When a couple announces their engagement, it is a happy time for everyone. After the well-wishing is over talk inevitably turns to where the couple will live, how they will manage or merge their busy lifestyles and how they will start or merge their pre-existing families. For most, a prenuptial agreement does not cross their minds. However, it is both useful and wise for all couples to consider, discuss and deal with financial styles and issues before marriage. Though counterintuitive, this is the time to prepare for the worst while hoping for the best. A prenuptial agreement can address these issues.
What is a prenuptial agreement ("prenup")? It is a contract between two parties contemplating marriage or civil union, which sets forth terms by which the parties will abide in the event the marriage, or union ends in death or divorce. The "consideration" for this contract (consideration being the value exchanged which makes a contract binding) is the marriage or union itself. If the marriage or union does not take place, the agreement is void. If the union is made, then a validly entered prenup will control the distribution of assets in the event of the death of one of the parties or divorce.
How does a prenup control distribution of assets at death? Spouses hold unique positions under most states' descent and distribution statutes. If a spouse is not properly provided for in the other spouse's will, most states afford the spouse (or spouse and children) the opportunity to ignore the will and take a "forced share" of the deceased spouse's estate. This forced share can be over 50% despite what the deceased person intended with their estate plan. Through a prenup, spouses can validly waive their forced shares and agree to abide by the other spouse's plan for his or her estate. The laws of descent and distribution vary from state to state. The laws that apply are those of the state where the decedent is domiciled at the time of death and also those where certain tangible personal or real property may be located.
How does a prenup control distribution of assets upon divorce? The divorce laws of each state determine property distribution, child and spousal support according to a specific set of guidelines and requirements, which vary from state to state. The law that controls a divorce is the law of the state in which the divorce takes place, not the state where the marriage took place. So parties entering marriage under one state's set of rules may find themselves operating under a different set of rules at the time of divorce. Some states are "community property states" which consider all property acquired by a spouse during marriage to be owned jointly by both while property brought to the marriage by one spouse is considered that spouse's separate property. Other states recognize spouses' separate property acquired during marriage and will allocate separate property back to the acquiring spouse. Still other states, including New Hampshire, consider all property owned by either spouse to be part of the marital estate to be divided "equitably" between the spouses based on a variety of factors, including each party's historical contribution to the asset. A prenup can avoid the unintended or undesired consequences of a court reviewing and deciding property distribution after a brief hearing or a long, expensive trial, by creating a contract that specifies how the property and support issues will be handled upon divorce.
Top four reasons to think about having a prenup:
1. Blended families: Individuals on a second or third marriage with children from a previous marriage may want or need to preserve previously acquired assets for the children of that prior marriage.
2. Estate planning: Similar to blended families, individuals with family wealth, may want or need to maintain that family wealth separate from assets acquired during the marriage. Spouses may also want to avoid the forced share from disturbing a carefully crafted estate plan.
3. Business interests: Divorce can result in the division of business assets that are not easily divisible. A prenup can maintain a business interest intact by specifying how it will be handled in divorce.
4. Wealth Disparity: When parties to a marriage or union have unequal assets, a prenup may provide certainty to both parties that the asset balance will not be upset by the marriage or union, that each party will be reasonably protected and that the parties may maintain the flexibility to transition assets to shared ownership by choice, not by operation of law.
What makes a prenup enforceable? As with any contract, a prenup needs the willing participation of two competent adults, under non-coercive circumstances and containing terms that are objectively reasonable. Each party should have separate legal counsel before entering into a prenup. Prenups require full disclosure of all assets by both parties. The terms in the prenup may not violate public policy, which include terms that conflict with current law or terms so onerous that one party or the other becomes destitute or is effectively placed into involuntary servitude under its terms. For example, a prenup that leaves one party without sufficient means of support, unless due to that party's direct and willful actions, may be subject to successful challenge as against public policy. Similarly, a prenup that requires one party to work solely for the benefit of the other may be considered void. Most importantly, a prenup should not be entered into without sufficient time for reflection, advice, and the opportunity to question, comment, revise or edit the terms. Nothing imperils a prenup more than the lack of full disclosure or a party's claim to have signed the document under time pressure shortly before the wedding, when family and friends are gathered and the agreement is presented by surprise with no opportunity for independent review and consultation.
How long does a prenup last? The agreement may be for a period of years, or for the duration of the marriage. Some agreements outline stages: if the couple is married five or less years, certain terms apply; if the couple is married five to ten years, different terms apply; and if the couple is married for more than ten years, still different terms apply.
What may be covered in a prenup?
- Estate Planning. The parties may outline their plans for their respective estates in the event of their deaths.
- Spousal support. Levels of spousal support upon divorce may be delineated in a prenup, except in states that do not allow for waivers of alimony.
- Property division. Property brought to the marriage and property acquired during the marriage may be allocated upon divorce according to an advance plan agreed upon in a prenup. Note that certain provisions may be overridden or ignored by Medicaid qualification rules if applicable.
- Parenting issues: Some parenting issues, such as location of the children's residence, schooling, religious instruction, emergency guardians may be agreed in a prenup. Enforceability of these provisions will depend on a variety of factors and will be evaluated in light of the children's best interests.
- Child support. States almost universally do not allow child support to be predetermined or waived in a prenup because children are not parties to the agreement. In addition, the state's interest in adequate support for children of divorced parents trumps the parents' desires to pre-plan child support matters.
Can a couple enter into or amend a prenup after marriage or civil union? It depends. Many states recognize "post-nuptial" agreements. The consideration for such agreement is the parties' agreement that they will continue the marriage. These agreements may follow a period of strife and reconciliation in the marriage, or they may simply come at a time when financial or other considerations make a post-nup an appropriate planning tool.
Can a couple have a "prenup" without marrying? No, but couples may have agreements that govern their joint interests. Adults may contract for all sorts of things. Unmarried parties may "agree" to share expenses, purchase property together, assume debts together, benefit each other in wills and confer insurance benefits. However, each agreement is subject to contest, and its enforceability is only as strong as the terms provide. For example, an agreement between two friends to share a lease on an apartment only describes the relationship between the two friends. The landlord likely will hold each of them accountable under the terms of the lease. If one party is held responsible for the full rent and obligations, that party must seek recourse against the other party for his or her unpaid obligations. With unmarried or un-unionized parties, there is no comprehensive process similar to divorce that would gather all the assets and obligations together in one forum, or one document. Each agreement would be enforced separately, according to its terms.
So, dear friends and family, as unromantic as it may seem, while the happy couple is planning for their future, they should plan for the possibility that their relationship will end in death or divorce. The process of thinking through potential changes in the relationship and its impact on the financial dynamic is an appropriate planning tool and is also a positive way for the couple to start their life together on solid footing, with the stars out of their eyes - at least for a moment. Many argue that raising the issue of a prenup can doom a prospective marriage or union. If simply discussing the issue of a prenup will imperil the union, perhaps the parties should reconsider their plans.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
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