An Overview of a Prenup
A prenuptial agreement (commonly referred to as a premarital agreement or prenup) is an agreement entered into before marriage pursuant to which a person’s rights to property acquired during marriage can be altered after the marriage is dissolved. Generally, a prenuptial agreement addresses the distribution of property, alimony, and a waiver of spousal rights at death, such as electing against a will. Essentially , a prenuptial agreement is the legal blueprint for what will happen if a couple decides to separate, divorce or one spouse dies. We find prenuptial agreements to play an increasingly important role for both second marriages and first marriages with particular attention to children from a prior relationship. In addition, we all know that divorce rates are high, and even well-planned prenuptial agreements are tested by the courts when the marriage ends.
Common Clauses in Prenuptial Agreements
A variety of clauses can—and should—be included in a prenuptial agreement:
Right to Manage Separate or Marital Property. You have the right to manage any separate and marital property as you wish. This means you can use it anyway you want without your spouse’s consent, and likewise, your spouse has the same rights with respect to his/her separate or marital property.
Classification: Separate vs. Marital Property. If there is any dispute about whether an asset is your separately owned property, rather than your shared marital property, you have to prove it. Accordingly, the prenuptial agreement allows you to prove that an asset is separate for purposes of division in a divorce. Additionally, the prenuptial agreement can be a vehicle for achieving your intention to keep certain items or a certain value out of the shared pool if you should divorce at some point.
Paying Debts. A prenuptial agreement can be a vehicle to provide that if you should later divorce, one party will pay certain debts (ex: credit cards or student loans) as a part of the divorce settlement. The funds to pay these debts can be directly identified or can be indirectly identified as part of how the marital property is divided.
Division of Assets. In the event of a divorce, the prenuptial agreement provides that separately and jointly held assets will be divided in a certain manner. For example, you might provide that the parties will retain all wealth accumulated prior to the marriage as separate. Additional provisions can also give a percentage of the marital assets to one spouse based on seniority or a variety of other factors.
Spousal Support. Both parties can waive their right to spousal support upon divorce or can specify that one will receive spousal support under certain conditions, for a specific period of time, etc. In addition, the parties can agree to modify support in the event there is a significant change in circumstances corresponding to an existing support award.
Governing Law. States differ on their laws regarding the enforcement of prenuptial agreements. You can specify a particular state law that will govern your contract in order to anticipate divergence.
Financial Clauses
When one or both spouses have a significant amount of property or debt, the prenuptial agreement should include clauses that relate to the financial protection of the parties. So, to put it simply, what happens to the parties’ then separate property if the parties divorce? I’ll divide these clauses into three categories:
What if the parties own separate businesses? A prenuptial agreement should address separately and jointly owned business(es) and whether the parties want a joint venture (a joint business) or separate ventures. If any accounts were created jointly, should they remain joint or separate if married?
I represent business owners and entrepreneurs all the time. Oftentimes, those business owners have significant equity in their businesses developed during the marriage and after the marriage. And, sometimes, especially in the case of a startup company, the parties will have paid off significant debt. If the business development was during the marriage but paid off after the divorce, should the non-owner spouse have an interest in the business post-divorce for payment of employment of the owner spouse? Does the non-owner spouse have an equitable interest in the business since the debt was paid off after the divorce? This is a complicated question that often requires a trust accountant to work with the attorney to determine whether the owner spouse should be compensated based on a residual valuation of the business or whether the non-owner spouse should receive regular payments over time or a percentage of business revenues.
What happens to funds from each party’s inheritance during the marriage? What if the parties inherit something during the marriage? Does it matter whether it was joint or separate when the inheritance was received? What if there are claims by third parties for personal injury or workers compensation?
What if each party had debts prior to the marriage and as debts were incurred during the marriage? What happens if one party can’t refinance a credit card or house mortgage to both parties’ names? What happens if a party has a student loan with just his or her name? Is it enough if each party’s assets or incomes are enough to pay down a particular type of debt?
Property Distribution Clauses
In general, a prenuptial agreement can contain clauses or stipulations that deal with the division of property and assets that are acquired before and during a marriage. For example, in Indiana, property acquired during a marriage is presumed to be marital property, which means it is subject to the two-step classification process in which the court divides the property into marital and separated property before deciding how to distribute the marital estate equitably. If parties enter into a prenup and later divorce, any property listed in the prenuptial agreement as property owned prior to the marriage or as a specific gift made from one spouse to the other is excluded from the classification process. It may also be possible to exclude certain property from the property division process by including it in a prenuptial agreement. Though not a requirement, many people find this idea appealing. The provisions in the prenup clarifying which property is to be treated as separate property in the event of a divorce can be a great relief for the parties.
Spousal Support & Alimony Clauses
The terms of spousal support/alimony are even more complex than property distribution. Long gone are the days where spousal support was permanent. In most states, it has been replaced with a finite amount deduced from various formulas based on a myriad of variables. These vary from jurisdiction to jurisdiction, so if you want an idea of how much spousal support you could be paying, you may want to consult with an attorney in your area.
Another issue is whether spousal support will be in effect at all. While there was a time when spousal support was mandatory, nowadays it is agreed to or granted on a case-by-case basis. Your prenuptial agreement can be as specific as defining the exact formula for calculating how much spousal support you or your spouse will receive or as vague as stating that neither party will receive spousal support or alimony. It all depends on how you wish to divide spousal support in the event of a divorce.
Another issue is waiving alimony/spousal support. In most states , election of alimony will result in a full waiver of the right to file for alimony or spousal support. Further, some states will not give spousal support to either party now that they have anything preexisting. Generally, generous or even equal distribution of property will offset eligibility for spousal support/alimony. In other states, however, you may be able to waive your eligibility for spousal support or alimony through a prenuptial agreement. This can be beneficial for some couples. Others would rather retain the right to request spousal support or alimony in the event of a divorce.
Clauses Covering the Children
It is essential to understand the limitations of what matters can legally be negotiated in a prenuptial agreement. While dividing assets, debts and income such that each spouse can hopefully achieve a sense of financial independence, is certainly important for all the reasons that have been previously discussed, there are limitations on subjects such as child custody, child support and visitation. When the issues of child custody and child support are raised in regards to prenuptial agreements, they generally relate to how fees and expenses of the children will be handled during marriage, not aspects of their upbringing and welfare.
In essence, the law recognizes that issues relating to children who are not yet born and therefore cannot be considered in a concrete manner if any of them end up requiring the protection of a Court. Therefore, children already born but subject to a divorce, where some degree of uniformity exists, can be addressed in a fashion that binds the parents.
New York State has been clear in its attempts to keep issues of child custody and child support out of prenuptial agreements as they attempt to avoid a situation where a divorcing parent attempts to hold another parent to a situation that may have changed financially or literally in an instant. This is also important in that it protects the rights of the children in that if a prenuptial agreement becomes a substitute for the authority of the courts to deal with the welfare of a child, it places these children at risk of psychological and physical abuse.
The basic law is that child support cannot be dealt with, except for issues relating to payment of premium for health insurance for the child, unreimbursed medical, dental or vision expenses, child care costs and the payment of educational expenses. There have been numerous attempts to widen the scope and some form of wide ranging child support agreements have not previously held up over time.
This does not mean that issues of child custody may not be dealt with during the marriage, both in terms of guardianship of children but not necessarily in the context of custody rights in the event of separation or divorce. It is generally accepted that placing such issues in a prenuptial agreement could be used in the future as a basis to allow rehabilitative alimony to continue well into what would have otherwise been the lifetime of the marriage. On the other hand, if a party demonstrates that they likely intend to remain in a marriage for a specific set period of time for economic purposes, perhaps for recognition in the family business or to be entitled to promotional opportunities, terms may be agreed to upfront about the custody of children, but not necessarily with regard to child support.
Even though, for the most part, many of these issues are dealt with in the context of a separation or divorce agreement, the parties are free to incorporate these agreements into a prenuptial agreement.
Prenuptial Clause Enforceability
Enforcement of Prenuptial Agreement Clauses
Typically, courts will enforce the terms in a prenuptial agreement as long as they are reasonable, not illegal, and not against public policy. Certain factors can, however, lead to a challenge of a prenuptial and, ultimately, the setting it aside entirely. For one, the party against whom enforcement of a prenuptial agreement is sought must have executed the agreement voluntarily. Courts may set aside a prenuptial agreement if the party did not execute the agreement voluntarily due to either fraud or coercion. A premarital agreement may be considered the product of fraud if the party seeking enforcement of the terms of the agreement fails to make a full and fair disclosure of his or her financial circumstances or, in other words, provide complete financial information to the other party. Courts have found that this disclosure requirement is satisfied by a sworn financial statement that provides each party sufficient information to make an intelligent decision about whether to sign the agreement, absent evidence of fraud or coercion by the party seeking enforcement. For example, if you receive a written disclosure stating your spouse’s income, expenses, assets and debts, you should be satisfied that full financial disclosure has been made and you have the ability to make an intelligent decision about whether to sign the agreement. A prenuptial agreement may be considered the product of coercion if the terms of the agreement are so unfair to one party when they are executed that he or she has no choice but to sign. In most cases, a court will not set aside a prenuptial agreement that was executed prior to the marriage unless the terms of the agreement were very unfair when executed and not brought into line by subsequent events. A court may find that a prenuptial agreement that is heavily weighted in favor of one party at the time of execution is acceptable, however, if, subsequent to execution, a substantial change occurs in one of the parties’ circumstances and the terms of the agreement no longer are reasonably related to the parties’ actual financial resources at the time of divorce.
Myths and Misunderstandings About Prenups
Myth – Prenups Are Only For The Wealthy: In today’s world, prenups are not strictly for the rich and famous. While a Florida prenuptial agreement can be an expensive undertaking, the reality is that anyone with any assets, even those of little value, should consider having one in place. Marriage can affect your finances in ways you may not yet understand, so prenups are ideal for protecting not just what you already have but also what you may earn in the future. An attorney from our firm will be able to explain what a prenup can do for you.
Myth – Prenups Are Only For Men: While this was certainly true in the past, prenups can and should be drawn up by both parties of a marriage, regardless of gender. It is an excellent financial idea for all involved.
Myth – If You Don’t Have Money or Assets, a Prenup Doesn’t Matter: Many people believe that prenuptial agreements are not necessary if neither party has significant assets . While this may seem true on the surface, the reality is that it’s never too early to define how you will divide your assets – or your debts – should a divorce eventually occur (see next point).
Myth – A Prenup Will Protect You From Debts Incurred By Your Spouse: While a prenuptial agreement is a great way to protect yourself and your assets, there are limits to what a prenup can do. For example, general language stating that you are not responsible for your spouse’s debts incurred before the marriage does not offer guarantees in most cases. If joint funds are used to pay these debts, for example, a court may not choose to separate the debt. More specific, detailed agreements are needed to protect assets or profits gained after the marriage, so it’s best to discuss your situation with a skilled Orlando divorce attorney.