What Is a Prenuptial Agreement?

What Is a Prenuptial Agreement?

The Uniform Premarital Agreement Act of 1983 (UPAA), which has been adopted in some form by 27 states (two states have adopted the more recent Uniform Premarital and Marital Agreements Act (2012)), defines “premarital agreement” (also known as prenuptial agreement) as

an agreement between individuals who intend to marry which affirms, modifies, or waives a marital right or obligation during the marriage or at separation, marital dissolution, death of one of the spouses, or the occurrence or nonoccurrence of any other event. The term includes an amendment, signed before the individuals marry, of a premarital agreement.

The drafters of the UPAA intended to make clear that a prenuptial agreement is distinct from other types of agreements, such as cohabitation agreements (between two people who live together but are not married and may never choose to marry), marital agreements (between two spouses during marriage), and marital settlement agreements (between two spouses after separation). Each of these types of agreements comes with its own rules regarding what duties are owed by the parties to each other, what kind of financial disclosures need to be met, and how the process should unfold.

What Does This Mean, and Why Does It Matter?

Prenuptial agreements are unique because they are agreements between prospective spouses made in contemplation of their upcoming marriage. Generally, prenuptial agreement negotiations provide an opportunity for prospective spouses to iron out the details of their marriage, particularly regarding their finances. One might think, “That’s some way to kill the spark!” Quite the opposite is true. When couples communicate about their finances before issues arise during marriage, they are far more equipped to handle inevitable bumps down the road. The financial discussions that should be happening before the wedding are required when parties enter into a prenup, and so the soon-to-be spouses can decide how they intend to build a marital estate (or not), how they will manage their earnings, and what financial goals they may have for the future.

What’s in a Prenuptial Agreement?

General contract principles apply to prenuptial agreements, which vary widely from state to state. This means that prenuptial agreements can cover many topics. Despite media portrayals of prenups as documents where spouses agree to how much someone has to exercise or cook dinner, more often than not attempts to agree on behavior are not included; instead, prenuptial agreements provide for the parties’ rights to spousal support (alimony) and the division of property at divorce.

Prenuptial agreements are unenforceable to the extent that they adversely affect a child’s right to support or otherwise modify a custodial responsibility, including custody or parenting time. There are other restrictions that vary by state, but, universally, prenuptial agreements cannot restrict any rights that affect children. In California, we know not to include anything in our agreements that would set child support or discuss parenting time.

What Happens without a Prenuptial Agreement?

When parties enter a marriage without a prenuptial agreement, the law of the state where they reside applies at divorce. This means that upon divorce, the law will determine such matters as how certain property is characterized and divided, what support should be, and the duration of support. Due to the discretion that most family courts have when making these decisions, it can create a lot of room for dispute and disagreement even in the most straightforward of situations.

In a community property state such as California, for example, this could mean that, even if a business were established by the wife prior to marriage, the husband may have a right or interest in the premarital business if it appreciated in value during the marriage. This may be true whether the appreciated value was due to the investment of community funds or simply due to wife’s efforts during marriage. In this case, the business would need to be appraised and a forensic accountant would likely need to be retained to perform an analysis of the community interest in wife’s business, depending on the length of the marriage and other relevant facts at the time of the divorce. Once determined, the wife could then buy the husband out of her business and retain her ownership without his involvement.

Who Might Consider a Prenuptial Agreement?

In the example above, if the parties had a prenuptial agreement, the wife could avoid buying the husband out of her business, even if she works there during marriage and even if the parties invest community funds into the business during marriage. Language can be included, and customized, so that the business remains hers no matter what the circumstance. In the alternative, the agreement could be drafted to provide the husband with a portion of the business, but only up to a certain cap. The parties have the ability to craft exactly what they want to happen and can contract outside of the prevailing law in their state.

Though they are not necessary for most marriages, prenuptial agreements are advantageous to many people. Where one party enters a marriage with a premarital business, it can be beneficial to protect the separate interest in a prenuptial agreement and avoid and/or limit potentially costly litigation at divorce. Parties with children from prior marriages/relationships may wish to protect their separate assets for the benefit of their children. While they cannot predetermine child support or custody time, they can certainly keep separate and protect assets for their children. Anyone likely to receive a large inheritance, or who has a large estate can benefit from establishing and clarifying his/her expectations with a prospective spouse. The same is true for parties with great disparity in assets and/or debts. Premarital agreements also can include terms regarding what is to occur upon each party’s death, thereby addressing both manners in which marriages end.

Why Is It Legally Advantageous to Enter a Prenuptial Agreement?

While it may be awkward to broach the subject of a prenuptial agreement with one’s betrothed, there are several legal advantages to entering an enforceable prenuptial agreement. First, one gains certainty regarding an outcome that can be extremely unclear without a prenuptial agreement. Second, with a prenuptial agreement, one can avoid some of the dreaded legal process at the time of divorce. For example, while the fact of the divorce must be publicly filed, parties can agree in advance to keep other issues confidential and avoid airing all of their dirty laundry. Third, the number of issues to litigate at the time of divorce decreases. This limits acrimony and attorney’s fees, and the fewer issues there are, the more likely the parties are to reach a settlement and avoid litigation. Finally, money spent on a prenuptial agreement is money saved at divorce; by entering an enforceable prenuptial agreement, parties are saved from months (or sometimes years) of costly litigation at the time of divorce.

What Are Other Advantages?

There are also emotional advantages for parties who choose to enter prenuptial agreements. The discussion of finances before marriage preempts some of the most common issues that arise after the wedding. When parties take the time to negotiate a prenuptial agreement, they also must take the time to discuss how they will handle their finances during marriage. This is invaluable and almost always sets the tone for open and honest communication as future partners. Sometimes, relationships break down during prenuptial agreement negotiations. If a relationship cannot withstand prenuptial agreement negotiations, it will certainly not withstand the pressures of marriage. Although uncomfortable and unpleasant, it is usually less complicated for the parties to call off a wedding than it is to dissolve a marriage.

Whether parties sign a prenuptial agreement or not, they enter a contract with the state the moment the marriage license is filed. Parties who wish to know the terms of this contract in advance should meet with an attorney to learn their rights and obligations. Contacting an attorney about a prenuptial agreement is always a good idea, even if just to learn that a prenuptial agreement is not necessary. If a party believes that he/she needs a prenuptial agreement, it is best to reach out to an attorney as early as possible. Laws vary by state, and there are many pitfalls in drafting. It helps to have a professional review and advise well in advance of the wedding. Moreover, many jurisdictions have time restrictions and other formalities required in order for the prenuptial agreement to be enforceable. Some jurisdictions require parties to be represented by counsel for certain provisions, such as spousal support waivers, to be enforceable.

Are Prenuptial Agreements Enforceable?

To give a lawyer’s favorite answer: it depends. At the time of divorce, either party could decide to challenge the enforceability of a prenuptial agreement. That does not mean they will be successful. There are many ways in which to ensure the most bulletproof prenuptial agreement possible, but the primary way is to retain counsel (for both parties) that is proficient in family law, specifically in drafting and reviewing premarital agreements. There are specific rules that apply to what must be disclosed, the timing of when the agreement must be presented in advance of the wedding, and what language must be included, to name just a few. Without considerable knowledge about these issues, it would be easy for a party to enter into what one thinks is an enforceable prenuptial agreement only to discover at the time of divorce that potential pitfalls were missed in drafting the agreement.

It is the policy goal of every state to be sure that when they give parties the right to contract amongst themselves they do not create significant inequities between the parties such that one may be left penniless and in need of state assistance. Further, to the extent either party is giving up a legal right that he or she would otherwise have under the law, there must be full knowledge and consent to same. There have been cases where a premarital agreement was found to be unenforceable due to one party’s lack of attorney or failure to have proficient understanding of English, or due to the agreement being presented too close to the wedding date.

Takeaways

Prenuptial agreements can be useful to a variety of people and can be used to accomplish different goals; due to potential time constraints and statutory timelines related to when these agreements need to be executed, if interested in a prenuptial agreement, parties should reach out to an experienced family law attorney ASAP.