The following memorandum summarizes the benefits and parameters of prenuptial agreements, as well as the rights and responsibilities of spouses in the event of death or divorce in the absence of a prenuptial agreement.
What is a prenuptial agreement
A prenuptial agreement is a contract entered into between two individuals prior to their marriage. Typically, the contract defines the rights and responsibilities of the parties in the event of divorce or death. The rights and responsibilities defined usually pertain to alimony, division of property acquired before the marriage, division of property acquired during the marriage, and the portion of the estate that will pass to or for the benefit of the spouse in the event of death.
What if I don't have a prenuptial agreement
In the absence of a prenuptial agreement, the law of the state in which the individual resides will determine the rights of both individuals in the event of divorce or death.
Under Massachusetts law, in the event of divorce, a court may award alimony to either spouse and may require one spouse to provide the other spouse with health insurance coverage. In addition, the court may assign to either spouse some or all of the assets of the other spouse. Massachusetts does not recognize the concept of "separate property," instead following principles of "equitable division." As a result, regardless of the name in which the property is titled and whether such property was acquired prior to or during the marriage, a court may award it to the other spouse in a division of property between the spouses. The property which may be assigned includes all assets in the name of either party, including but not limited to real estate, stocks, business interests, retirement benefits, vested and nonvested benefits and pension funds. Property received as a gift or by inheritance is not clearly exempt under current Massachusetts law and may be available for property settlement. Further, even assets held in trust for the benefit of a spouse may be considered by the court in making property settlement awards. A court will consider a number of factors in making alimony and property assignment determinations, including the following: length of the marriage, age, health, occupation, amount and sources of income, vocational skills, employability, size of estate, liabilities and needs of each of the parties, opportunity of each for future acquisition of capital assets and income, contribution of each of the spouses to the acquisition, preservation and appreciation in value of the estates of both spouses and the contribution of each spouse as a homemaker to the family. Absent a prenuptial agreement, one spouse may be awarded assets acquired by the other spouse both before and during the marriage.
Massachusetts law provides that in the event of death, the surviving spouse is entitled to share in a portion of the estate of the deceased spouse. Specifically, should the deceased spouse fail to leave a valid Will, the surviving spouse would be entitled to a minimum of one-half (1/2) of the deceased spouse's estate, outright ("intestate share"). If, however, the deceased spouse left a valid Will, but failed to adequately provide for the surviving spouse, the surviving spouse could choose to take his or her "statutory share" in lieu of the bequest under the Will. If the deceased spouse had children, the statutory share would provide the surviving spouse with one-third (1/3) of the deceased spouse's probate estate as a life estate (a life income interest) to the extent that the one-third exceeds $25,000 (which amount is payable outright to the spouse). Absent a prenuptial agreement, a surviving spouse would be entitled to receive the intestate or statutory share described above.
Who should consider a prenuptial agreement
Prenuptial agreements are appropriate in any instance where an individual wishes to protect the assets the individual will bring to the marriage or may acquire during the marriage, either in the event of divorce or upon such person's death. In particular, individuals should consider entering into a prenuptial agreement for the following reasons:
· To create certainty for both individuals in the event of divorce or death, understanding that what is agreed to may be more or less generous at certain points than what a court might order in the absence of an agreement;
· To avoid the public nature of divorce proceedings which divide assets and make provisions for alimony;
· To insure that both individuals have compatible financial expectations of the marriage;
· To avoid the litigation costs attendant to a protracted divorce proceeding where issues of property division and alimony are litigated;
· To allay fears or calm reservations of family members, particularly children of a prior marriage or parents of substantial wealth; or
· To protect a business and allay the concerns of fellow business owners.
How enforceable are prenuptial agreements
The requirements for the enforceability of prenuptial agreements under Massachusetts law have evolved over time. A case recently decided provided a clear indication that Massachusetts courts favor the enforcement of prenuptial agreements. To be enforceable under Massachusetts law, a prenuptial agreement must be (i) fair and reasonable at the time of execution of the agreement, (ii) accompanied by full disclosure of the assets of both parties, and (iii) be fair and reasonable at the time of enforcement of the agreement (at divorce or death). In order to be "fair and reasonable," however, the prenuptial agreement need not provide an alimony award or assignment of property that a judge might enter in the event of a divorce. A court will consider an agreement "fair and reasonable" as long as the agreement is not "unconscionable." In order to be enforced, the agreement must also be free from duress and coercion. Accordingly, the Agreement should not be signed moments before the wedding. Further, each party should be represented by separate counsel to insure that both spouses have been adequately advised and are knowingly waiving their rights under Massachusetts law. Given the recent case law, Massachusetts courts will likely enforce a prenuptial agreement as long as (i) there is full disclosure of assets, liabilities and income; (ii) both parties were represented by separate counsel; (iii) the agreement was signed reasonably well in advance of the wedding; and (iv) the agreement provides the less wealthy spouse with sufficient property, alimony or employment to support herself or himself, even if such means of support do not approximate the lifestyle of such spouse during the marriage. In fact, a recent case concluded that as long as the spouse did not become a public charge as a result of the provisions of the prenuptial agreement and the other enforceability requirements were met, the agreement would be enforced. The court reasoned that the spouse was entitled to make a bad bargain.
What does a prenuptial agreement generally cover
Prenuptial agreements may be drawn as narrowly or broadly as the marrying individuals desire. They may not, however, bind a court with respect to issues of child custody and support.
In delineating the rights and responsibilities of each individual, there are generally, although not exclusively, four methods of property distribution or retention:
· No creation of economic partnership. Each individual retains the assets brought to the marriage (and the income and appreciation thereon). There is no commingling of funds, and there is no jointly acquired property;
· Restoration of individuals to their respective places prior to the marriage as near as possible, which would typically entail each individual keeping his or her assets brought to the marriage (and the income and appreciation thereon) and the individuals dividing all assets acquired during the marriage equally between them. Some individuals share future appreciation, but not the value of the underlying assets brought to the marriage;
· Recognition of marriage as an economic partnership where the individuals vest into it and the less wealthy spouse acquires a percentage of the wealthier spouse's property based on the duration of the marriage. Typically, there may be little or no benefit provided to a spouse in the event a divorce occurs in the first year or two of marriage with a small percentage or fixed dollar amount for the next incremental period and then a vesting schedule; or
· Recognition of marriage as an economic association where the less wealthy spouse is provided a severance package of sorts upon the dissolution of the marriage, which package usually increases in value with the years of marriage, but is not necessarily measured by the value of the wealthier spouse's assets. This may include fixed dollar distributions with or without inflation adjustments.
Alimony provisions may vary or be absent altogether from any of the foregoing methods. Regardless of the method of property distribution or retention, there are further provisions which should be considered to either increase certainty or flexibility which may include the following:
· The appropriateness of placing a cap on the vesting schedule of the less wealthy spouse (e.g. in no event does he or she receive more than 30% of the wealthier spouse's property);
· The desirability of a sunset provision by which the agreement would become null and void if the marriage survived a specified term of years (e.g. 20 years);
· The necessity of any religious provisions (e.g. a requirement that a get be given in the event of a divorce);
· The definition of separate property to be protected by the agreement (e.g. to include all property brought to the marriage or also all property acquired during the marriage in individual names or only certain assets, such as shares of a family business);
· Different benefits or a different vesting schedule depending upon whether or not there are children of the marriage; and
· The appropriateness of an initial gift to the less wealthy spouse as a token of goodwill or as a means of starting the economic partnership. Typically this would include residential real estate held in either joint names or in the sole name of the less wealthy spouse.
The agreement may provide that a certain portion of the estate of a spouse will be left outright or in trust for the surviving spouse. In the case of a trust, the predeceasing spouse may reserve the right to name the trustees of the trust and designate the remainder beneficiaries following the death of the surviving spouse. The agreement may also call for the purchase of a life insurance policy payable to the spouse or a trust for the benefit of the spouse as part of or in addition to the provisions for the surviving spouse. Alternatively, the agreement may provide that the predeceasing spouse may fund all of his or her obligations to the surviving spouse by the purchase of life insurance for the surviving spouse's benefit. The provisions in the event of death may be greater than or less than that to which the surviving spouse would be entitled under Massachusetts law.