Prenuptial Agreements-Not Just for the Rich and Famous

A prenuptial agreement or antenuptial agreement (sometimes referred to as a “prenup”) is a contract made before marriage to settle in advance the respective rights and liabilities of the husband and wife to property, debts, and maintenance (spousal support) in the event of a divorce, and may also settle the respective rights of one party in the event of the death of the other. While validity and the enforceability of a prenuptial agreement often gets publicity in divorces of wealthy individuals, these agreements are no longer the exclusive province of the rich and famous.

The prenuptial agreement may be particularly appropriate in the following situations: (1) in advance of a second marriage as a means to protect inheritances for children from a prior marriage; (2) to preclude the nastier aspects of divorce that a person has experienced in a prior marriage or that a person has fears about after hearing the horror stories told by others; (3) to prevent the bitterness of a prior divorce; (4) in marriages where each person is beginning a career with potential for accumulating wealth but lacks a current nest egg so that each can protect separate assets; and (5) and in marriages involving heirs to family businesses and fortunes, or anticipated inheritances or beneficial rights under trusts established by family members. Furthermore, business owners, including professionals and members of partnerships and limited liability companies, use these agreements to protect their businesses/practices from spousal claims in divorce or probate proceedings, and also to protect spouses not involved in those businesses from the claims of business creditors. In addition, many agreements seek to limit or waive rights to spousal support.

Protecting the Family Assets

A “simple” prenuptial agreement which may be significant for a younger family member is one that protects only the family business or other family assets by confirming that any interest in the business or other family assets received by that family member by gift or inheritance, as well as any income from, or growth of, those assets, will remain family assets, free from claims of the spouse.

Prompted by high divorce rates and the phenomena of serial marriages and dual-income families, couples seek a practical way to deal with their property, debts, and incomes in the advance of a possible divorce. The divorce process, which becomes laden with emotion, often makes objective and reasoned decisions impossible. In addition, the perceived high cost of protracted divorce litigation creates an air of pragmatism when it comes to the bonds of matrimony.

A Desire for Financial Order-Not a Lack of Trust

Despite the usefulness of a prenuptial agreement, a party’s request for such an agreement will often result in an emotional response from his or her fiancé and controversy because the agreement contemplates the failure of the marriage before it begins. However, if the requesting party can convey that it is not a lack of love or trust that motivates the request, but a desire for financial order and continuity that will benefit both parties, a prenuptial agreement can, in fact, add to the solidarity of a marriage. Discussions about money and spending expectations before marriage are often taboo subjects. A prenuptial agreement brings these topics into the open prior to marriage.

Although property distribution laws in the event of divorce and death vary from state to state, generally, a valid prenuptial agreement will allow a couple to avoid state laws governing property division in such circumstances. For example, equitable distribution states like Missouri do not require an equal division of marital property and debts, and allow certain exceptions for separate (nonmarital) property, such as property owned before the marriage or property acquired during the marriage by gift or inheritance (so long as that property has not been commingled with marital property). However, because of ever changing judicial interpretations and applications of the laws controlling property issues in divorce, many legal principles have developed that permit a court to “transmute” separate property into marital property, even if the title to such property remains in the sole name of one party. As a result, without a prenuptial agreement a party may be successful in claiming a marital interest in premarital, gifted, and inherited property, including real estate, bank accounts, publicly traded and closely-held stocks, pensions and other retirement funds, and business interests. A well drafted premarital agreement can block such a claim.

Frequently, divorce and probate litigation may involve a family business. Issues often arise as to whether the increase in value of a business interest is property subject to division, even if the business interest was acquired before the marriage or after the marriage by gift or inheritance. This is why knowledgeable family business owners often insist that their children invoke the protection of a prenuptial agreement. Although it is unclear whether such an agreement can insulate the financial affairs of a family business from the invasive discovery process that often accompanies a domestic proceeding, a prenuptial agreement can help prevent the disruption of a business if a divorce or death occurs.

Prenuptial Agreement-A Preventive Measure

Nevertheless, a prenuptial agreement cannot be viewed as an insurance policy against subsequent litigation or successful claims against property and income. Rather, it should be viewed as a preventive measure. A spouse who is eager to marry may enter into a contract that becomes less palatable over time, as circumstances change the marriage sours or a wealthy spouse dies. As a result, challenges to the validity and enforceability of prenuptial agreements frequently occur.

Unlike many other states, Missouri has not enacted statutes governing the validity of prenuptial agreements. However, Missouri courts have developed some standards for determining the validity and enforceability of these agreements. If an agreement is entered into freely, fairly, knowingly, with understanding, in good faith and with full financial disclosure, it will be upheld by the court so long as it is also determined to be conscionable. As a result, the courts have the discretion to invalidate a prenuptial agreement based on the unique facts and circumstances of each case.

Allow Ample Time for Review and Signing

While counsel cannot give an ironclad guarantee that a prenuptial agreement will withstand a future challenge, such agreements serve a very useful purpose and are frequently upheld by the courts. A person entering into a prenuptial agreement can take certain practical steps to increase the likelihood that a prenuptial agreement will be enforced. First, the parties should allow ample time in advance of the wedding to finalize the details of the agreement–the longer the time between the signing and the wedding the better. Also, each party must make full financial disclosure, and should obtain the advice of independent counsel specializing in matrimonial law and probate law. Further, memorializing the signing of the agreement through videotape or a court stenographer may help defend against later claims of fraud, duress, coercion, or a lack of understanding of the terms. Finally, to avoid a breach of contract claim, a spouse must comply with his or her obligations under the agreement, and a spouse doing estate planning after the agreement is signed should make sure that the terms of the estate planning documents comply with the provisions of the prenuptial agreement.

Whether to use a prenuptial agreement is a personal decision. Marriage is an economic partnership, as well as an emotional one. The cost of a prenuptial agreement depends on the nature, amount and complexity of the assets and debts involved, as well as the extent of the negotiation and drafting process. It is not unusual to see agreements addressing matters such as long term care insurance, the doctrine of necessaries, income, estate and gift tax issues, and legal obligations under the immigration laws. The cost, which can include the fees of attorneys, accountants, and qualified appraisers, may be anywhere from $2,500 to many thousands of dollars. But a properly drafted agreement is worth every penny.

It may prevent a protracted divorce that culminates in an unanticipated award of maintenance or an unfair division of valuable family and personal assets, or both.

By: Bruce E. Friedman

ST. LOUIS LEGAL SERVICES

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