Prenuptial Prerequisites: The 4 essential elements of an inviolable agreement
Prenuptial Prerequisites: The 4 essential elements of an inviolable agreement
By Mark A. Chinn and Charles Greer
Published in Family Advocate, A practical journal by the ABA Family Law Section, Vol. 24, No. 3, Winter 2002
In America today, the probability of a marriage ending in divorce is greater than 50 percent. U.S. Census Bureau figures reveal that 10 percent of the adult population is divorced, up more than 7 percent from 1970. Prenuptial agreements also are on the rise.
Since 1970, the median age of first marriages has increased from 20.3 to 24.8 for women and from 22.8 to 27.1 for men.When these older and more financially savvy twenty-to- thirty somethings arc ready to marry, they have individual investments, and earnings to protect. In addition, their parents are insisting on prenuptial agreements before bequeathing the parents’ hard earned savings.
What to include
Prenuptial agreements can address almost anything, from avoiding the default rule in community property jurisdictions (which divides all marital property equally upon divorce) to waiving alimony or other support. Custody and child-support matters may be addressed, but courts are likely to set them aside, reserving the right to decide the best interests of children.
To draft a valid prenuptial agreement, first investigate your jurisdiction’s statutory law. Twenty-six states have adopted some form of the Uniform Premarital Agreement Act (UPAA). (See Morgan, page 12.) Whereas common law requires prenuptial agreements to be procedurally and substantively fair, the UPAA protects against unconscionability.
Most jurisdictions mandate four basic prerequisites to a valid prenuptial agreement: timing, disclosure, independent counsel, and fairness. (Note: Some say there is a fifth mandate: properly acknowledged in the form required by the jurisdiction. One prenuptial agreement in New York state was thrown out because the notary did not date the signature.)
The timing of a prenuptial agreement is critical. Circumstances surrounding its negotiation and execution should be free from duress, overreaching, or coercion. An agreement presented just before or on the wedding day may be invalid due to duress.
However, in Fletcher P. Fletcher, 68 Ohio S.3d 464 (Ohio 1994), the Supreme Court of Ohio held that an agreement signed one day before the marriage was valid when all other prerequisites were satisfactorily met. The court noted, however, that presenting a prenuptial agreement shortly before a wedding ceremony would”create a presumption of overreaching or coercion if postponement of wedding would cause significant hardship, embarrassment, or emotional distress.”
Encourage your clients to play it safe by presenting the prenuptial agreement before the wedding invitations go out.
Both parties should present complete financial statements, detailing all assets and liabilities. These statements should be made as closely as possible to the time of marriage to ensure current figures at the time of the agreement’s execution. The financial statement should cover bank accounts, income tax returns, security accounts, real estate and mortgage information, a list of automobiles and other vehicles, and any outstanding loans.
Occasionally, disclosures are more complex. If your client owns a business, he or she should disclose the name and nature of the business, the value of his or her interest in it, and the valuation method used to calculate the value. The value of retirement benefits also should be disclosed. A CPA will be helpful in determining which valuation methods to use for the business or retirement benefits as well as in preparing a first-rate financial statement.
Some courts have ruled that disclosure statements may approximate net worth. In Megginson v. Megginson, 367 Ill. 168 (Ill. 1937), a wife who was trying to invalidate a prenuptial agreement admitted that her husband had disclosed owning two farms but denied knowing the nature and extent of his property. In upholding the agreement, the Supreme Court of Illinois stated:
It is settled that persons competent to contract may execute a valid antenuptial agreement…Where the intended wife has knowledge, or reasonably out to have knowledge, of the character and extent of the intended husband’s property, an antenuptial agreement releasing statutory rights in the latter’s estate in consideration of the covenants of the intended husband will be held valid if the parties had legal capacity to contract.
The court went on to say that the husband’s description of his real property was sufficient to enable the wife, by the application of ordinary intelligence, to verify his statement.
Case law does not provide significant insight into what is fair and reasonable disclosure. Nevertheless, a court will likely view a detailed financial statement accompanying the premarital agreement to be fair and reasonable disclosure.
If your state has adopted the UPAA. you may be tempted to allow your client’s spouse to waive full disclosure as the act permits. The better practice is to insist that both parties present a detailed and thorough financial statement as a means of avoiding an attack based on concealment or even fraud.
3 . Independent counsel
In many instances, independent counsel has been a key factor in determining the overall fairness and enforceability of a prenuptial agreement. Because both parties must enter the contract knowledgeably and voluntarily, each should consult with independent counsel. However, no state mandates such consultation for validity. Some states require that each party have the opportunity to consult with counsel of his or her choice, but they do not require actual consultation for the agreement to be upheld. Other states hold that independent counsel is one factor to be considered in determining whether the agreement was entered into knowledgeably or voluntarily.
Under the UPAA, an absence of counsel does not make the premarital prenuptial agreement unenforceable. However, a lack of counsel may be a factor in determining whether the contract was entered into voluntarily or whether it was unconscionable when executed.
In re Bonds, 83, Cal. Rptr.2d 783 (Cal. App. 1999), the appellate court found the prenuptial agreement invalid because the prospective wife was not represented by an attorney and thus did not have equal bargaining power in the drafting and execution of the agreement. Strangely enough, California was among the first state to adopt the UPAA, which does not specifically require independent representation. However, the appellate court reasoned that a strict scrutiny test should be applied to voluntary requirement when one party lacks independent counsel (In re Bonds, 24 Cal.4th 1 (Cal. 2000)
In August 2000, the California Supreme Court overturned the appellate ruling, stating that although independent counsel is an important factor in determining whether the agreement was entered into voluntarily, premarital agreements are not subject to strict scrutiny when the less sophisticated party is not represented by counsel and has not waived counsel.
The Bonds case highlights the importance of being well versed in the applicable law. When a spouse challenging a prenuptial agreement has obtained legal advice prior to signing, courts generally have found the agreement fairly executed. Therefore, each party should have independent legal counsel, and to prevent the appearance of undue influence or other impropriety, attorneys should avoid recommending a particular lawyer to the other party.
T he last prerequisite is that the terms of an agreement be fair. Courts and legislatures have agreed that disproportionate provisions alone do not invalidate a prenuptial agreement. However, courts apply different standards of fairness to provisions on distribution of assets and alimony. For example, a court may apply an unconscionability standard to alimony but not to the distribution of assets. Similarly, provisions pertaining to the distribution of assets may be assessed for fairness only at the time of execution, whereas alimony provisions may be reviewed for unconscionability at the time of enforcement. Some courts also consider the length of the marriage, whereas others will enforce an agreement that is not fair or conscionable if the parties signed the cOntract voluntarily and knowledgeably.
The time for assess ing substantive fairness varies from state to state. States are divided on the appropriate time for measuring substantive fairness. Some do so at the execution of the agreement; others at the time of enforcement or both. Determining the substantive fairness of a prenuptial agreement at the time it was made coincides with the parties’ right to contract freely, However, it does not protect against unforeseen changes in circumstances that may affect financial status and place one party at future financial risk. Consequently, an increasing number of states are evaluating the fairness of prenuptial agreements at the time of enforcement.
Provisions waiving or altering alimony are particularly susceptible under such evaluation. Provisions that leave a spouse unable to meet reasonable needs, at a drastically reduced standard of Living, or a public charge or close to it, or, provisions that are otherwise unconscionable, will not be enforced. For example, the UPAA provides that if a provision causes a spouse to become eligible for welfare assistance, the court may order the other spouse to pay support sufficient to avoid that eligibility. Ultimately, the standard of fairness and the time for measuring it will depend on the state. Clients should be encouraged to draft agreements that meet the reasonable needs of a dependent spouse and account for changes in circumstances during the marriage. This can be accomplished by allocating assets or alimony to a dependent spouse based on the length of the marriage. Another possibility is a sunset clause, which provides that after a specified time the entire agreement or a certain provision, such as waiver of alimony, terminates. These options may ensure that the agreement is fair and conscionable at the time of execution or enforcement, thereby decreasing the likelihood of the provision’s being set aside.
The following cases illustrate how the four basic prerequisites may be interpreted by courts. In each case, the agreement would not have been set aside if the spouse seeking to enforce it had satisfied the four basic prerequisites.
In McMullin v. McMullin, 926 S.W2d 108 (Mo. App. 1996), the Missouri Court of Appeals found a prenuptial agreement so one-sided that it was “unconscionable” and thus unenforceable. The court ruled that the agreement failed to meet “full disclosure” requirements because it listed but did nor value the husband ‘s property and did not allow the prospective wife sufficient time to seek legal counsel in reviewing the agreement prior to signing. This case is particularly interesting in that the proponent had fulfilled his obligations under the agreement and argued that the wife should be estopped from challenging its validity because she had benefited from it. (Generally, the acceptance of benefits estops a person from questioning the existence, validity, and effect of a contract.) The court held that when a prenuptial or separation agreement is unconscionable, the court is under no duty to estop a party who has benefited from challenging the agreement’s validity.
In the Matter of the Estate of Robert J. Crawford, 107 Wash.2d 493 (Wash. 1986), the Supreme Court of Washington voided a prenuptial agreement signed by a wife in the presence of her husband’s attorney three days before the marriage because no provision was made for the wife in the event of divorce or death . The husband failed to disclose the value of his property, and the wife was not afforded an opportunity to review the agreement with independent counsel. However, the court stated that a prenuptial agreement may be valid in the absence of a fair and reasonable provision for the less advantaged spouse if there was full and fair disclosure of all material facts relating to the amount, character, and value of property and the agreement was entered into voluntarily with full understanding upon advice of competent independent counsel.
The court recognized that the dependent spouse had not entered into the contract knowledgeably or voluntarily because the value of the husband ‘s assets were not disclosed and she had no opportunity to seek independent counsel. Although the court noted that independent counsel is not an absolute requirement, it concluded that counsel is required when an agreement is patently unreasonable, as this one was .
The valid agreement
The following steps may be helpful in drafting agreements that stand the best chance of being held valid .
1. Encourage the parties to execute the agreement before selecting a marriage date or at least sixty (60) days before the wedding.
2. With the help of an accountant, have each party prepare a detailed financial statement, setting forth all assets, the account or other identification numbers, and the assets’ values. Remember to include significant personal property and to document the parties exchange of financial statements. Have each accountant submit a letter certifying that he or she has reviewed the disclosures with the client and found them adequate.
3. Make sure the opposing party is represented by counsel of his or her choosing and have that attorney sign an attestation, certifying that he or she has reviewed each provision with the client.
4. Do not draft a one-sided agreement.
5. Film the signing.
6. Have the parties sign a ratification of the agreement after the marriage.This will help the validity of the agreement and with enforcing pension provisions.
-M.A.C. & C. G.