Prenuptual Agreements and Estate Planning
April 4, 2024
It is important to remember that all marriages end at some point, either by divorce or the death of a spouse. So, planning a marriage and the ownership of assets moving forward can determine rights and duties for conducting the marriage and the estate after death. These laws can differ widely from state to state, and the state where a marriage begins may not be the state in which that marriage ends. A prenuptial agreement is a couple’s opportunity to decide what will happen should a marriage end, either by divorce or death, and relying on the consent of the persons as opposed to relying on state law.
Prenuptual Agreements
A prenuptial agreement is a contract between two soon-to-be-married individuals in which they agree upon the rules; especially with respect to their property. The agreement can set rules that apply during the marriage and following the termination of the marriage. with respect to the disposition of property.
Creating a successful prenuptial agreement can only be achieved when all parties understand the process and engage in good faith; trusting in open-mindedness with a commitment to resolving issues without hurt feelings and resentment.
Prenuptial agreements traditionally have been seen as symbols of mistrust and control. The historical negativity has rested in the provincial idea that people only married once and did not generally have children from various marriages. Yet the times have changed, and people may have more than one marriage, children from various marriages and are now marrying later in life, when assets have been accumulated prior to the marriage that is subject to such an agreement. Despite how uncomfortable conversations, prenuptial can serve several important purposes, including:
Keeping family wealth, however defined, within the family that generated it.
The protecting assets for many generations.
Establishing formalized rules, governing the disposition of wealth upon the dissolution of a marriage (either by divorce or the death of a spouse).
Providing a forum to discuss finances in an open and productive way.
Creating a philosophy and plan regarding wealth.
Laying framework of estate planning and understanding integration of families that previously did not have the same interests or point of view. Who should consider a prenuptial agreement?
Any couple can create a prenuptial agreement. However, such prenuptial agreements should be considered particularly when:
One person (or one person’s family) has significantly more assets or debts than the other.
One person or one person’s family owns a family business.
One person or one person’s family has special assets (such as artwork, antiques or jewelry, among others) that they desire to remain with that family.
One or both persons have children from a prior marriage and desire to leave property to those children or grandchildren, only.
When one or both people are professionals with special education, credentials or licenses who desire their enhanced earnings and potential earnings to remain with them.
Prenuptual Agreements: Main Issues
Support Issues
While married, spouses must financially support one another and their children by providing the necessities of life. Spouses can agree as to how they will manage their finances and which spouse will pay which household expenses. Should the spouses divorce, a prenuptial agreement may require one spouse to provide financial support to the other. Spousal support, sometimes called maintenance or alimony, is a payment from one divorcing spouse to the other, usually for a term of years following the dissolution of a marriage by divorce. The amount of support, term of support, and any increases in support during such term are all separate nuances to consider.
Parents must also consider providing for their minor children. Agreements with respect to child support, especially upon termination of a marriage, are generally not permitted in a prenuptial agreement. It is possible, however, for spouses to agree upon financial arrangements that can be used for children, such as maintaining a certain amount of life insurance coverage, allocating certain private education costs, and requiring the creation of trusts.
Property
Absent a prenuptial agreement, state law defines how assets are divided upon divorce. There are two general systems for dividing property upon divorce: common law systems and community property systems. The nuances of each state’s law can mean that even states using the same general system (community property or common law) may classify property differently. It is critical before entering into any agreement to consult an experienced attorney licensed to practice law in the state in which the agreement will be governed. The division of assets when a marriage ends (either by divorce or at death) is another important part of a prenuptial agreement.
Generally, in community property states, assets acquired after marriage are owned by each spouse equally (no matter who has title). It operates with the notions of a partnership. Assets acquired before the marriage may be characterized as separate property or some type of mixed property.
In common law states, marital assets are generally divided equitably (equitable distribution). In essence, the court dissolving the marriage decides what constitutes a fair division of the property. Assets considered marital property are typically subject to division, while assets considered separate property are generally not subject to division.
A prenuptial agreement can change the rules of state law with respect to the division of property. The agreement can, for example, define which assets (or classes of assets) are separate property not subject to division; limit what property may be allocated to a spouse; include a sliding scale, with more property being allocated to a spouse in a longer marriage; or provide some other division unique to the couple and their assets.
When a marriage ends because of death of a spouse, then other property rights are considered. Almost every state forbids a decedent from completely disinheriting a spouse.
How the amount payable to a surviving spouse is calculated and what property is included in the calculation can vary significantly by state. Also, the concepts of marital and separate property may not apply when a spouse dies, as many states calculate the surviving spouse’s required share based on the value of all property owned at death. Note that leaving a trust for a surviving spouse may not satisfy the minimum required amount, possibly allowing the surviving spouse to make an election between accepting the trust or taking the minimum statutory amount outright.
Also, a surviving spouse’s rights can be waived in a prenuptial agreement. If one spouse has assets such as an interest in a business, an inherited home, family heirlooms, wealth acquired before marriage, etc. and desires to bequeath those assets to someone other than the other spouse, or if a spouse’s will leaves assets in trust for the surviving spouse, it is essential that a prenuptial agreement waiving spousal rights at death be executed.
Other Considerations
When a marriage ends there can be conflict, whether in a divorce or the deceased spouse’s children and the surviving spouse. Evidence can bring the prenuptial agreement into court with one side seeking to enforce it and the other side seeking to have it invalidated. There are some general steps that you can take to make your agreement more likely to be enforced, sch as:
Failure to fully disclose assets when preparing a prenuptial agreement may jeopardize the agreement’s validity.
Waivers of rights are generally not valid if they are not made with full knowledge of what is being waived. Failure to fully disclose assets and expectancies, including their value, can invalidate the agreement.
Each person entering into a prenuptial agreement should be represented by a separate attorney. Failure to be adequately represented is often a factor cited when someone seeks to invalidate a prenuptial agreement. Further, the rules of attorney ethics would prevent the same attorney from representing both parties.
A court is more likely to uphold a prenuptial agreement when the parties have had “adequate” time to review the terms of the agreement with an attorney. What constitutes “adequate” is determined by the court reviewing the prenuptial agreement and the facts and circumstances of its execution.
The closer to the wedding an agreement is executed, the more likely a challenge will succeed.
Legal Representation
Each party will need assistance when discussing and preparing an effective prenuptial agreement. Of course, attorneys skilled in domestic relations law will be necessary. Also, the parties and their families may require the assistance of accountants and valuation experts to prepare adequate financial disclosures. Finally, the parties may desire to review their financial status with a financial advisor to determine if the financial arrangement each makes for the other will be adequate, presently and in the future.