Aparty who seeks a premarital agreement typically wants to protect their exclusive rights—at death or dissolution—to nonmarital property (premarital, gifted, inherited). Some want the right to retain all assets, regardless of source, including the fruits of their own labor, a title-controls type of agreement. A second, and often equally important, goal is to avoid a contested divorce or probate proceeding with all of its risk and expense.
A premarital agreement can achieve those goals; but it’s not over when the agreement is signed. The post-execution conduct of one or both parties can strengthen validity of the contract, result in a revocation or create a dispute about parties’ intent that must be resolved in court, or leave the agreement intact but change the parties’ economic circumstances. Some such actions are simply the natural result of a party exercising their rights to manage their property.
The lawyer can anticipate some common circumstances and attempt to address them at the drafting stage and can give the client post-execution advice about steps to take, and not to take, to avoid a bad result. Ideally, the lawyer would write an advice letter that explains how the client can achieve the maximum protection afforded by the agreement. Some clients are willing to pay for this additional service, while others are not. Sometimes the most the lawyer can do is deliver the bad news to the client after the damage has been done. Assuming the agreement is valid, it will be enforced as written.
Post-Execution Conduct Can Strengthen Validity
The laws governing validity make it easy to get a valid premarital agreement. The only essential requirement is that parties enter into the agreement voluntarily. A fair financial disclosure is generally required but is waivable. The terms can be unfair. So, why worry about strengthening validity? Suppose the parties move to a state with more demanding criteria for validity. The agreement should have a choice-of-law clause. But, what if the judge in the forum state applies forum law on fundamental public policy grounds? Even if parties stay put, actions that strengthen validity can discourage litigation and offer an opportunity to correct serious flaws.
Formal Ratification—Amendment during Marriage
During the marriage, parties can enter into an amendment. An amendment should acknowledge the validity of the premarital agreement and ratify all other terms. When the process leading to execution was flawed, for example, when the proponent presented the agreement very close to the wedding, the other party did not have a lawyer, the financial disclosure may have been inadequate, or there was a gross disparity in assets, it can be useful to both parties to amend. This is an opportunity to improve the terms for a weaker party, perhaps after the marriage has endured for a time. Parties have the time for a real negotiation, with lawyers on both sides, and the stronger party can update the financial disclosure.
In drafting the provision of the agreement that acknowledges that parties may amend, the lawyer should consider how much formality to require. A typical provision says that the agreement may only be amended in writing with the same formality as the agreement itself. When the agreement is executed with multiple originals, wet signatures, initials on every page, witnesses and/or a notary, is it in the client’s best interest to require the same formality? More formality is likely to better protect an elderly client who may be vulnerable to undue influence. Language that would permit parties to amend on the back of a cocktail napkin is at the other extreme. The lawyer should consider whether something in between is appropriate, rather than treat amendment language as mere boilerplate.
ERISA and Ratification
When the agreement provides for each party to retain his/her own retirement benefits, such as a 401(k), and for the spouse to waive survivor rights, the plan participant must take steps after the marriage to make the waiver effective; specifically, get the spouse to sign a waiver and file it with the plan administrator with an appropriate beneficiary designation. When a spouse signs such a waiver, that could constitute ratification of the agreement. The participant could add the following text to the ERISA (Employee Retirement Income Security Act of 1974) waiver form: “In accordance with the terms of the parties’ Premarital Agreement executed on [date].”
Ratification by Conduct—Acceptance of Benefits
Basic contract law principles tell us that acceptance of the benefits of a contract constitutes ratification of the contract. The lawyer for the proponent can provide an opportunity for ratification with terms that will be implemented during the marriage, not just upon death or dissolution, for example: transfer of title to real estate; obligation to make cash gifts during the marriage; life insurance for the spouse; obligation to pay college tuition for a stepchild. The party who takes on such an obligation needs to remember to carry it out.
Claim of Oral Revocation
Common law principles permit parties to orally revoke a contract, including the provision that says it cannot be orally revoked. The Uniform Premarital Agreements Act (UPAA) supersedes the common law; only a signed writing can revoke. Thus, a claim of oral revocation in a UPAA state should fail. Nevertheless, it is in the best interests of the proponent to avoid actions that could support such a claim. The good news is these claims rarely succeed.
Claims of Revocation That Are Likely to Fail
Parties have attempted a variety of theories to support a claim of revocation. For example, termination of an engagement appears not to revoke so that after reconciliation the agreement remains viable. However, in this circumstance, it would be best to have parties sign a ratification, especially if there was a long hiatus between breakup and reconciliation. A claim of oral revocation, even if coupled with conduct, e.g., tearing up the agreement, may fail. An ordinary breach that can be cured or compensated does not create revocation, nor does a party’s disadvantageous change of position, such as quitting a job or going to work for the other party without pay. That an economically weaker party experienced some good fortune does not revoke an agreement, nor does a stronger party’s reversal of fortunes such that his/her obligations become burdensome. Adultery will not generally cause revocation unless the agreement says so expressly.
Claims of Revocation That Might Succeed
When the party claiming the existence of an agreement cannot produce it (an unsigned copy is insufficient), a court could treat it as revoked; this also could happen with a party forgetting to mention such an agreement until trial. See K. v. B., 13 A.D.3d 12 (N.Y. App. Div. 2004). When parties merge and jointly title all of their assets, the practical effect is revocation. A breach that is so substantial that it defeats the very purpose of the agreement may result in a court ruling of revocation. Cases involving extreme marital misconduct sometimes produce a ruling of revocation or other relief.
Conduct That Can Create a Claim the Agreement Is Unconscionable at Enforcement—The Second-Look States
Fourteen states permit a court at divorce to consider whether a premarital agreement has become unconscionable as of divorce and to void the agreement or grant relief that mitigates the unfairness. Consider the client who enters into an agreement in Virginia, not a second-look state, and retires to a second home at Hilton Head, South Carolina, a second-look state. Parties are better served by substantive terms that will afford a reasonable degree of financial security when the marriage ends, including, in some cases, property transfers during marriage (creating ratification) or at dissolution.
Sharing Agreement where Parties Consume Marital Property
An agreement where each party retains exclusive rights to nonmarital assets and parties share the fruits of their labor can be appealing to many couples. The lawyer representing a party who must work to create a nest egg should consider that parties may consume marital assets on lifestyle or children while a wealthy party preserves nonmarital assets. The lawyer can anticipate this and provide for it in the agreement, for example, by carving out certain assets—a 401(k); an annual set-aside for savings—as nonmarital property of the weaker party. The lawyer can also advise the client to actively create a nest egg and to avoid spending down his/her own nonmarital property.
Wealthy Party Makes Disadvantageous Decisions
A wealthy party may choose to use nonmarital assets to benefit the other party and later regret their generosity. Too bad. A standard provision allows for intra-spousal gifts to become the separate property of the recipient if solely owned or to become marital property if joint. When the agreement says that a joint financial institution account is marital property, a party’s claim that they intended such an account solely for convenience will go nowhere.
Commingling Marital and Nonmarital Liquid Assets
When a party commingles their nonmarital money or securities in an account in their sole name with money or securities defined as marital, engages in multiple transactions, or has inadequate records, a court may have to find the entire account is marital. The lawyer can advise the client about the necessity—however burdensome—of maintaining two sets of financial institution accounts, one for nonmarital assets and another for marital; the latter can be solely titled or jointly titled. Similarly, a party who is entitled to retain a premarital retirement plan or IRA, plus gains and losses, and share marital contributions, must maintain account statements from the date of marriage forward or the entire account may be divisible marital property under the terms of the agreement.
Treatment of Gifts
Some lawyers like to require that any transfer be documented in writing as a gift to qualify as the recipient’s separate property; arguably this would allow the donor to seek to reclaim assets if he/she failed to put the intent to make a gift in writing. This creates an undue burden for the weaker party and opens a door to messy litigation. A provision that says title transfers are conclusively gifts absent agreement in writing is preferable. The agreement could provide that a party’s clothing, jewelry, sports equipment, personal effects, and special occasion gifts or transfers are always the owner’s separate property. It could also provide that furniture and household effects purchased during marriage are marital property without regard to the source of funds.
Weaker Party Takes Advantage of Stronger Party
A party entering into a premarital agreement today may be healthy and in control of their financial affairs. The lawyer should consider the prospect that the client’s health and mental acuity will decline in a way that creates an opportunity for exploitation. Consider a spouse with a power of attorney who uses it to transfer the other party’s nonmarital assets into survivorship. This could be a breach of fiduciary duty; a court may have to decide after expensive post-death litigation. When parties own cash/securities jointly, a spouse can empty the account; that may or may not be appropriate under the circumstances. The lawyer should encourage the client to see to their estate planning, including appropriate powers of attorney and health care powers, titling of assets, and appointment of fiduciaries, and to update these documents periodically as circumstances change.
Weaker Party Makes Disadvantageous Decisions
A weaker party is particularly vulnerable when they rely on oral promises or unspoken expectations that a wealthy party will see to their financial security beyond what is required in the agreement. A weaker party may, for example: quit work to travel; use separate property income to pay routine expenses while the other party pays the mortgage on a separate property home; work to build a marital estate while the other party actively grows their nonmarital business; dissipate their separate property; or use separate property for meritless litigation, e.g., a fight over validity. The lawyer for the weaker party can advise him or her about the risks in decisions of this type and emphasize what he/she must do to provide for his/her own financial security. A client who is entitled to receive transfers or other property interests during the marriage should be advised to insist on getting these benefits; a failure could result in loss of rights. A provision requiring each party to bear their own fees to implement the terms of the agreement and that shifts fees to a losing party can discourage meritless litigation.
Issues in Planning for Death
A premarital agreement typically applies at death or dissolution. It may provide for each party to waive all claims at death or may carve out specified terms for the survivor. In either case, each party should take steps to carry out the terms. Each should update beneficiary designations and other estate planning documents to conform to the obligations under the agreement. The spouse who is entitled to be provided for at death should be advised to follow up, request copies of documents, and see to life insurance obligations, including payment of premiums. A party who is entitled to name a child as beneficiary of a 401(k) must remember to get the ERISA waiver signed. Unless the participant does so, the plan must pay the benefits to the surviving spouse. The lawyer should advise the client to carry out these steps and of the consequences of failing to do so. The lawyer should explain to the client that he/she can create estate planning documents that are more generous to the new spouse than required, but not less so, and that these more generous documents will prevail unless revoked.
Some premarital agreements allow the decedent to create a trust to receive assets due the surviving spouse. In the absence of a trust, these assets will go outright to the survivor; that spouse will determine their ultimate disposition. A party who wants to provide generously for a surviving spouse, but for assets ultimately to go to offspring, and not to stepchildren or the survivor’s next spouse, must act. The spouse’s lawyer should consider whether the agreement should restrict the wealthy spouse’s ability to make sizable gifts during their life. When an agreement gives a survivor the right to receive a home owned by the other party, the lawyer should consider whether it should restrict the owner’s ability to mortgage the property and what rights the spouse will have if the owner decides to sell during their life.