a Durable Power of Attorney.

➢Establish Health Care Proxy and Living Will.

➢Establish a Designation for the Disposition of Remains.

➢Establish a Cohabitation Agreement.

➢Establish a Joint Custody Agreement.

➢Property Considerations.

69

Conclusions and Take-Aways Continued

4. Be the quarterback. Get the client to the proper

(sophisticated) professional for gaps and preparing

necessary documents.

5. Watch the referrals come in.

70

QUESTIONS

71

THANK YOU.

Please feel free to contact me should any questions or issues arise in

your practice.

Ryan M. Holmes Ray J. Koenig, III

Clark Hill PLC Clark Hill PLC

130 East Randolph Street 130 East Randolph Street

Suite 3900 Suite 3900

Chicago, Illinois 60601 Chicago, Illinois 60601

Phone (312) 985-5918 Phone (312) 985-5938

rholmes@clarkhill.com rkoenig@clarkhill.com