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This page contains a single entry by Associate Editor - 3 published on July 10, 2011 4:34 AM.

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Premarital Agreements: Validity Is Not Enough

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PREMARITAL AGREEMENTS: Validity Is Not Enough
   
 

A premarital agreement is a contract between two persons who intend to marry that determines their financial rights at the end of the marriage by death or divorce.  It seems to be a fairly widespread belief that it is easy to challenge the validity of a premarital agreement in court.  In one sense it is easy:  A determined opponent will be able to find a lawyer who is willing to go into court and attempt to convince a judge to throw out a premarital agreement.  However, it is a myth that these challenges are often successful.  In fact, they rarely succeed. 

But, even when the party who wants the agreement to be upheld - the proponent - wins the fight over validity, he or she often pays a heavy price in legal fees, delay, risk and uncertainty.  When a proponent wins the fight over validity, often it is only after a trial and then an appeal. 

The thesis of this article is that it is not enough for a premarital agreement to meet the minimum standards for validity in the state where the agreement is to be signed.  Rather, the proponent's interests can be better protected if the process leading to execution and the text of the agreement discourage an attack by making it overwhelmingly difficult for an attack to succeed.   

The Basics of Validity

In the majority of states, the only requirement for a valid premarital agreement is that both parties entered into it voluntarily.  Financial disclosure is optional, although, as discussed below, parties should make such disclosure in most cases.  Independent legal representation for each party is not a requirement for validity.  However, especially where there is a disparity of resources and bargaining power, there are compelling reasons for both parties to be represented in the negotiations.  In the majority of states, the terms of the agreement need not be fair.  As long as both parties signed the agreement voluntarily, the law allows them to accept terms that are quite unfair, even harsh.  Nevertheless, an economically stronger party can strengthen the validity of the agreement by making some provisions that afford a degree of financial security to the weaker party.

Challenging Validity - (Almost) Always a Losing Proposition


The following, standing alone, are not enough to prove an agreement was involuntary (in other words, that it was the product of duress):  threat to call off the wedding; the weaker party did not have a lawyer; the weaker party was pregnant (except a pregnant bride with no assets, who was not fluent in English, and whose fiancĂ©e visa was about to expire); emotional distress; agreement presented close in time to the wedding; lack of bargaining power; the weaker party did not read the document before signing.  Because no one has to get married, a threat not to marry without a premarital agreement is not a wrongful threat; thus, it does not constitute duress.  That a weaker party did not have counsel is not duress if he or she had an opportunity to get advice and chose not to do so.  A late presentation is not, in and of itself, duress if the weaker did in fact have sufficient time to negotiate and/or if the wedding could have been postponed.  In other words, it is extremely difficult to prove duress.  Most duress claims fail.

Challenging Validity - The Rare Winner

In the rare cases where courts have held a premarital agreement invalid, it is usually because of either inadequate financial disclosure, or a combination of egregious circumstances that constitute duress coupled with very unfair terms.

Inadequacy of financial disclosure can be the result of a disclosure schedule becoming detached from the agreement and subsequently lost.  A frequent occurrence in the reported cases is a disclosure statement that identified assets without valuations or with misleading valuation data.  For example, in a New Jersey case the husband identified his major assets and provided valuations totaling $850,000 for certain assets but omitted valuations for others.  His total estate was worth six million dollars.  The premarital agreement was invalid. 

When a court holds that a premarital agreement is invalid for reasons other than inadequate financial disclosure, it is usually because there was an extremely unfair process combined with extremely unfair terms.  For example, an agreement presented for the first time shortly before a large wedding, at a time when the weaker party is unable to obtain representation, when there is a big disparity in age, sophistication, and bargaining power, and where the weaker party may become impoverished at the end of the marriage, is quite vulnerable to attack. 

How to Litigation-Proof a Premarital Agreement

A lawyer for a party seeking a premarital agreement can do several things to insulate the agreement from attack.  These include encouraging the weaker party to get counsel, helping the client to do an adequate financial disclosure, creating an opportunity for an actual negotiation, and, when there is a significant disparity in resources, encouraging the client to make some provisions for the other party's financial security.  To the extent the lawyer has an opportunity to encourage the client to start the process sooner, rather than later, he or she should do so.  The more time a weaker party has to consider the agreement and negotiate the terms, the less likely will he or she be able to mount a credible attack on the agreement.

Independent Counsel for the Weaker Party

An independent lawyer for the weaker party is the single most important factor in achieving a premarital agreement that will hold up against any challenge.  The lawyer for the proponent should encourage the other party to hire a lawyer.  In some cases the stronger party should offer to pay the fees of the weaker party to enable him or her to have competent representation.  The lawyer for a stronger party can offer to provide recommendations of lawyers - preferably at least two - who are skilled and competent in drafting and negotiating premarital agreements.  He or she should not hand-pick a lawyer for the other party and should make it clear that the other party has a choice and need not accept a recommendation.   

Dealing with the Unrepresented Party

When the other party has elected not to retain counsel, the lawyer for the proponent should make all reasonable efforts to persuade him or her to reconsider.  This can include one or more letters urging the party to retain counsel and explaining why it is so important that he or she do so.   The lawyer should also communicate clearly his or her role as solely to protect the interests of his or her client.

Financial Disclosure

A good financial disclosure can head off litigation before it begins or position the proponent to prevail at an early stage in a suit over validity.  Ideally, the financial disclosure should be in writing and should identify amounts and sources of income, and major property interests and their values.  One court has described this as the gold standard.  The lawyer can help by prodding the client to make sure he or she has not overlooked any important assets, such as the cash value of life insurance or a valuable collection.  When income is variable the lawyer can assist by drafting language that accurately describes the client's compensation with appropriate qualifiers. 

When value of an asset is not readily ascertainable, for example, the value of a closely held business interest, the lawyer can advise about how and what to disclose and how to qualify the disclosure to make it accurate.  The lawyer should inquire whether there has been an appraisal of the business, when it was done and for what purpose, or whether the business has made a statement of value, for example, in an application for key person insurance.  The statement of value in the premarital agreement disclosure should not contradict other contemporaneous statements of value or the proponent should explain in writing any discrepancy.

Regardless of how much information the proponent includes in his or her financial disclosure, the lawyer should invite the other party to ask questions, seek additional information, or request copies of appropriate documents.  An invitation that is declined is evidence the other party was satisfied with the disclosure and had enough information to make an informed decision whether to sign the agreement.  It is also evidence that execution was voluntary.

Opportunity to Negotiate

When parties to a premarital agreement engage in an actual negotiation about the terms, the very fact of negotiation is overwhelming evidence that the parties entered into the agreement voluntarily.  This is especially true if a weaker party asks for revisions and the stronger party makes some of them.  A stronger party does not have to accept all proposed changes.  It is the fact of negotiation, not the particulars of the revisions, that makes an actual negotiation so powerful a statement of voluntariness.

Substantive Fairness


In the majority of states, the terms of a premarital agreement do not have to be fair.  However, when the terms are harsh from the weaker party's standpoint, it does create an incentive to attack the agreement.  Moreover, in a significant minority of states, a court can judge whether a premarital agreement is fair at divorce.  If the parties move to one of these states, the premarital agreement may be more vulnerable to attack.  An economically stronger party can insulate the agreement by making reasonable provisions for the other party.  These can include cash or property transfers during marriage and/or upon death or divorce.

Barriers to Litigation of Validity

There are several provisions that can be included in an agreement to discourage a challenge to validity.  The agreement can provide that a challenging party who loses must pay the legal fees and costs incurred by the prevailing party.   In addition, when the agreement provides for the spouse to receive some benefits under the agreement - for example, spousal support and/or a cash payment - it could provide that these rights will be reduced or forfeited if the spouse challenges validity.  Another approach is to provide a bonus payment to the spouse for signing a ratification of the agreement after the marriage or after a separation or death.   Such provisions should cause a spouse who is unhappy with the agreement to think twice before mounting a challenge. 

After the Marriage - Ratification and Amendment

A party's acceptance of the benefits of a contract generally constitutes ratification.  Once a party has ratified a contract, he or she cannot effectively challenge its validity.  Therefore, a stronger party should carry out his or her obligations, such as to transfer title to real estate or make a will.  The stronger party might also consider revising the terms, perhaps after several years of marriage, to create more financial security for the weaker party.  The amendment should include a provision that says the parties ratify the original agreement in all other respects.  Doing so greatly strengthens validity.




 

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Premarital Agreements: Validity Is Not Enough from Wealth Strategies Journal 2.0 (Beta) on July 10, 2011 4:49 AM

The Wealth Strategies Journal has posted a new article entitled "Premarital Agreements: Validity Is Not Enough," by Linda J. Ravdin.Excerpt: "The thesis of this article is that it is not enough for a premarital agreement to meet the minimum standards... Read More