Tuesday, February 26, 2013

Prenuptial Agreements

     As part of our estate planning practice, we will often recommend clients execute a Prenuptial Agreement when considering remarriage, whether because of the death of a spouse or a divorce. This recommendation comes from the experience of clients whose parents who remarry, retitle their assets jointly or change their estate planning documents, then die leaving nothing to their children. Frequently that outcome is the accidental result of someone with the best intentions.
     Most of our clients want to protect their new spouse during their lifetime but still ensure that the majority of their assets will eventually pass to their children. A Prenuptial Agreement is a contract between two people considering marriage, that sets forth property rights each will have in the event of death, divorce or separation. Most often agreements of this type focus primarily on the property owned by the wealthier of the two parties, but usually each party desires to protect their own family members too. A properly drafted and executed Prenuptial Agreement can be an important part of a client’s estate plan.
     Until 1991, Prenuptial Agreements in Michigan were invalid because the courts were loath to encourage divorce. That changed with a case decided in 1991. Now, absent a showing of fraud, undue influence, lack of knowledge or mental incapacity, Prenuptial Agreements are valid contracts between parties. A later claim of no consideration or a claim that the agreement is contrary to public policy as not protecting a spouse fails because the courts have said that in addition to any actual benefit a party receives from the Prenuptial Agreement the marriage alone is sufficient consideration.
     In order for a Prenuptial Agreement to be valid, it must clearly define certain provisions:
  1. Name and address of each party 
  2. Schedule and value of real and personal property owned by each party 
  3. Determination of ownership of property acquired during the marriage 
  4. Specific provision as to property that will be considered to be owned individually or jointly 
  5. What happens upon the death of one of the spouses or upon divorce or separation 
  6. An acknowledgment that each party has had an opportunity to consult their own attorney, even if they did not do so 
  7. A provision regarding life insurance and pension benefits and who are the beneficiaries 
  8. An agreement of who will be responsible for which debts 
  9. A listing of rights that each spouse is waiving 
  10. Provisions regarding revocation, termination or modification of the agreement
     In addition to all of the above, the agreement must provide full and fair disclosure of all the terms and all of the assets of each party. Full disclosure of assets is essential. If a spouse can prove that there was not full and fair disclosure of assets or that assets were specifically hidden, and that the spouse did not know what he or she was giving up, that is a reason for setting aside the agreement. 
     Finally, the agreement must be executed without any duress. It is important to provide the parties with sufficient time to consult their own attorneys for complete review of the agreement. A party who presents a Prenuptial Agreement to another party the morning of the wedding is likely to find the courts holding that the agreement is unenforceable. It is hard to argue that the agreement was made without any duress if a party is told that the wedding will be canceled if the agreement is not executed. 
     The agreement can be as simple as "I retain ownership of my assets, you retain ownership of your assets and assets we jointly purchase during our marriage are split equally." However, the agreement can be much more complicated, and can include the following:
  • A formula amount of how much a spouse will be entitled to upon death or divorce, usually dependent upon length of the marriage--for example $100,000 per year for each year of marriage 
  • An agreement to provide a specific amount or income stream for the spouse upon the death of the other party, whether directly to the surviving spouse, or pursuant to terms of a Trust of the decedent spouse 
  • A provision that the agreement terminates and is of no force or effect upon a specific anniversary of the marriage, for example after 10 years 
  • A provision that the agreement only applies to certain assets, such as a family-owned business 
  • Specific disclaimer as to any rights otherwise available under Michigan law in the event of death, divorce or separation 
Even the following unusual provisions are enforceable:
  • A spouse being limited to no more than one football game on Sunday during the season. 
  • A spouse being allowed to opt out of all vacations with in-laws. 
  • Limiting a wife's weight to 120 pounds, with a penalty of $100,000 if she gained a pound or two. 
     As with estate planning, the only limit on prenuptial provisions is one's imagination. Like any other contract, the Prenuptial Agreement can be crafted to meet the needs and desires of the parties to protect their spouse yet ensure an inheritance for their own family members. Because of the potential for problems or accidentally invalidating an agreement, care should be taken in discussing the terms of the agreement and its drafting. Even greater care should be taken in ensuring full and fair disclosure of not only assets but also all of the provisions in the agreement. The hope is that the marriage will be long and loving, but the terms of the agreement should be specifically detailed and agreed upon when there is harmony between the parties, not if problems arise later.

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