Prenuptial Agreements Explained
In law, a prenuptial agreement is a contract, made before two people marry, in which each party agrees to give up or protect his or her claims to assets and/or income in the case of a divorce. Prenuptial agreements can be used to allocate the parties’ assets in the event of divorce in many ways, such as providing differently for children from prior marriages or from a later marriage, or for the lesser or greater maintenance of economically vulnerable spouses. They are also used to protect assets acquired before marriage. The agreement can even impose a contractual obligation to create a will after marriage.
Prenuptial agreements originated with the British aristocracy, and they have retained something of their elitist connotation. However, prenups are best for anyone about to enter their first marriage. They are just as relevant, if not more so, for a person who is entering a second marriage.
The reasons for this are obvious. Many people in their 40s and 50s have already accumulated significant assets, perhaps in the form of a business, a home, retirement accounts, collectibles or family heirlooms . A spouse who receives property through inheritance or as a gift can rely on both common and statutory laws that protect those assets from the other spouse, but no such laws exist for property a person acquires before marriage. Some states will take into account any increase in the value of an asset that occurs during marriage as marital property. This means such an increase can be added to the pot subject to division in a divorce. For example, if a person owned a home worth $350,000 before getting married, and it is worth $600,000 at the time of a divorce, the $250,000 increase in value may be divided. A prenuptial agreement could be used to establish a methodology to determine the amount of this increase.
Ordinarily, assets acquired after marriage would not be protected, but spouses can agree in a prenuptial or postnuptial agreement that if one spouse makes a down payment on a house, buys mutual funds, or contributes to retirement accounts, the funds belong to him or her after divorce. So, a prenup can protect assets for people of all ages. However, lawyers warn that prenuptial agreements can be difficult to enforce when there are complicated issues like family businesses and what happens to them if the couple divorces.
Prenuptial Agreement Considerations for Second Marriages
As the American marital landscape becomes increasingly complex, second marriages have become almost as common as first marriages. According to Pew Research, 61% of the U.S. population are on second or higher marriages, and 1 out of 5 marriages are remarriages. Moreover, second marriages are also quickly succeeding first marriages in duration, with studies finding that second unions last longer on average than first marriages in which one partner is previously married. With more and more couples choosing to marry again later in life, older marriages are becoming the new norm.
While many individuals entering a second marriage may be better financially off than those marrying for the first time—68% of remarriages are between two people who are not only in their 40s, but also financially independent—they face different challenges than first-time spouses with respect to marital and divorce law. These couples often have children from prior relationships and may have invested decades-long savings toward their retirements. For the many people entering a second marriage, a carefully negotiated prenuptial contract to protect hard-earned assets is more important now than ever.
Prenuptial Agreement Legal Statutes
In the U.S., the common law and the statutes of many states govern prenuptial agreements. In most cases, a prenuptial contract will be governed by state law. For example, in New York, the general requirements for a valid prenuptial agreement are the same as that for a contract generally. Those requirements are that the contact be in writing and that it be signed by both parties in wet (not digital) ink. Unless there has been a waiver made, there is also a disclosure of financial condition that must occur. That is, each party must make a written disclosure of their assets and liabilities to the other party so that the other knows what they are entering into upon doing the marriage vows.
The writing requirement may pose the greatest challenge when there is a second marriage. Often times (but not always), one party hastily scribbles something out. While it is always clear that the parties want a prenup, it is not always clear what they wanted the terms of the deal to be. If what is written is not what was intended, a court probably will not be able or willing to help. This is the risk that must be taken when people do not capture the terms of their deal in writing before the marriage.
New Jersey has heightened requirements on the formalities involved with a prenuptial agreement. In addition to the even more strict "voluntariness" threshold, the parties have to have the prenuptial agreement accorded notarization. Furthermore, both parties must be given "at least 7 days" to review the contract with counsel before it is signed. Even if it is reviewed and signed the day before the wedding, the contract is deemed unenforceable unless the waiver of the 7th day was made in writing. The reason that high legal standards exist in New Jersey concerning prenups is because the NJ Supreme Court decided a case called marital trust v. hirsch, 349 nj super. 640 (App. Div. 2002), where the court held that right to counsel is not an illusory right. In essence, whatever party stand to be disadvantaged by sharp terms in the prenup, must not be forced into the contract without having the opportunity to consult counsel. Otherwise, the contract is deemed to have been entered into involuntarily or was not fairly made.
Financial Disclosure and Its Importance
In a second marriage situation, financial disclosure is even more important due to the complexity of the assets and debts that may need to be addressed. Below are just some common types of assets and debts that may have come into play.
Retirement Accounts – Although each person possesses his or her own retirement account, it is also important to consider any accounts that your spouse may possess. There are different types of accounts, i.e., 401(k), IRA, pension, etc. and there are also tax implications and rules governing them. They should all be disclosed to each other.
Businesses – If either spouse has an ownership interest in a business, then any value or buyout provision within their agreement should be disclosed.
Investments – Stocks, bonds, options and even groups of such things are usually disclosed by one spouse to another. Even paper investment certificates and insurance policies may be disclosed and assigned their value, etc.
Debts – Any debts acquired during the marriage should be disclosed. These debts could include credit card debt, real estate loans, mortgages, etc. Of great importance is whether or not your spouse manages the debt. Are they responsible for it? Could you be responsible for paying some portion of it even if not a party to the loan agreement?
Many other categories of assets are relevant, but the above represent the ones most often discussed. Keep in mind that full disclosure is necessary for several reasons, including:
Inheritance and Legacy Protection
When it comes to the financial security of children from prior relationships, prenuptial agreements are also an important tool. Substantial family inheritances, whether or not held in a trust, are often subject to attack by a second spouse who believes the first spouse diverted marital assets to the children.
If a spouse to a second marriage dies without a will or in contemplation of divorce, the children risks losing their inheritance to a surviving second wife. And under New Jersey law, inheritance has to be specifically bequeathed to a child by a will. Otherwise, if the surviving spouse is the second spouse, at least one half of the deceased spouse’s estate is considered intestate property, meaning not properly disposed of by a will. This "intestate property" passes to the surviving spouse, rather than to the children. Thereafter, the surviving spouse is free to make a will that bequeaths the intestate property to her children.
Elective shares in New Jersey will also wipe out family inheritances and legacies. When the resident spouse of a second marriage passes away without a will , the second spouse is entitled to one-third of the estate, regardless of the deceased one’s wishes.
Even when the deceased spouse passes away with a will, if the will ignores spouses and children alike, it is possible for a surviving spouse to elect against the will and take greater of $200,000 plus a one third share of the remainder of the estate (excluding joint accounts, trusts, life insurance and other non-probate transfer).
The risk to children of prior marriages divided by the risk of a second spouse electing against the first spouse’s will is more than many families with substantial inheritances can bear. Premarital agreements are the best method to avoid the possibility of this unfortunate loss of wealth.
By a carefully worded waiver of the statutory elective share, a new spouse can waive any right to an elective share. And if the waiver of elective share is included in a premarital agreement, the surviving spouse would be obligated to adhere to provisions of the premarital agreement that addresses pre-existing family inheritances.
Typical Features in Prenups for Remarriages
Many couples entering into a second marriage have significant assets, or children and other interests from their first marriage, and have considered entering into a pre-nuptial agreement with their next spouse. Given the legal advice that you should have a pre-nuptial agreement because post-nuptial agreements are difficult to enforce (not to mention, often viewed by law practitioners as being against public policy), they’ll usually do so. There are some common provisions that are found in most pre-nuptial agreements for a second marriage, at least in Canada.
Spousal Support
While it is up to each party to retain their own lawyer and negotiate the terms of the agreement, spousal support will often be limited or set at specific amounts for specific periods of time, or perhaps limited to a one time lump sum payment. One spouse may be perfectly willing to give up his or her entitlement to spousal support in order to protect the assets that they have before the marriage or that they hope to acquire during the marriage. In other cases, where there is disparity between the incomes of both parties, the spouse that is the primary caregiver to the children may be provided for a period of time to protect that individual’s future financial well being.
Property Division
One of the goals of the pre-nuptial agreement is to protect your property in the event of a marriage breakdown. Usually, the agreement will provide that there is no equalization of net family property upon the marriage breakdown, although it may also contain a provision that protects any increases in the value of assets over the period of the marriage. An exception to this type of arrangement can often be found when it comes to pensions that provide for survivor benefits for a spouse in the event of death. Other specific exemptions are usually set out.
Aloha Clause
Some pre-nuptial agreements contain an escape clause, more commonly known as an Aloha clause, where husband agrees to let the wife keep the house and all the furniture in it, and vice versa, since they are starting a relationship in another country, and if they come home, in five years, or seven, what does it matter who had what furniture or the house. Some people may laugh, but I have seen this scenario in more than one case.
Amending a Prenuptial Agreement
A prenuptial agreement is meant to be as much a living document as a marriage is a living institution. In addition to addressing numerous concerns about your assets before the marriage, it can address what happens if you divorce. But it can also address what happens if you stay married, in the form of updated terms on child custody and support if you have a child later in the marriage, and dividing property and defining support if one partner dies and the other remarries. Depending on how it is written, a prenuptial agreement can help eliminate much of the discussion and discord that arises when changes in your life affect the terms of your marriage agreement.
You don’t get "one and done" with your prenuptial agreement. Your circumstances may change over time to warrant an update and revision of the agreement’s terms. A few typical examples include: If you suffered from temporary financial issues when you got married, but now own a successful business or have recently landed an excellent job, your prenuptial agreement may be out of date in providing for you in the event of your death. If you have any children now, whether from your current marriage or your previous one(s), what happens to them if you pass away? You may want to update your will, your prenuptial agreement, and your life insurance policy (or buy one if you did not previously) to protect and provide for your children.
If you have accumulated significant wealth since you signed your prenuptial agreement, you may want to review it to determine whether there are other changes you would like to make. If your spouse has a poor income or financial history and you do not want that to impact your children if you die, you may want to update your agreement and will to cover that possibility as well. Additionally, if any of your children have started to have relationships with poor financial prospects, you may wish to update the prenuptial agreement and your will to consider those possibilities.
Your prenuptial agreement will not go up in flames if you do not update it. However, you cannot assume that a court will cast it aside or not honor it during a divorce proceeding if it is out of date. Courts tend to uphold prenuptial agreements if they are reasonable, have been freely signed by both parties, and both parties have full knowledge of the terms within them. A court’s finding that those requirements have not been met has been the most common reason for refusing to enforce them.
How to Draft a Fair Prenup
The process of a second marriage prenup is familiar but slightly different than that of a first marriage. Generally, the steps involved with drafting a fair and balanced prenuptial agreement include:
- Choosing legal representation. A prenup requires the input of both parties and since one party does not receive a benefit from the other’s counsel, it’s important that each party select counsel independently.
- Disclose, disclose, disclose. To ensure that a fair and reasonable prenuptial agreement is executed, both spouses should fully disclose their financial condition as well as their income. You cannot execute an enforceable prenuptial agreement if the nondisclosing party had no idea you were worth millions of dollars.
- Avoid "turf wars" over children, custody and support. The children born to a previous relationship are outside the bounds of the prenuptial agreement negotiations. Further, because most states have disallowed child support and custody issues from being negotiated in the context of a prenup , any provisions in the agreement related to these matters are unenforceable.
- Consult your estate plan. Your estate plan may have been drafted before the idea of a second marriage pact was even conceived. Because state law requires spouses to inherit from one another by operation of law unless otherwise stated in a valid will and/or trust, your estate plan may be very specific about who you want to inherit from your estate. Therefore, it’s prudent to review your estate plan with counsel when you’re contemplating drafting a prenuptial agreement.
- Don’t be cheap. Budgeting for the negotiation of your prenuptial agreement is just as important as budgeting for the purchase of your spouse’s engagement ring. Remember, a prenuptial agreement is a legally binding contract, so spend the requisite time, energy and money to ensure that it’s done properly.
A prenuptial agreement can be a very valuable document, particularly when you or your spouse have children from a prior relationship or have significant assets. A qualified and experienced prenuptial agreement attorney can help you navigate the process of negotiating a fair and reasonable prenup with your soon-to-be spouse.
