As featured in Pink Magazine:

What is a Premarital Agreement – and why do we care?

The use of pre-marital agreements (sometimes referred to as an Anti-Nuptial Agreement) is becoming increasingly popular. Of course, they are often considered for a second marriage or later in life when one has accumulated more wealth, but they are also increasingly common in first and younger marriages, as well. So what do these do?

There are a number of reasons for one to consider having a premarital agreement. In general, the primary reason is to protect “pre-marital” or “separate” assets in the event of a divorce or separation. The concept is that “what’s mine is mine and what’s yours is yours”. While our state property distribution laws may keep these “pre-marital” or “separate” assets and liabilities separate from marital assets, this helps insure that this is the case should the marriage fail.

Pre-marital agreements are also utilized to prepare for a caring distribution of assets. Such an agreement may establish a life estate for a surviving spouse to live in for as long as he or she may want to do so. And the establishment of a trust can help offset those expenses to remain in the home. It is easier to be equitable when one still loves one’s partner, then when one is angry or hurt.

Another reason to consider the use of a pre-marital agreement is to factor in the debt that each party may bring into the marriage. Although a state’s distribution laws may already address the issue of student loans, for instance, an agreement can establish who is responsible for a particular obligation, so there is no question in the event of divorce.

We are seeing the increased use of pre-marital agreements by younger couples, particularly where one of the soon-to-be spouses has family money, or has the expectation of receiving family money or a business. Often parents want to make sure there is protection of these monies in the event the marriage does not last.

In addition, this protection also includes the growth of an asset as well as the exchange of a “pre-marital” or “separate” asset after the marriage into a different asset. Examples would be interest or dividends on a separate bank account might be considered as growth on that account, and considered non-marital. Or the sale of a pre-marital home, or car, or jewelry and the purchase of a replacement. These, too, can be considered as that person’s separate property under a pre-marital agreement.

Less often considered, however, is that a pre-marital agreement can also have an impact in the event of the other spouse’s death. Every state has some form of what is referred to as a “right of election”, which provides some protection in the event the deceased spouse has left his or her estate to a third-party (an unknown lover, for example, or a favorite charity). This right of election mandates that a certain percentage of the decedent’s estate be left to the surviving spouse.  Pre-marital agreements often include a provision that the couple are waiving this right of election so that all of the assets will be distributed according to someone’s will or trust.

As we are discussing an agreement that may not be relied on for years after it was initially signed, there may be some unintended consequences without additional planning. We have seen some unfortunate situations where, for example, a couple had a pre-marital agreement, with no provision made in any later estate plan for the wife in the event her husband died first. When he died, she was left with no money for her needs or the needs of their young children. As she had waived her right of election she was not entitled to any portion of her husband’s estate. One way to assure this does not happen is to provide for a phase-out of the agreement after a certain number of years or to assure, in that document, for some provision for the other spouse in the event of an unexpected death. Life insurance on the husband’s life, with the wife named as his beneficiary, would also have provided her with some funds after his death. And, a continuing dialogue on these issues is essential.

Unlike reaching a settlement agreement with a spouse during divorce litigation, when such an agreement will quickly be put before a judge for his or her review and approval, a pre-marital agreement may not be reviewed as part of divorce or estate litigation until sometimes years after it was signed.  This may negatively affect the agreement or the original intentions of the parties to the agreement. Laws may have changed in the intervening years. Witnesses to that agreement may be long gone. So it is important that certain steps be taken to at least try to assure that the agreement will be held valid years later, if needed. For example, each side have separate counsel throughout the negotiation and drafting of that agreement and that there be financial disclosure as to each party’s assets, liabilities and income at the time the agreement was signed.

Now for the legal disclaimer: Every pre-marital agreement, as with every couple’s situation, is different. The information in this overview is just that: an overview. It is not intended to be specific legal advice. If contemplating entering into a pre-marital agreement each party to that agreement should obtain separate legal advice regarding the advantages that having such an agreement might provide. And separate legal advice is the key: what may be of greater importance for one person may have less significance for the other. An open and honest discussion of the finances will help later in the event the marriage does not last.

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