SHOULD YOU SIGN A PREMARITAL AGREEMENT?

WHAT IS A PREMARITAL AGREEMENT

A premarital agreement is a written contract between two people who intend to marry that affects their financial rights and obligations while they are married, if they separate or divorce, or when one of them dies. In a premarital agreement, a couple can agree to alter the rights and obligations they otherwise would have to each other as spouses. A premarital agreement is also known as a prenuptial agreement (a prenup) or an antenuptial agreement.

WHAT SUBJECTS CAN BE COVERED IN A PREMARITAL AGREEMENT

State law dictates what subjects can be addressed in a premarital agreement. The specifics can vary from state to state so it’s important to consult an attorney in your state to determine what provisions your state courts will uphold. Furthermore, each party should have a separate attorney at all stages of drafting and signing a premarital agreement. A premarital agreement is more likely to be upheld if each party had an independent attorney.

As a general rule, in a premarital agreement prospective spouses can:

• Relinquish rights to the other spouse’s income and property that they would typically acquire as a result of the marriage.

• Relinquish the right to inherit from a deceased spouse.

• Determine how property and liability for debts will be distributed between them should the marriage fail.

• Relinquish the right to alimony or agree on how much alimony one spouse will pay the other.

• Determine whether one spouse will or will not be obligated to pay the other’s attorneys’ fees if they separate or divorce.

Provisions for custody and support of children born during the marriage are sometimes included in premarital agreements. However, a court will not enforce these provisions if they are not in the best interests of the children.

WHO CAN BENEFIT FROM A PREMARITAL AGREEMENT

When you think about premarital agreements, you may imagine the stereotypical situation: a wealthy celebrity or titan of business demands a premarital agreement to protect the family fortune from a fiancée of modest means. However, you don’t need to be rich to benefit from a premarital agreement.

You may find a premarital agreement especially valuable if:

• You are an older or mid-life person who has accumulated significant assets that you want to protect if you divorce. The more assets a person owns, the more critical a premarital agreement becomes.

• You want to avoid a contentious and costly fight over property and alimony if you divorce.

• Your prospective spouse has significant debt or money management problems.

• You have children from a prior marriage or relationship to whom you want to leave your estate.

• You own a business.

Some people resist a premarital agreement because they view it as an admission that the marriage is likely to fail. On the contrary, a premarital agreement can increase the likelihood that a marriage will succeed. A premarital agreement presents a couple with an opportunity to have a realistic discussion about how they expect to manage their finances and who they want to inherit their property. False assumptions can be exposed and examined before the marriage. Thus, the chances of marital conflict are reduced.

A young couple will not usually have as great a need for a premarital agreement as a more mature couple or a couple on a second or subsequent marriage. However, even a young couple should consider the issue before foregoing a premarital agreement.

HOW MARRIAGE AFFECTS PROPERTY OWNERSHIP

To understand why premarital agreements are important, you need to understand who owns the property in a marriage and how it would be divided on divorce absent an agreement between the spouses. When you get married, what was once yours can become “ours.”

In a marriage, property is typically classified into one of three categories: separate property; marital or community property; and mixed property. These classifications become important if a divorce occurs because they determine what property is part of the marital estate that is divided between the spouses.

A. Separate Property

Separate property is property that you own when you enter the marriage and property that is given to you (and not also to your spouse) as a gift or inheritance during the marriage. If you divorce, you are entitled to all of your separate property.

B. Marital or Community Property

Property that is acquired during marriage other than by gift or inheritance is marital property or community property if you live in a community property state. Both spouses own an interest in the property. The efforts of one spouse are considered to be the efforts of the marital team.

C. Mixed Property

Separate property can become mixed property if it increases in value during the marriage. The property’s value when you entered the marriage remains separate, but any increase in value can become marital property. Property can increase in value for one or two reasons, passive appreciation or active appreciation.

1. Passive Appreciation

Passive appreciation occurs due to market forces with no use of marital assets.

2. Active Appreciation

Property can increase in value due to active use of marital assets. Remember, one spouse’s efforts are considered an expenditure of marital resources.

D. When a Divorce Occurs

When a couple divorces, their marital or community property is divided between them. They can agree on how to divide the property. If they can’t agree, a court will decide for them. In community property states, a court is usually required to make an equal division. In non-community property states, the court may order an unequal division to achieve a fair result. The court may consider various factors such as the length of the marriage, how much separate property each spouse has, and each spouse’s age, health, earning capacity and ability to be self-supporting. When one spouse has unfairly dissipated marital assets (e.g., gambling debts or gifts to a paramour), the court may make an unequal division in both community property and equitable division states.

PROBLEMS A PREMARITAL AGREEMENT CAN RESOLVE

Premarital agreements are adaptable to the needs of the couple. Every couple has different problems they want to solve in their premarital agreement. Here are some of the most common.

A. Preserving Assets during Marriage and on Divorce

• You want to avoid an expensive and contentious court fight over property if your marriage fails.

• You want to keep the assets you entered the marriage with if you divorce.

• You have income that you regularly invest. You want the investments and any earnings your investments generate to remain your separate property

• You or your parents have furnished the down payment on a home for you and your spouse. You want to make sure the down payment is returned to you if the marriage fails.

B, Alimony

You don’t want to pay alimony. Or you are willing to pay alimony, but you want the amount to be predictable. Or you are the less wealthy spouse and want to ensure that you will receive reasonable alimony.

C. Debts

You are concerned about your prospective spouse’s spending habits and want to protect yourself from liability for his or her debts.

D. Retirement Accounts

You want to keep all your retirement savings should you divorce.

E. Keeping Assets in the Family

• You want to keep an heirloom or other assets in the family should you divorce or die before your spouse.

• You are expecting to receive an inheritance that you want to pass to your children or other family members.

• You want to leave all or a substantial portion of your estate to children from a prior marriage or relationship

F. Business Owners

• You want to be able to manage your business free from your spouse’s interference.

• You want to prevent your spouse from acquiring an interest in your business that you will have to buy out if you divorce.

FAIRNESS ISSUES WHEN ONE PARTY HAS ALL THE WEALTH

A premarital agreement need not provide as little as the law permits for the less wealthy spouse. A more balanced agreement may be a better choice for the health of the marriage and may prove more effective in the long run.

A premarital agreement allows the parties to waive the rights they would otherwise have to marital or community property and support on divorce or the death of one of them. When the parties' financial situations are comparable, a mutual waiver of these rights can be a win-win situation. Each party protects his or her separate property, investments and retirement savings, business interests, family heirlooms, and the inheritance of children from prior marriages.

The result is different when one party has far less wealth than the other. A premarital agreement can put the poorer party in a much more precarious financial situation than he or she would otherwise experience. Consider the less wealthy spouse's position if the agreement:

• Waives alimony regardless of the wealthy spouse’s ability to pay and the less wealthy spouse’s contributions to the marriage (e.g., raising children, making a home, supporting the other spouse’s career).

• Waives appreciation on the wealthy spouse’s separate property, even appreciation due to the efforts of the less wealthy spouse.

• Waives any interest in the wealthy spouse’s retirement benefits.

• Provides that the earnings of the wealthy spouse remain his or her separate property and need not be shared with the less wealthy spouse.

• Provides that the couple will not accumulate any marital property or that any marital property that they do acquire will be disproportionately awarded to the wealthy spouse.

• Waives inheritance rights so that the wealthy spouse can completely disinherit the less wealthy spouse

They are many ways you can make your agreement more generous while still protecting your interests. Your agreement could give your fiancée some financial benefits in exchange for waiving an interest in your business and separate property. For example, you could agree to pay a reasonable amount of alimony and provide your spouse with a home or other specified property if you divorce. You may want to include a formula that increases the financial benefits based on the length of the marriage or the birth of children. Your agreement could include a sunset clause. A sunset clause provides that the agreement, or certain parts of it, expire after a specified number of years. If you divorce after that time, your assets are split according to your state’s rules.

A balanced agreement will promote the success of your marriage. If the marriage fails, a balanced agreement is more likely to serve its intended purpose of protecting your assets.

CREATING AN ENFORCEABLE PREMARITAL AGREEMENT

Most state laws and court decisions establish similar requirements for an enforceable premarital agreement. The most important requirements are:

• The agreement and any subsequent changes to it must be in writing.

• Before the agreement is signed, each party must fully disclose his or her financial information to the other.

• Each party must sign the agreement voluntarily after having sufficient time to review it and obtain legal advice.

• Each party should be represented by a different attorney. The parties should not use the same attorney or law firm.

A. The Agreement Must Be in Writing

Premarital agreements and any modifications to them must be in writing. In a few rare instances, courts have recognized an unwritten modification to a premarital agreement based on the spouses’ conduct.

B. Each Party Must Fully Disclose All Assets and Liabilities to the Other

If prospective spouses do not fully disclose their assets, income, and indebtedness to each other, they cannot make an informed decision on whether to sign the premarital agreement. Without full disclosure, you and your attorney cannot evaluate the fairness of the agreement.

C. Each Party Must Understand the Agreement and Sign It Voluntarily

A person must be fully aware of what a premarital agreement provides and enter the agreement voluntarily. Whether a premarital agreement was voluntary can be a point of contention.

D. Each Party Should Have an Attorney

The best policy is for each party to choose and pay for his or her own counsel. Even if you provide funds to pay for your fiancé’s attorney, do not choose the attorney or suggest any attorneys to him or her. A court may be skeptical of advice provided by an attorney who has been chosen and paid for by the opposing party.

KEEPING YOUR AGREEMENT UP TO DATE

You should review your premarital agreement from time to time to make sure it reflects your family’s current circumstances. A premarital agreement is based on the situation of the parties at the time it is married. The future is unpredictable and much can change during a marriage. A spouse can acquire new job skills or start a business. A spouse can become disabled and unable to work. A business can flourish or fail. An unexpected windfall or inheritance can appear. A special needs child can be born. These and other major developments could require a modification of your agreement. Remember that an oral modification of your agreement is usually not enforceable. Any changes that you and your spouse agree to make must be put in writing.

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-Gabriela Bonilla, ESQ