Prenups – No Longer Taboo
From the MO Planning business and estate planning blog by Austin Dowling and Steve Bahr
For many years, if one were to even mention a “Prenup” to a prospective spouse, it would send them running for the hills (or at least to their lawyer). There has been a certain level of instinctive animosity that has gone along with the subject for a number of years, and in the past many couples simply refused to even entertain the idea of creating one. However, we have noticed a significant shift in thinking when it comes to Prenups. More and more couples view it not as a threat or lack of confidence in the marriage, but instead view them as a useful planning tool and contingency. That is, we are seeing a significant increase in the number of clients who want to have a Prenup prepared for them.
“Prenup” is actually short for “Prenuptial Agreement” or “Antenuptial Agreement,” which simply is a contract entered into before marriage between two people. In almost every case, each party obtains their own attorney who represents them throughout the process. This is done to assure that both parties’ interests are protected – a necessary step to ultimately make the contract enforceable.
The unfortunate reality is that 40 to 50 percent of marriages in the United States end in divorce, and many of them lead to conflicts that would have been avoidable if the parties had entered into a Prenuptial Agreement. Here are some of the benefits for both parties of having a Prenup:
- It protects your estate plan
By determining ahead of time what would happen to your estate in the event of a divorce, you can avoid court involvement of how your property is to be distributed. It can also protect the inheritance rights of children, step-children and grandchildren.
- It prevents conflicts over finances
Financial decisions are sometimes at the heart of marital conflicts leading to divorce. By defining each party’s financial responsibilities from the outset, you can avoid potentially relationship-ending conflict. Also, if one spouse has a significantly greater amount of debt than the other, a Prenup can prevent that debt from becoming the responsibility of the other.
- It provides certainty and reduces the potential attorney fees in the event of divorce
By defining things such as property rights and financial obligations to one another during a divorce, a Prenup provides each party with some certainty as to property rights and obligations in the event of a Divorce. A Prenup typically reduces the amount of time a divorce lawyer would have to spend on your case, likely leading to lower attorney fees.
The rules regarding the validity of Prenups can be paired down to three basic principles: (1) The confidential relationship of the parties; (2) The requirement of disclosure; and (3) Fairness. It is important to engage an experienced attorney who can assure that proper drafting of the Prenup is done so that any potential challenges to the Prenup in the future will fail.
(1) Representation by Counsel/Confidential Relationship of the parties: In order for a Prenup to be enforceable, it must be an agreement that was understood by each party, including any rights that have been waived or released by entering into such an agreement. It is critical that each party is represented by a competent attorney. Because two parties that are about to get married typically know a lot about each other (a confidential relationship), the parties are not in an arm’s length bargaining position in relation to one another. Therefore, duties of openness, fairness and candor to each other are enforced, and concealment and deceit can ruin the enforceability of a Prenup.
(2) Disclosure: The disclosure requirement means both parties must make a full disclosure of the extent of their assets, property, income and interests that the other party is waiving. Although there is some caselaw that may save some Prenups that do not make an express disclosure, a good Prenup will make a full and accurate disclosure, so as to leave no room for argument as to its enforceability by a disgruntled party.
(3) Fairness: The issue of fairness most often comes into play when one party presents a Prenup to the other party, with little or no time to review the Prenup or obtain their own counsel; think the husband who presents his soon-to-be wife with a Prenup in the limo ride to the church. If the terms and conditions of a Prenup are considered unconscionable, the Prenup could be unenforceable, if challenged.
The bottom line is if you do not have a Prenup drafted and executed correctly, you might as well not have one done at all. Courts are very careful to be sure that the above tests have been met when there is a dispute over the validity of a Prenup. Prenups are not just for couples with children from prior marriages, anymore; they are also for the savvy couple who likes the peace of mind of having all of their ducks in a row.