Prenuptial agreements traditionally have been seen as symbols of mistrust and control.
Yet, despite how uncomfortable conversations about prenuptial agreements may be for couples and their families, they are an effective way to help keep family wealth, however defined, within the family that generated it and allow it to last for many generations.
Prenuptial agreements can also establish a set of rules, agreed to by all, governing the disposition of that wealth upon the dissolution of a marriage (either during the lifetime of the spouses or following a spouse’s death).
Although families and couples may be reluctant to consider a prenuptial agreement, discussions around such an agreement can actually provide a healthy opportunity for a couple to discuss finances in an open and productive way and to create a joint philosophy regarding wealth. A conversation among all parties, including parents, can also help integrate a future spouse into the family. But success will only be achieved if all parties (the couple, the parents, and other involved parties) understand the process and engage in trusting, frank, and open-minded communication – listening and being listened to – with a commitment to resolving issues without hurt feelings and resentment.
What Is a Prenuptial Agreement?
A prenuptial agreement is a contract between two soon-to-be-married individuals in which they agree upon the disposition of their property and a set of rules for that disposition both during and at the end of their marriage (whether by death or divorce).
Each state has its own laws dictating what happens to property when a marriage is dissolved by divorce and what a surviving spouse must receive from a deceased spouse’s estate. These laws can differ widely from state to state, and the state where a marriage begins may not be the state in which that marriage ends. A prenuptial agreement is a couple’s opportunity to decide what will happen should a marriage end (either by divorce or death) rather than relying on the dictates of state law.
Although this article focuses on agreements made before marriage (hence, the term “prenuptial agreement”), some couples desire to specify their rights and responsibilities in a separate agreement after they are married, known as a “postnuptial agreement.”
While not the subject of this article, the standards for making an enforceable postnuptial agreement may be higher than those for a prenuptial agreement (as once married, spouses stand in a fiduciary relationship to one another). The rules for creating and enforcing both prenuptial and postnuptial agreements are governed by state law, which varies from state to state.
Who Needs One?
Any couple can create a prenuptial agreement. However, such agreements are particularly common when one person (or one person’s family) has significantly more assets or debts than the other. A couple may also want a prenuptial agreement when one person or a person’s family owns a family business. People with children from prior relationships also create prenuptial agreements to allow for some or all of a parent’s property to remain with such person’s own children (which can also include children from the new marriage).
Even couples just starting out with few actual assets but with the potential for more may wish to create a prenuptial agreement. Imagine, for example, two young professionals (one a lawyer, the other a doctor) who are just starting their careers and want to get married. Although they have few assets and quite a bit of student debt, each desires to retain their own earnings created through the value of their education. In such a case, the couple could agree that each would retain such person’s earnings and future earning potential, even if the marriage were to end in divorce.
Key Points: Support and Division of Assets
Most prenuptial agreements address two key concepts: division of assets (defining and dividing the marital property between the two spouses) at the end of a marriage, and support (ongoing payments from one spouse to the other) upon dissolution of the marriage. An attorney should help define these terms, understand the laws governing them, and review how such payments will be taxed. An attorney will also provide suggestions based on the person’s specific situation.
Spousal support, sometimes called maintenance or alimony, is a payment from one divorcing spouse to the other, usually for a term of years following the dissolution of a marriage by divorce.
The amount of support, term of support, and any increases in support during such term are all separate nuances to consider. Some states calculate the amount of support by combining the income of both spouses from all sources and directing a percentage thereof to be allocated to each spouse. The definition of “income” includes not just salary but other forms of income, such as investment income (interest and dividends).
There are many ways that a client’s attorney may craft a support provision in a prenuptial agreement. The couple may set a cap on their income for purposes of the formula, exclude certain types of income from the formula, or set specific percentages to be applied to the amount of income (however determined). Some may ask a future spouse to waive maintenance altogether or waive it unless the couple has a child. It is important to note that spousal support is distinct from child support: Child support cannot be governed by a prenuptial agreement.
The division of assets upon termination of the marriage (either by divorce or at death) is another important part of a prenuptial agreement. Absent a prenuptial agreement, state law defines how assets are divided upon divorce. There are two general systems for dividing property upon divorce: common law systems and community property systems. Of course, the nuances of each state’s law can mean that even states using the same general system (community property or common law) may classify property differently. It is critical before entering into any agreement to consult an experienced attorney licensed to practice in the state whose law governs the agreement so that the nuances of local law are not missed.
Although this is an oversimplification, generally in community property states assets acquired after marriage are owned by each spouse equally. Assets acquired before the marriage may be characterized as separate property or some type of mixed property. Also, and again an oversimplification, in common law states marital assets are generally divided equitably (equitable distribution); in essence, this means the court dissolving the marriage decides what constitutes the fair division of the property. Assets considered marital property are typically subject to division, while assets considered separate property are generally not subject to division. However, in some states, courts may consider a spouse’s separate property when determining a fair division of the marital property. Although states may define assets constituting separate property differently, many states include assets acquired before marriage, gifts received before or during marriage, and inheritances received before or during marriage in the definition of separate property. Some states do not recognize the concept of separate property, which could result in all assets, no matter how acquired, being subject to division.
Income from and incremental growth on separate property can add a layer of complexity when creating a prenuptial agreement. Many states allow the appreciation on separate property earned or accrued after the marriage to be divided between the divorcing spouses. Further, when determining income subject to division in a support calculation, some states’ laws include income from separate property. Even trust income, in some circumstances, may be considered family income when determining appropriate spousal support.
As with the provision of support for a former spouse, the prenuptial agreement can change the rules of state law with respect to the division of property. The agreement can define which assets (or classes of assets) are separate property not subject to division; limit what property (or how much value) may be allocated to a spouse; include a sliding scale, with more property being allocated to a spouse in a longer marriage; or provide some other division unique to the couple and their assets. A prenuptial agreement is essential to determining how property is divided between divorcing spouses, allowing each spouse to classify certain assets, such as shares in the family business, trusts and their income, professional licenses and the income derived therefrom, and inherited assets as separate property not subject to division in a divorce.
Almost every state forbids a decedent from disinheriting a spouse. How the amount payable to a surviving spouse is calculated and what property is included in the calculation can vary significantly by state. Importantly, the concepts of marital and separate property may not apply when a spouse dies, as many states calculate the surviving spouse’s required share based on the value of property owned at death, from whatever source acquired.
Further, leaving a trust for a surviving spouse may not satisfy that spouse’s state law right to receive property from the deceased spouse, allowing the surviving spouse to elect to receive the state law minimum share outright and forego the trust that would have been created under the deceased spouse’s will.
A surviving spouse’s rights can be waived in a prenuptial agreement. Accordingly, if one spouse has assets (e.g., an interest in a business, an inherited home, family heirlooms, wealth acquired before marriage) that such spouse desires to bequeath to someone other than his or her spouse, or if a spouse’s will leaves assets in trust for the surviving spouse, it is essential that a prenuptial agreement waiving spousal rights at death be executed. Of course, a prenuptial agreement can also require a decedent to provide a surviving spouse with a minimum amount that differs from that required by state law (even, perhaps, an amount greater than the state law minimum).
Although most families prefer to keep information regarding their family finances private, failure to fully disclose assets when preparing a prenuptial agreement may jeopardize the agreement’s validity. Waivers of rights are generally not valid if they are not made with full knowledge of what is being waived. Failure by a person entering into a prenuptial agreement to fully disclose assets and expectancies, including their value, can invalidate the agreement. Such disclosures may be uncomfortable and may accelerate conversations that either or both parties may not be prepared to have. Disclosure may even require parents or grandparents to reveal previously undisclosed financial information to children or grandchildren (even information they may not want to disclose).
It is essential that each person have a good understanding of the different assets and ownership structures that make up his or her family’s wealth:
- The engaged couple should be prepared to disclose all assets currently owned, including the assets’ values. This disclosure would include ownership interests in family or other closely held businesses entities, along with the value of the interest. It may even be necessary to obtain a business valuation from a valuation expert to support the disclosure.
- The engaged couple should be prepared to disclose all trusts in which either has a beneficial interest, whether current or contingent, and the value of the assets in the trust. A copy of the instrument establishing the trust (or a summary of the trust’s terms) may have to be disclosed.
- It may be necessary to disclose potential future inheritances.
Remember, disclosure requirements can be complicated and vary from state to state. Therefore, it is necessary for each person to engage a skilled matrimonial law attorney in the state whose law will govern the agreement to follow the proper disclosure of assets and liabilities.
Each person entering into a prenuptial agreement should be represented by a separate attorney. When considering whether the circumstances regarding the execution of a prenuptial agreement were not fair, which could lead to the agreement being invalidated,
“[t]he factor most often mentioned, and perhaps given the greatest weight, has been the complaining party’s access to independent counsel prior to consenting to the contract terms. In one jurisdiction it has been held that, under both common law and the statutory scheme replacing it, both parties must have an opportunity to consult with legal counsel of their own choosing as a prerequisite to enforcement of a premarital agreement governing property or maintenance in a subsequent dissolution proceeding.”
Nevertheless, “most courts have more probably indicated that access to counsel was a factor to be considered along with all of the others, either expressly saying so or impliedly adopting that approach by scrutinizing other circumstances as well as the availability of legal advice.”
A court is more likely to uphold a prenuptial agreement when the parties have had “adequate” time to review the terms of the agreement with an attorney. Of course, what constitutes “adequate” is determined by the court reviewing the prenuptial agreement and the facts and circumstances of its execution.
First presenting the agreement to the challenging spouse on the parties’ wedding day has been found to offer insufficient opportunity to consult counsel, while presenting the contract 1 day to 1 week before the parties’ wedding day has produced differing conclusions, some courts finding that interval sufficient for the complaining spouse to obtain independent advice, but other courts holding that such a time frame negated the complaining spouse’s inclination to seek counsel. When a spouse first viewed the agreement either more than 1 week, or an undisclosed period of time which presumably exceeded 1 week before signing it, that interval has been held to offer the challenging spouse sufficient opportunity to seek an attorney’s assistance.
The timing (along with other circumstances) of when a prenuptial agreement was signed can implicate whether the agreement was signed voluntarily.
Although some [courts] have invalidated agreements negotiated at the last minute due to unfair bargaining, there is a disturbing trend to approve of such bargaining. Such tactics put the party being presented with the contract at the last minute in a very difficult situation. As a practical matter, it is nearly impossible at that late date to find a lawyer. Given the frenzy of many wedding weekends, there probably is little time to consider negotiating any changes. Further, this is not the time when people should be asked to make a substantial financial decision such as whether to sign a premarital agreement.
California will consider that a prenuptial agreement was signed voluntarily only if the person being asked to waive rights is given at least a week after it is first presented. The American Law Institute has proposed a period of at least thirty days before the wedding.
Of course, a coerced agreement is not valid.
Prenuptial Agreement Process
Every family is different, and there is no “one size fits all” with respect to any family arrangement. Each prenuptial agreement should be tailored to the particular couple’s circumstances and family needs. Nevertheless, below is an outline that may help with the prenuptial agreement process.
- Shortly after becoming engaged, the concept of a prenuptial agreement should be introduced.
- The idea of a prenuptial agreement should be discussed by the engaged couple – all of the specifics do not need to be nailed down, but the concept should be introduced.
- Both parties should discuss why an agreement is important and why it might be necessary.
- The discussion should be friendly and seek to allay fears and anxieties.
- Once both parties have decided to enter into a prenuptial agreement, each should hire their own attorney.
- Separately interview attorneys.
- Use a specialist in matrimonial law. Don’t use the “family’s business or general” lawyer (even if family members insist).
- The attorney client relationship is extremely important, so it is best to choose an attorney who is easy to work with.
- Each party should be prepared to discuss their assets and liabilities at the initial meeting (including beneficial interests in trusts and business assets).
- Each party’s accountant and financial advisors (even before the initial meeting) should be contacted to prepare a personal balance sheet and to provide statements and other information.
- Engage an attorney.
- Understand the terms of the engagement and have a written engagement agreement with the attorney.
- Have the attorney provide counsel regarding the state’s marital, property, and rights at death laws. Questions to ask include:
- What are the statutory maintenance and separation of assets laws in the state?
- What is considered marital property and separate property in the state?
- What is necessary to know about trust income and future inheritances?
- Does state law prevent a surviving spouse from being disinherited (commonly known as an elective share, dower, or curtesy)?
- Under state law, what portion of a decedent’s estate must pass to the surviving spouse?
- Each spouse should be separately represented. If one party speaks with an attorney, that attorney (generally) cannot represent the other party.
- If there is a great disparity in assets, one party can pay the fees of both attorneys.
- Separately interview attorneys.
- Once both parties have engaged attorneys, work with the attorneys to negotiate an agreement. During negotiations:
- Each party should disclose assets to one another. Generally, statements listing each party’s assets and liabilities (including their values) will be attached as exhibits to the prenuptial agreement.
- The engaged couple should have an open and honest conversation about those assets.
- As part of this process, the parents of the engaged couple may need to have open and honest conversations about family assets with their child who is entering into the agreement.
- The engaged couple can discuss what would be fair terms for their agreement.
- Difficult topics can be negotiated by the attorneys. If possible, avoid direct negotiations. Personal arguments over difficult topics should be avoided.
- Finalization and signature.
- Execute the documents according to state law.
- After the wedding and beyond
- Consult with a financial advisor when taking title to new assets. Taking title incorrectly may violate the agreement or inadvertently turn an asset that was intended to be separate property into marital property.
- Avoid comingling assets. For example, if an inheritance is separate property, don’t deposit the inheritance into a joint account. If such an action does not convert the inheritance into marital property, at a minimum it will be difficult to trace what part of the account is separate property and what part is marital property in the event of a divorce.
- Divorce is governed by the law of the state in which the divorce is filed. Before moving, engage a lawyer from the new state for advice regarding rights and responsibilities upon moving.
A prenuptial agreement can be the catalyst for creating a shared financial strategy.
It can create a set of agreed upon rules for the division of property when the marriage ends (either by divorce or upon death).
A couple entering into a marriage without an open and honest conversation about these important issues and others may already be at a disadvantage.
For more information, please consult your PNC Advisor or contact PNC Private Bank.