Premarital Agreements Are an Ounce of Prevention
 
October 23, 2003
 

A well-designed agreement can help to avoid financial and emotional stress.

Marriage today is more complex than ever before.  Consider the high rate of divorce, second marriages and two-career couples.   Anyone with significant property, an inheritance, a family business or children from a prior marriage ought to consider a premarital agreement.

Definition

A premarital agreement (or ante-nuptial agreement) is a contract between a couple planning to marry that typically provides how property owned before or acquired during the marriage will be divided in case of divorce or at death, and can provide for alimony or maintenance.  The agreement can be as broad or as limited as the couple desires. 

Law

All 50 states recognize the validity of premarital agreements and over half of the states have adopted the Uniform Premarital Agreement Act.  That Act encourages the enforceability of premarital agreements and requires that the agreement and any amendment be in writing and signed by both parties.  The agreement is effective on the parties’ marriage.

Objectives

The primary objective of a premarital agreement is to settle property rights in case of divorce or at death and maintenance in the case of divorce.  Except for child support, a couple is free to enter into any type of agreement they wish.  There are many important issues to consider, such as:

Definition of Non-Marital or Separate Property. This includes property owned before marriage, gifts and inheritances, including in some states interest and dividends earned by that property.  Non-marital property typically is not divided on a divorce and will pass on death without a claim by the surviving spouse.  However, a couple could agree to use non-marital property for the purchase of a residence and that could be treated as marital property.

Definition of Marital Property. This is property acquired after the marriage, other than separate property, but the agreement can limit this to only property in joint name or designated in writing as marital property.  The parties can specify how marital property is divided on a divorce or distributed at death.

Wages and Earned Income. Under most state laws, earned income, wages, and Social Security benefits acquired after marriage are marital property.  The agreement can provide, however, that earned income is to be treated as non-marital property. 

Retirement Plans. Contributions to retirement plans after the marriage are generally treated as marital property.  The couple can agree to allow each party to accumulate retirement benefits separately.  The agreement can also provide that each party may name someone else as the beneficiary, but to be effective the participant’s spouse must sign a waiver of rights to a qualified retirement plan after the marriage. 

Maintenance or Alimony. A party can agree to waive maintenance or alimony in case of divorce or agree to a specified schedule of payments.   The couple needs to consider the ability of each spouse to support his or her self after the divorce if circumstances change, such as the birth of a child.  Some states allow a court to award maintenance or alimony if, due to unforeseen circumstances, the spouse would suffer undue hardship or be eligible for public support at the time of the divorce.

Death. The couple can agree on how their property will be distributed on death, including the waiver of certain spousal estate rights.  A party is free to name his or her spouse in his or her will or trust or may make lifetime gifts.  The couple may specify how the marital residence will be distributed if the owner dies first.  Sometimes, the surviving spouse is given the right to remain in the residence for period of time after the first spouse’s death.

Enforceability

An important issue for the couple is whether the agreement will be enforceable.  Generally, it will be upheld if it was entered into voluntarily and is not unconscionable.   There are several facts the courts will look at to determine enforceability.

First, both parties must sign the agreement voluntarily.  It should not be signed in circumstances that may indicate duress, coercion or undue pressure.  This means that the parties should not sign the agreement on the way to the wedding.  Ideally, the agreement should be signed well in advance of the wedding. 

Second, there must be full and complete disclosure of all of the assets, income and debts of each party before the agreement is signed.  Assets include all bank, brokerage and financial accounts, all retirement accounts, such as IRAs or 401(k)s, all stock, business and partnership interests, life insurance, personal property and real estate.  Copies of current income tax returns should be exchanged to verify income.  Finally, a list of liabilities, mortgages and credit card debts should be prepared by each party.  This exchange of information should be made before the agreement is negotiated and well before it is signed.  The agreement should also waive the right to any further disclosure of information. 

Third, each party should be represented by his or her own lawyer, who can explain how the rights and obligations arising from marriage are modified or preserved by the agreement.  An agreement that has been reviewed and revised by an independent attorney is more likely be viewed by the courts as having been entered into voluntarily and as being fair to both parties.

Fourth, some states make a determination whether the agreement was fair to both spouses when signed.  Other states will not address this fairness issue when full and complete disclosure was made before the agreement was signed.

Conclusion

Many of the financial issues facing a couple marrying today can be resolved by a properly drafted premarital agreement.  The need to protect children of a first marriage or to preserve a family business can be accomplished through such an agreement.  The couple should continue to review and amend the agreement when circumstances change, since it is a plan for the future that should evolve with the couple’s marriage. 

For more information, e-mail Maureen Strauts at maureen.strauts@hklaw.com, or call toll free, 1-888-688-8500.