The following article, written by Michigan divorce and family law attorney, Jeanne Hannah, appeared in a Michigan newspaper recently. I have removed the references to Michigan law for this post:
People ask: “Would we ever have to go to court to enforce a prenuptial agreement?”
There are times that one party challenges the validity of a prenup. If that occurs at the time of a separation or divorce (or sometimes after death), there may be a trial. The judge will weigh the evidence and the credibility of the witnesses before deciding whether to enforce the agreement. These cases are fact-dependent. The judge will decide if the agreement is enforceable only after resolving any disputed facts.
Will state courts uphold prenuptial agreements?
Yes. The right of competent adults to enter into a contract will be respected by a court. Times have changed since the days of Ozzie and Harriet, and prenups are no longer against public policy. Because important rights are being disposed of in a prenup, a party asked to sign one should ask a lawyer to explain exactly what the impact of the agreement is. What property rights or what rights to support would the person have under state law if there were no prenuptial agreement?
A well-drafted prenup will contain a provision that each party has read the agreement and understands the terms of it. It will likely also say that each party was represented by counsel or had the right to be represented, but waived that right. Those “boilerplate” terms will make it difficult or impossible to set aside an agreement once it’s executed. Therefore, it’s very important for each party to know exactly what rights he or she is giving up.
Are all prenuptial agreements enforceable?
No. The facts and circumstances surrounding the execution of a prenup might cause a trial court to invalidate it later. The law of each state will govern whether or not a prenup is valid and enforceable. Some states will enforce a prenup in the same way it enforces any contract; if the terms of the agreement are clear and unambiguous, then a court will enforce it as written, even if it isn’t fair and equitable. In other states, the court may find the agreement clear and unambiguous, but invalidate it because it’s “unfair” or “unconscionable.”
When will a court generally enforce a prenuptial agreement?
Enforceability and validity will vary from state to state. The following guidelines should be followed to ensure enforceability of a prenuptial agreement:
• The Agreement should be written in clear and unambiguous language, and should fairly and accurately describe what rights and obligations each of the parties has in any of the property owned by either party (or both).
• The Agreement should be specific about determining the rights and obligations with respect to property (and debt) owned prior to the marriage or property (and debt) acquired during the marriage, or both.
• The Agreement should be in writing and signed by both parties prior to the marriage.
• A prenup should not be executed on the day of marriage or even a week before the marriage. It’s important to establish that both parties have had ample time to review the agreement with a lawyer prior to the marriage.
• Both parties to the prenuptial agreement should have separate legal counsel.
• The prenuptial agreement should be entered into voluntarily; it should not be unconscionable. In other words, it should not be so one-sided and oppressive that no person in his or her right mind would sign it without duress, coercion, or fraud.
• Each party should provide a specific disclosure of his or her financial information. Some courts will enforce a prenuptial agreement if the parties have waived that disclosure. The disclosure should be in writing, attached to the agreement, and incorporated by reference within the agreement.
• Enforceability is more certain when the prenuptial agreement does not harshly and unfairly eliminate a party’s rights to property acquired during the marriage.
How long does it take to draft and sign a prenuptial agreement?
The amount of time that it takes to draft and sign a prenuptial agreement depends upon several things, mainly how complex the parties’ estates are and whether they have children from a former marriage. It can be time-consuming if substantial negotiation is required.
Is it a good idea to buy a pre-printed generic prenuptial agreement from a website and fill in the blanks? Will this protect us?
No. Active involvement of an attorney or attorneys to represent each party is important. Finding a lawyer whose practice is focused on family law will ensure that the lawyers drafting the agreement are familiar with how the laws of the state will look at enforceability of the agreement to uphold the parties’ intent. A specialist in family law will be intimately familiar with current law in the state where you live. Moreover, there are numerous complexities that should not be attempted to be resolved with a “one-size-fits-all” generic agreement. Additionally, when choosing a specialist in family law, you’ll benefit by knowing the personal reputation of the lawyer you choose. You’d have no way of knowing the identity, the experience, the educational background, the level of expertise, or the reputation of the person who prepared a generic prenuptial agreement. You’ll have no way of knowing whether the generic agreement has taken into consideration the current state of the law in your locale.
Is it a good idea to address the issue of “commingling” of separate property in a prenup?
Yes. In most marriages commingling of assets occurs. Sometimes people have a prenup and they simply fail to understand that the prenup will not protect them as was intended if it doesn’t carefully address the issue of commingling. For example, if one of the parties uses his or her separate assets to pay marital bills, the laws of most states will consider that they have intended to gift the other spouse by those expenditures and there will be no reimbursement if the marriage ends by death, separation, or divorce.
If separate monies are used for a down payment on a house or other property that is titled jointly, laws in some states will allow traceable assets to be considered as separate property. But in other states, the law will consider those separate monies to be “commingled” with marital assets, and will consider that the monies are “transmuted” or changed into joint marital property or community property. If the parties intend that they may use some separate property to acquire other different property that they will title jointly and that in doing so they will not lose their right to claim that the monies invested in this different property are still their separate property, then they should make that clear in a prenup.
Failure to have the prenup specifically address these issues may lead to prolongation of litigation at the time or separation or divorce and may cause serious problems if one party predeceases the other, and each party intends for his or her estate to benefit surviving children from a former marriage, the jointly titled property will pass as a matter of law to the surviving spouse. Unless each party’s interests have been clearly defined, assets intended to remain separate can end up, ultimately, in the hands of the non-owner spouse’s children. For this reason, it’s important to set forth the intent of the parties clearly in the prenuptial agreement.
What is meant by “separate” assets vs. “marital” assets?
Separate property is what each spouse owned at the time of the marriage, and should include liabilities at that time as well. Generally speaking, marital property is everything that is accumulated during the marriage from the joint efforts of each party, each acting in his or her respective roles.
When a couple divorces in some states, each party keeps his or her separate property owned prior to the marriage so long as it was maintained in the property owner’s sole name during the marriage and not commingled with marital assets. Some states will allow some commingling and still protect separate assets if they can be “traced” or specifically identified as, for example, “the down payment for the house.” for example.
It’s becoming more common in these days of upscale living that both parties work, bringing in two incomes to support the family’s lifestyle. However, it remains true today, as it did 20 or 30 years ago, that if a wife (or husband as the case may be) is a stay-at-home parent who cares for the parties’ children and home, and who facilitates the other spouse in his or her career endeavors by making it possible for the working spouse to be free to do what it takes to build a business or advance a career, that a court will consider that the “non-working spouse” is contributing in his or her respective role to the accumulation of marital assets. Therefore, the term “joint effort of the parties” doesn’t necessarily mean that one spouse is contributing money to the family coffers. That spouse will generally be awarded half of whatever is earned and accumulated between the date of the marriage and the date of separation or divorce.
If the parties have not reached an agreement when divorcing, the court divides the marital property in the proportion that it deems “just” after considering all relevant factors. If you entered the marriage with a house or investment portfolio or an inheritance, and kept title to those assets separate during the marriage, these assets will be considered your separate assets and not subject to division. There are two exceptions to this rule, however.
The increase in value in separate assets during the marriage may be considered joint if your spouse contributed to its appreciation. Usually the court considers passive appreciation separate property, but active appreciation is subject to division. Sometimes assets purchased with income from your original assets, will be considered marital property and subject to division upon divorce.
If my intended asks me to consider a prenuptial agreement, what should I be concerned about?
Keep in mind as well, that income contributed during the marriage to a retirement plan (such as a 401(k) would be considered marital property. Consequently, upon divorce, the court could grant your spouse certain rights to your retirement plan account accumulated during the marriage. The parties should address some element of fairness in the prenup. It wouldn’t be fair, for example, if one party were permitted by the agreement to protect income earned during the marriage by building up equity in a separately titled property while, under the agreement, the other party’s income is allocated for paying general family expenses. If this were the case, then if the parties separate or divorce, the first party would end up with substantial equity while the other’s wealth would have been poured down a rat hole.
A prenuptial agreement allows the engaged couple to alter the definitions of separate and marital assets in order to protect their assets and control distribution of assets upon death or divorce. It’s important that both parties exercise tact and are fair with each other. Don’t sign a prenup that seems unfair. Let your lawyer negotiate an agreement that levels the playing field and protects your interests.
Does my prenup need to address liability for debts incurred in connection with the ownership of separate property before or after the marriage?
It can and it should.
Does a prenuptial agreement mean the parties don’t trust each other?
Maybe, but a prenuptial agreement usually is grounded in realism rather than a lack of trust. For older couples who are marrying a second time, the parties simply want to protect their children. Younger couples may simply feel that a prenuptial will save expense later if the marriage does not work out.
It is important to approach marriage as a partnership and to approach a prenup with a sense of fairness. It’s not uncommon for one spouse to be the wage-earner, while the other is a stay-at-home parent and/or the cheerleader for the spouse who is building a career or a business. While the marriage may seem like a partnership, things can and do get ugly in a divorce. On the one hand, the worker bee may feel that it’s unfair that he or she (usually he) has to split his hard-earned pension or the value of a business built during a marriage. On the other hand, if the stay-at-home spouse hadn’t been there building and caring for the nest, freeing up the worker bee for career-promoting travel and development, then the business prospects might not have panned out so well.
Retirement accounts are really only deferred income — income that would be marital if it had otherwise come into the marriage as savings or had been used to purchase a jointly titled asset. It’s not fair to penalize the stay-at-home spouse by allowing one spouse to leave the marriage with assets that are truly marital in character, if not title.
Thus, it is important when discussing the terms of a prenup that parties have reasonable and fair expectations. Think of marriage as a partnership and build incentive for both partners to contribute to the well-being of the partnership. For sure, it will be easier to be fair at the beginning of a marriage than after the relationship has turned sour. This is why both parties should have separate legal representations to protect their interests.