By Stephen J. Dunn
A marital agreement specifies how a couple’s property shall be divided upon their divorce or the death of one of them. The purpose of this article is not to displace a party’s counsel in drafting or negotiating a martial agreement, but to help a party to determine whether a martial agreement approved by his or her counsel effectively serves his or her interests.
Division of Marital Property Absent a Marital Agreement
Divorce. Absent a marital agreement, state law generally requires equitable distribution of a divorcing couple’s marital property. Equitable distribution is not necessarily equal distribution, but a deviation from equal distribution must be justified.
Marital property is property the couple or either of them acquires during their marriage by their personal effort. It excludes property brought to the marriage, or property acquired during the marriage by gift or inheritance. Commingling separate property with marital property transforms it into marital property.
Death. When a spouse dies, devolution of his or her property absent a marital agreement depends on whether the property is probate property. Nonprobate property is property which exists be reason of a contract. Examples include property held with another subject to right of survivorship, a life insurance policy, an annuity, a retirement plan account, or property held in trust. Such property passes according to its terms. For example, property subject to right of survivorship passes to the surviving joint tenant, property subject to a beneficiary designation passes to according to the beneficiary designation, etc.
Probate estate is all other property which an individual owns at the time of his or her death. If a spouse dies without a will, that state’s statute of intestacy controls devolution of his or her probate estate. If a spouse dies with a will, surviving spouse may reject the will and take an intestate share of the deceased spouse’s probate estate.
The Uniform Probate Code is typical of state intestate succession laws. UPC § 2-102 provides that the surviving spouse’s share of an intestate estate is the entire estate, if the decedent is not survived by a descendant or a parent of the decedent, or if all of the decedent’s surviving descendants are also descendants of the surviving spouse, and no other descendant of the surviving spouse survives the decedent.
Three Kinds of Marital Agreement
There are three kinds of marital agreement: a prenuptial agreement; a post-nuptial agreement; and a marital separation agreement. Post-nuptial agreements, entered into after the parties are already married, are the most problematic. A married couple’s property is presumptively marital property, each spouse being entitled to half of it upon their divorce. Unequal division of marital property in a post-nuptial agreement raises concerns of fraud and undue influence, especially if one spouse’s attorney purports to represent both of the spouses in drafting the post-nuptial agreement. A good example is the post-nuptial agreement invalidated in the divorce case of Los Angeles Dodgers owners Frank and Jamie McCourt.
Each Party Needs Independent, Competent Counsel
The same attorney cannot represent both parties. This is the cardinal rule of marital agreements. The parties’ interests are directly adverse. Having the parties acknowledge the conflict and waive it will not cure the problem. One attorney representing both parties to a marital agreement is the surest way to render the agreement unenforceable, and subject the attorney to a malpractice claim.
Each party’s attorney should also be experienced in marital agreements.
One party’s attorney will draft the agreement and submit it to the other party’s attorney. The attorneys will then negotiate any unagreed terms, with input from the parties.
The Parties Must Fully Disclose Their Property
It is important that each party fully disclose his property in the marital agreement, so that the other party knows what she is giving up. Otherwise, the agreement may be unenforceable for fraud or breach of fiduciary duty. The parties should specifically describe their property in schedules appended to the agreement and incorporated into it.
The Agreement Must Clearly Describe the Subject Property
A marital agreement should describe, as specifically as possible, the property to which it does or does not apply.
Litigation is legion over marital agreements poorly describing the property they purport to cover or not cover. Among the Gallery of Horribles is Garner v. Garner, 2009 Mich. App. LEXIS 2368. In that case, the prenuptial agreement provided “[t]hat all properties of any kind and nature, real personal, or mixed, wherever the same may be found, which belongs to each party, shall be and forever remain the individual estate of said party . . ..” Does this include property owned at the time of the marriage, as well as that acquired after the marriage? If it includes property acquired after the marriage, what about property bought by the spouses together, or from a joint bank account? What about separate property commingled with marital property? Is not who owns property a legal question? The court in Garner limited these messy issues by interpreting the prenuptial agreement as applying only to property owned by the parties at the time of their marriage.
A marital agreement should consider all of the property which the parties now own or expect to acquire in the future, including retirement plans, stock options, and other employee benefit plans.
Closely-held business interests can be difficult to value as there is no ready market for them. Generally the parties are best served by a provision requiring valuation of closely-held business interests at fair market value as determined by appraisal. Formula appraisals are not usually recommended, as they may not take account of changes in circumstances.
Courts tend to treat appreciation in property as an asset separate from the underlying property itself. Thus, if parties wish to exclude property from a martial agreement, they should make sure the agreement clearly describes the property and any appreciation thereto. The same is true of property they wish the marital agreement to cover and distribute to them in the event of their divorce.
The Agreement Needs an Effective Trigger
A marital agreement should have a clear trigger for operation of its property distribution provisions. For example, a prenuptial agreement provides that wife gets half of husband’s house plus $100,000 of each year of their marriage if they divorce after five years of marriage, but none of husband’s property if they divorce after less than five years of marriage. Husband consults me four years, ten months into the marriage. He learns that wife plans to leave him for another man and file for divorce whence the five years are up. When are the parties “divorced” for purposes of wife’s entitlement to property under the prenuptial agreement? Upon filing of a divorce action? Upon entry of a judgment of divorce? Many states have a statutory waiting period between filing of a divorce action and entry of a judgment of divorce. In Michigan it is 60 days.
The prenuptial agreement should have defined “divorce” as the filing of a divorce action by either party. Then, upon filing of a divorce action within five years after the parties’ marriage, wife would be entitled to none of husband’s property.
Some marital agreements purport to operate upon the parties’ “no longer living together as man and wife.” This is a vague, fact-intensive condition, subject to interpretation. What are the parties supposed to do, have a jury trial on whether they are still living together as man and wife, or when they stopped so living together?
A marital agreement could provide that its property division provisions shall operate upon the first to occur of (1) the filing of a divorce action by one of the parties, or (2) the parties’ no longer living together as man and wife.
The Parties Must Fund Promises made in the Agreement
It is essential to fund a spouse’s financial commitments under a marital agreement. For example, a wife came to me with a prenuptial agreement she and her fiancée had executed some years earlier, shortly before marriage. The prenuptial agreement provided that upon the parties’ divorce, she would be entitled to $200,000 for each year of their marriage. The $200,000 was indexed for inflation, and by the time wife consulted me, 12 years into their marriage, it had reached $400,000. When the parties executed the prenuptial agreement, Husband’s net worth exceeded $20,000,000.
Husband’s counsel had drawn the prenuptial their agreement, purporting to represent both parties. Wife did not have separate counsel. The prenuptial agreement included language acknowledging the drafter’s conflict of interest, and purporting to waive it.
In the years since the parties entered into the prenuptial agreement, husband’s business had fallen off sharply, due largely to the recession. Husband had also made substantial gifts of his estate to his children by a previous marriage. As a result, by the time wife consulted me, the principal asset in husband’s estate was his closely-held business, worth far less than $4,800,000, if anything at all.
Husband’s obligations under the prenuptial agreement should have been funded. Upon signing the marital agreement, husband could have been required to transfer to a trustee for wife’s benefit liquid assets sufficient to cover husband’s obligations under the agreement. The agreement could also require husband to make additional contributions to the trust in the event the value of assets in the trust falls below a minimum deemed necessary to perform his obligations under the agreement.
Assets held by the trustee would be subject to professional management. The trustee would have a duty to report to the wife periodically on the assets in the trust and the value of same.
Wife in my example has a malpractice claim against the drafter of the prenuptial agreement, but the statute of limitations will be an issue.
Some marital agreements require a party to purchase a life insurance policy to fund obligations under the agreement on the party’s death.