Prenuptial Agreements and Retirement Plan Assets

• Publication year: 2004
• Pages: 43

33 Colo.Law. 43 Colorado Lawyer 2004.

2004, February, Pg. 43. Prenuptial Agreements and Retirement Plan Assets

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43

Vol. 33, No. 2, Pg. 43

The Colorado Lawyer
February 2004
Vol. 33, No. 2 [Page 43]

Specialty Law Columns
Estate and Trust Forum
Prenuptial Agreements and Retirement Plan Assets
by Marcia Chadwick Holt, Rachel R. James

This column is sponsored by the CBA Trust and Estate Section The column focuses on trusts and estate law topics, including estate and trust planning and administration, elder law probate litigation, guardianships and conservatorships, and tax

planning

Marcia Chadwick Holt Rachel R. James

Column Editor:

David W. Kirch, of David W. Kirch, P.C., Aurora - (303) 671-7726, dkirch@qwest.net

About The Authors:

This month's article was written by Marcia Chadwick Holt, Denver, a partner with Davis Graham & Stubbs LLP - (303) 892-7320, marcia.holt@dgslaw.com; and Rachel R. James, Denver, an associate with the same firm - (303) 892-7214, rachel.james@dgslaw.com.

Although a prenuptial agreement generally is effective to waive a spouse's rights to qualified retirement plan benefits upon divorce, it usually is ineffective to waive a surviving spouse's rights to such benefits upon the plan participant's death. This article reviews the rules that create spousal rights in qualified retirement plans and requirements to waive such rights.

Estate planning practitioners often draft prenuptial agreements for individuals with qualified retirement plans ("retirement plans" or "plans").1 Such retirement plans may constitute a significant portion of the assets of parties who anticipate being married. Consequently, many people enter prenuptial agreements to control the disposition of their retirement plan assets in the event of divorce or death. However, a prenuptial agreement will not necessarily accomplish the parties' goals, because the provisions regarding retirement plans may not be enforceable under federal law.

This article reviews the rules that create spousal rights in retirement plans, including defined benefit, money purchase pension, target benefit, and certain other defined contribution plans.2 The article discusses spousal rights under retirement plans and the requirements to waive such rights. It also addresses how a prenuptial agreement may constitute an effective waiver of spousal rights under a retirement plan upon divorce, but not upon the participant's death.

Prenuptial Agreements And Divorce

Under the Colorado Marital Agreement Act ("Act"),3 prenuptial agreements are enforceable, provided that: (1) they are signed voluntarily; (2) there is fair and reasonable disclosure of the parties' property and financial obligations at the time of execution; and (3) the agreement is not unconscionable at the time its provisions are enforced.4 Nevertheless, to the extent that federal law prevents a binding agreement, the Act specifically limits an individual's ability to address retirement plan rights and obligations in a prenuptial agreement.5 Therefore, the retirement plan provisions in a Colorado prenuptial agreement must not conflict with federal law.

The Employee Retirement Income

Security Act of 1974, as amended ("ERISA")6 is the federal law that preempts state laws regulating retirement plans. However, ERISA does not preempt state laws regulating either the dissolution of marriage or the waiver of interests in retirement plans upon divorce.7

Although ERISA provides detailed spousal rights and consent provisions that protect a spouse upon the participant's death, ERISA contains no similar provisions to protect a spouse upon divorce from the participant.8 The absence of such ERISA provisions indicates that Congress did not intend to supersede state domestic relations law.9 In fact, the qualified domestic relations order ("QDRO") exception to ERISA's anti-alienation provisions appears to defer to state law upon a participant's divorce. Under the QDRO exception, ERISA allows the division of a spouse's retirement plan benefits under a state court order upon divorce.10

The Colorado Court of Appeals adopted this reasoning in In re the Marriage of Rahn.11 In Rahn, the parties executed a prenuptial agreement one week before their wedding. The agreement included a general waiver of rights to the parties' separate property acquired prior to and during their marriage. When the prenuptial agreement was executed, the husband had a vested interest in a retirement plan that continued to increase in value throughout their marriage. In conjunction with their divorce, the wife filed an appeal in which she asserted that the prenuptial agreement did not constitute an effective waiver of her rights to the husband's retirement plan. The court enforced the prenuptial agreement with respect to the husband's retirement plan and held that

ERISA does not preempt state dissolution of marriage law with respect to the waiver of all interests in a[n] ERISA-qualified retirement plan in a dissolution of marriage proceeding.12

Thus, a retirement plan participant may enter into a prenuptial agreement to prevent all, or any part, of his or her retirement plan benefits from being subject to division upon divorce, as long as the agreement complies with Colorado law. This usually can be accomplished in the prenuptial agreement. First, the retirement plan benefits must be identified as separate property. Second, the prenuptial agreement must contain a clause that provides that neither spouse may obtain an interest in the other's separate property or any related appreciation if such property is: (1) separate property when the prenuptial agreement is executed; or (2) later purchased or acquired and held as separate property.13

Prenuptial Agreements And Participant's Death

Although ERISA does not preempt state domestic relations law, the Internal Revenue Code of 1986, as amended ("Code"), and ERISA protect a surviving spouse's rights to retirement plan benefits upon the participant's death. ERISA and the Code each contains provisions that establish spousal rights with regard to the benefits of married persons who participate in certain retirement plans.14 These rules require that the normal forms of benefit for married participants be qualified joint and survivor annuities ("QJSAs") and qualified preretirement survivor annuities ("QPSAs"). QJSAs and QPSAs are sometimes collectively referred to in this article as "survivor annuity rules."15

To determine the impact, or lack thereof, of a prenuptial agreement on the survivor annuity rules, it is important for practitioners to review such rules. Specifically, it is necessary to examine QJSAs and QPSAs and the beneficiary designation requirements under plans that are exempt from the QJSA and QPSA requirements, as well as the requirements to waive such spousal rights.

Plans Subject to Survivor Annuity Rules

The survivor annuity rules generally apply to defined benefit, money purchase, and target benefit plans.16 In addition, defined contribution plans - other than money purchase pension and target benefit plans - also may be subject to the survivor annuity rules if such plans either fail to satisfy the requirements for exemption or voluntarily apply the survivor annuity rules.17 It is important to determine whether a plan is subject to the survivor annuity rules. This may be done by reading the plan or summary plan description or by consulting with the plan administrator to determine the terms of the plan.

Overview of QJSAs

And QPSAs

If a plan is subject to the survivor annuity rules, a participant or beneficiary does not have the option to elect between a QJSA and QPSA. The determination of whether the benefit will be a QJSA or

QPSA will depend on when the...