A
premarital agreement is a legally binding contract between two people
who intend to marry that determines the property rights of the
surviving spouse upon the death of the first spouse and that may also
determine property and support rights if the marriage ends in divorce.
Not so long ago the typical person considering a premarital agreement
was older, had been widowed or divorced, and had children from a prior
marriage for whom he or she wanted to provide at death. A premarital
agreement remains a useful planning tool for such individuals. When
there is a significant disparity in property and income between
prospective spouses, the economically better-off partner may wish to
limit his or her financial obligations, especially in the event the
marriage ends in divorce. Even when such persons are in comparable
economic circumstances, each may wish to preserve their own assets and
to avoid disputes with each other if marriage ends in divorce, or with
the other heirs of the deceased spouse if the marriage ends in death.
Often, because of their ages, there is no expectation that the couple
will have children together.
As
premarital agreements have gained favor as a means to resolve financial
and property rights in advance, more and younger couples entering into
first marriages seek them. There are no reliable statistics
documenting this trend, or the reasons for it, but the author's
experience, coupled with an informal and unscientific survey of
colleagues, suggests that the trend is real. There appear to be
several reasons for it:
- Today's
young adults will be the beneficiaries of the tremendous wealth built
by their grandparents or great-grandparents: the frugal children of
the depression, the post-World War II period, and their own successful
parents. Sometimes wealth coming from the older generation is in the
form of a family business in which the bride or groom is, or expects to
become, active. Parents, wishing to preserve their wealth in the
family, urge their children toward premarital agreements. The reality
of this factor is borne out by the frequency with which the longtime
attorney for the parents of the bride or groom is called upon to draft
and negotiate the agreement.
- Many
of today's young adults had a front row seat at their parents' divorce
and now seek an alternative to the sometimes bitter fighting that
sapped energy and resources from the family. Some of these young
adults witnessed the tensions that can arise over disposition of
property after the death of a parent, or grandparent, who was married
several times and did not plan for the allocation of property among the
widow or widower and the children and stepchildren.
- Many
young adults are delaying marriage until their early 30s. Some of
these more mature young people have established careers and have built
up assets, often have acquired a home and retirement benefits, or have
become wealthy as entrepreneurs. A premarital agreement is one way for
such persons to protect their premarital wealth as a separate asset.
- Premarital
agreements have gained much wider acceptance generally. The notion
that a premarital agreement represents a lack of faith in the future of
the marriage is fading. More persons getting married are considering
whether a premarital agreement is appropriate for them--and they are not
for everyone--while still holding on to their belief in romantic love.
When
a couple is young, they, and the attorneys who represent them, must
recognize that the approach to formulating the specific terms of the
agreement should not necessarily be the same as for a couple over 50
with independent assets and the means of supporting themselves. There
are several key factors that parties, and their attorneys, should take
into account:
- The
couple may have children together. Children change everything. Even
if the couple assumes they will both continue to work fulltime, their
plans may prove unworkable. A child may be disabled or otherwise
require an unusual level of parental attention. The couple may
discover, after a child is born, that having a parent at home suits
both of them. Or, the couple may realize that it is in their common
economic interest that one career take a backseat.
- The
younger the couple, the longer the timeline that must be taken into
account. A 30-year old couple getting married today may still be
together in 60 years. The number of unknowns in their lives is
virtually impossible to contemplate and plan for in a contract.
Younger couples tend to focus on the possibility the marriage may end
in five or ten years and on terms that may appropriate if that occurs.
They have much greater difficulty contemplating a 60-year marriage that
ends in death and the terms that would be appropriate and fair after so
many years.
- A
corollary to the above is that any provision of the agreement that
fixes the rights of the economically disadvantaged party at some
predetermined level will likely be grossly unfair to that party if the
marriage ends, whether by death or divorce, after 20 or 30 years. He
or she may develop health problems and be unable to work. Inflation
may erode the value of a fixed cash payment. There are also risks for
the wealthier party in fixing an obligation at a predetermined level.
If that party loses his or her wealth because of business reverses or
bad investments, he or she will remain liable to meet the financial
obligations established under the agreement.
There
are a number of options younger couples, and their counsel, may wish to
consider in formulating the terms of a premarital agreement that will
meet their objectives and still stand the test of time:
- The
agreement could provide that each party retains the right to seek
spousal support in the event of divorce, or that the economically
weaker party retains such a right while the wealthier party waives his
or her claim. Of course, in the event of divorce, that party would
still have to prove the need for support. There are variations on this
theme. For example, parties who wish to avoid court could agree to
binding arbitration of a spousal support claim. Alternatively, the
agreement could provide for a limited duration support waiver; for
example, a waiver that stays in effect until a child is born or the
fifth anniversary of the marriage with the right to seek support
reinstated thereafter. Such a provision would provide some security
for an economically weaker party who may leave full-time work to be a
homemaker.
- The
agreement could provide that, in the event of divorce, each party would
retain exclusive rights to his or her premarital assets and any assets
received by gift or inheritance in the future, while also providing for
the parties to share the fruits of their common labor. For parties
whose primary objective is protecting their rights to inherited assets,
and who will be working during the marriage and creating shared assets,
such an agreement can work well for both parties. It would allow both
parties to build some financial security through savings and investment
during the marriage while allowing each to decide how they wish to
manage their inherited assets. Over time, some parties may wish to
contribute more of their separate assets to the household, but a party
who wants to keep his or her inheritance separate would have the right
to do so.
- A
variation on the above is an agreement that singles out a specific
asset for special treatment in the event of divorce. Often the asset
is an ownership interest in an existing business or a professional
services practice, such as a law, or CPA, firm. Without such an
agreement, under the law of many jurisdictions, such as the District of
Columbia, Maryland, and Virginia, a premarital business that
appreciates in value as a result of the efforts of either or both
parties during the marriage could be subject to an equitable
distribution claim. An agreement could preclude such a claim and the
costly litigation that goes along with it while retaining the non-owner
spouse's right to share in retirement benefits and other assets
acquired with the compensation received by the owner-spouse for working
in the business.
- When
a wealthier party wishes to retain his or her exclusive right to
property in his or her name, the agreement could include some
compensating features to provide financial security to the other
spouse. For example, the agreement could provide that the wealthier
party would transfer specific property, such as a home, into the joint
names of the parties. It could provide that the wealthier party would
make a specified cash gift to the other party upon marriage, or on a
specified schedule thereafter, to enable the other party to build up an
investment portfolio for future financial security. There are a
variety of ways to structure such an obligation, limited only by the
desires and the imaginations of the parties and their counsel.
- The
agreement could provide that upon death the parties simply retain their
rights under state law. This means that the surviving spouse would be
entitled to survivor benefits under a private, qualified retirement
plan and under most governmental retirement plans, just as if there
were no agreement. It would also mean he or she would have the same
right to a spouse's share of the deceased spouse's estate as would be
in effect without an agreement.
- Another
option for providing for the death of a spouse is for the wealthier
spouse to agree to create a trust, funded at a specified level or with
specified assets, that provides for the survivor to have the income,
and, if necessary, to invade the principal. However, as discussed
above, parties and their counsel should consider the possibility that
the death may occur far in the future and that the terms will be either
inadequate for the survivor, or unreasonably burdensome for the
decedent's estate.
- Parties
may also wish to consider provisions for life insurance. Again,
however, an amount that may seem entirely adequate today may be wholly
inadequate 20 years from now. Moreover, if the spouse obligated to
maintain insurance opts for term insurance, which will be very
inexpensive when the parties are young, he or she may discover that the
cost of maintaining it is prohibitively expensive in the later years.
For some couples, a life insurance product that builds cash value may
be a better option.
- Parties
may wish to consider long-term care insurance as another way to ensure
the financial security of the weaker spouse. The wealthier spouse
would agree to pay the premiums on the long-term care policy, thus
providing some of the nursing home care costs for a spouse needing such
care
- Finally,
parties may wish to consider a provision that automatically terminates
the agreement in its entirety after a specified number of years, often
called a "sunset provision." When an agreement terminates under a
sunset provision, end of marriage rights granted by state and federal
laws are restored as though the parties never had a premarital
agreement. A variation on this theme is an agreement under which
certain provisions terminate after a specified number of years. As
suggested above, an alimony waiver could terminate after a certain
number of years or the birth of a child. Similarly, a waiver of state
law spousal rights at death could terminate after a specified number of
years without terminating the agreement as a whole.
A
good premarital agreement will be tailored to meet the specific desires
and circumstances of the parties. The solutions suggested above to
achieve such an agreement are by no means the only options nor are they
mutually exclusive.
Ideally, a party who wishes
to have a premarital agreement will broach the subject and begin
negotiations well before the wedding date. The proposed agreement will
be drafted and given to the other party in sufficient time to get
meaningful legal advice about whether to sign it as is or seek
modifications. When the couple is young, it is even more important
that the discussions and drafting begin far in advance of the
wedding. Many couples decide to get married, pick a date, and start
making financial commitments for a venue, caterer, and other vendors.
Only then do they focus on a premarital agreement. Negotiations that
take place in the midst of wedding plans with invitations about to go
out can be extremely stressful for both parties, and too often unfair
to one of them. Ideally, the couple would decide to get married, start
the discussion about a premarital agreement, resolve any disagreements,
and only then start making deposits for catering and invitations.
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