How Prenuptial Agreements Work
A prenuptial agreement is a written contract entered into by a couple prior to getting married or forming a civil partnership, which details the financial arrangements that will take effect during the marriage, and in the unfortunate event of a divorce. The existence of a prenuptial agreement means that agreements reached will be legally binding, and avoid some of the lengthy court based procedures that can arise during financial disputes stemming from divorce.
When a prenuptial agreement is signed there are normally three main components (although not exhaustive) which may be considered. These normally include the following:
How a couple decides to proceed with their finances during the course of their marriage, whether it be on a joint, single or partnership basis; and what arrangements will be in place for it, shall be contained within the four corners of the prenuptial agreement .
To be enforceable, a prenuptial agreement must be signed voluntarily by both partners, therefore if any degree of pressure is believed to have been imposed upon one party (for example where one partners’ parents have insisted on the prenuptial agreement being signed) then this could give rise to grounds to set the agreement aside entirely or in part.
If one partner tries to avoid complying with the written and signed prenuptial agreement, the other partner may invoke the terms of the written document within court proceedings. Where the court finds that the written agreement meets the criteria for being enforceable, it may be deemed to have the same effect as if the orders applied for in the court proceedings, are already in place.
Legal Advantages of Prenuptial Agreements
Divorce can often be a messy experience and when you factor in all the emotions it can become even more troubling and difficult. Another way in which divorce can be messy is when claims on property or financial responsibilities that were not even considered during the marriage can rear their head later on. Having a prenuptial agreement established with your spouse not only safeguards against some of the indicated situations but also works to prevent them from even occurring.
Suppose for instance that you were married for only five years before you decided to divorce. You were both young and at the beginning of your careers. Because of this, financially both of you were not in the most stable positions, a fact that was obvious enough to be considered. Because of the lack of wealth, you both determined that there would be no basis for a prenuptial agreement.
Because of the lack of stability, when the divorce increased costs for living, the decision was made that the house would be sold and both parties would go their separate ways. Now, if during the marriage one person had signed a credit card application without disclosing the others income, the situation would go from amicable to bitter in the blink of an eye.
Because the spouse who did not do the signing is now legally responsible for the debt, they are responsible for the payment, even though the other was responsible for the acquisition of the debt. Because this was never spoken of prior to the marriage, a very amicable split very quickly becomes acrimonious.
If there had been a prenuptial agreement, the one spouse would have been protected. This is just one example to the potential pitfalls that occur when a couple does not set a prenuptial agreement.
In addition to protecting each other from situations like the above-mentioned, a prenuptial agreement also acts as a warning to relatives that the parties involved have made arrangements regarding what would happen in the event things go south in the future.
This is in itself a benefit, as it prevents tensions growing between relatives, especially if there is a family business involved. It informs everyone that the matter is settled as far as the couple is concerned. It also helps set the set standard of how the children will be provided for, reducing some of the stress surrounding child support matters.
There can also be tax benefits to be gained by the use of prenuptial agreements. In the absence of a prenuptial agreement, upon the death of one spouse, if the surviving spouse is in receipt of the benefit, they will be required to pay capital gains tax at their marginal tax rate. If a prenuptial agreement had been in place, then the surviving spouse would not have to pay any capital gains tax at all. This can spell a significant difference in the amount of wealth that a couple can pass on to their children.
The financial responsibilities of the couple is something which can be clarified in a prenuptial agreement. Without that agreement, lesser earning parties can find themselves stuck with payments that they never anticipated having to make when the divorce comes about. Because prenuptial agreements determine who is responsible for what in the case of a split, it can aid couples in avoiding the heart of the matter in the first place.
The Role of Prenuptial Agreements in Divorce
When you decide to get a divorce, you will likely find that your prenuptial agreement has a significant impact on the process. In many circumstances, the prenuptial agreement will essentially dictate how property division is handled and what alimony will be awarded. If you have questions about how your prenup works and how it will affect your divorce, the first thing you need to do is read the contract. It is largely up to you to ensure that you know exactly what the contract says and how it impacts your assets.
The first component of your prenup that will directly affect the divorce process is asset division. Because most prenuptial contracts place specific limits on how assets can be divided, judges and attorneys often assume that the contract will be followed to the letter. You are not necessarily required to follow every detail of the prenup, but courts will generally look at the prenup as the controlling document in any property disputes. If you believe that property should be divided in a different manner due to circumstances that did not exist when the original contract was signed, you may still be able to get a court to agree with you. However, you will likely need to revise the divorce agreement considerably to get the contract to work for you in the new situation.
Debt division is fraught with difficulty in a divorce. Many people will retain debt even if they made no decisions related to the amount of each purchase or whether it was necessary at all. For this reason, the division of debt is often contentious. It can be easier to deal with debt if you had a prenuptial agreement that states who is responsible for which amounts. You will still need to negotiate with the other spouse about the amount of debt related to each spouse. Factors such as bankruptcy will likely be brought into the fray and affect the amount of debt that each spouse ultimately pays.
Alimony, or spousal maintenance, is not available in every case. However, when it is appropriate to award alimony, it is often a highly contentious component of the divorce process. The prenuptial agreement may limit or even eliminate alimony, which can be beneficial. Even if no limit is placed on alimony in your prenup, courts will generally award alimony in the manner stated by the contract because any changes to the agreed-upon amount can only be addressed by evidence that all parties agree to consider.
One important benefit of a prenuptial agreement is that it can help to speed up the divorce process. Any time that parties cannot agree about the aspects of a divorce, the entire process will be significantly slowed down. Because many aspects of the divorce process are already spelled out in the prenup, divorcing parties can often skip negotiations over those items entirely. This is particularly important when children are also present because a long divorce process can be very painful to them.
Prenuptial Agreement Drawbacks and Limitations
While prenuptial agreements offer several advantages, they also have potential pitfalls and limitations. First and foremost, prenuptial agreements can be challenged in court in certain situations. For instance, the court may rule a prenuptial agreement invalid if it was not done fairly or properly. If the terms of the prenuptial agreement are determined to be unfair or inequitable, the court may deny enforcement of the agreement. A prenuptial agreement may also be found invalid if one party was coerced into signing it, or if the agreement was executed under duress . Due to the sensitive nature of these types of documents, the courts will closely investigate the circumstances surrounding the drafting and execution of a prenuptial agreement, including whether the parties were represented by independent legal counsel, whether there was full disclosure of assets and income, and whether one party was pressured into signing the agreement rather than having a meaningful opportunity to review the agreement with their own attorney. Finally, a prenuptial agreement may be found invalid if it is not properly executed. Such an error could result from an agreement that was not signed in front of a Notary Public at the time of the execution.
How to Set Up an Effective Prenuptial Agreement
To be legally enforceable, a prenuptial agreement must meet a number of legal requirements. The agreement must be in writing and signed by both parties. The agreement must also include the disclosures of each party’s property. In fact, at least one state requires that there be a full financial disclosure by both parties.
Because a prenuptial agreement can dramatically affect issues pertaining to division of property, maintenance and more, it is best to seek legal counsel for assistance during the drafting process. Beyond the proper legal drafting, the substantive issues of the agreement must also be thoroughly negotiated. While it is important that you and your partner prepare the prenuptial agreement together, you should have your own lawyers and accountants review the document before signing and filing with the court. A prenuptial agreement is unlikely to be enforceable if the court finds that the agreement was signed while either party was under duress or without time to consider the terms of the agreement.
Prenuptial Agreement Alternatives
There are solutions available for people wishing to plan and protect their assets who do not want to enter into a prenuptial agreement. The two most common alternatives we have found are postnuptial agreements and asset protection trusts.
Postnuptial agreements are similar to prenuptial agreements, except for the timing. They are executed after the marriage has taken place. Pursuant to the Massachusetts Uniform Probate Code, once a marriage takes place, the ability to waive spousal allowances, rights and interests in property that would otherwise be followed in the event of death is restricted. In the absence of the waiver through a postnuptial agreement, these rights and interests would apply to spouses upon death. Like prenuptial agreements, postnuptial agreements must also be in writing and notarized by a disinterested third party. Although enforceability of warranty deeds are exempt , a postnuptial agreement must be recorded in the registry of deeds to be enforceable against third parties. In 2004, section 34B was added to the Massachusetts Uniform Probate Code allowing courts to generally enforce postnuptial agreements. Since then, postnuptial agreements have become more common, but their ultimate enforceability is still unclear.
Another alternative is to create an irrevocable trust. While anyone can create a trust during their lifetime, irrevocable trusts cannot be easily amended, generally speaking. It is important for individuals wishing to create an irrevocable trust to work with an attorney experienced in Wills and Trusts. The assets placed in an irrevocable trust are generally viewed as having been given away and therefore not available for equitable division in a divorce. Irrevocable trusts are not a perfect solution, however. Anyone who wishes to leave such assets to their spouse or children risk losing a valuable planning feature of estate planning.