April 6, 2015
by Linda J. Ravdin
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, 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, they may each 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 they have no expectation of having children together.
As premarital agreements have gained favor as a means to predetermine financial and property rights, more younger couples entering into first marriages are seeking them. There are no reliable statistics documenting this trend, or the reasons for it, but the experience of the author and other attorneys at Pasternak & Fidis, coupled with an informal and unscientific survey of colleagues, suggests that the trend is real. There appear to be several reasons for it:
• Many young adults are delaying marriage until their early 30s. Some of these more mature young people have become established in a career 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 that premarital wealth as a separate asset.
• 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 and the post-World War II period, and their own successful parents. Sometimes the wealth coming from the older generation is in the form of a family business that the bride or groom is, or expects to become, active in. Parents, wishing to preserve their wealth in the family, urge their children to seek a premarital agreement.
• Many young adults are from blended families themselves; they had a front row seat at their parents’ divorce and are seeking 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 allocation of property among the widow or widower and the children and stepchildren.
• Premarital agreements have gained much wider acceptance generally. The notion that a premarital agreement is a token of lack of faith in the future of the marriage has begun to fade. More persons getting married are able to consider 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 the 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 if the couple were 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 5 or 10 years and on terms that may be 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 after so many years.
• Any provision of an agreement that predetermines the rights of the economically disadvantaged party at a fixed amount may prove to be 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 as a result 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. Or, 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 fulltime work to rear children.
• 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. This is similar to the property rights divorcing parties currently have in the three Metro area jurisdictions. For parties whose primary objective is to protect their right 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 to build some financial security through savings and investment during the marriage while allowing each to decide how they wish to deal with their nonmarital assets. Over time some may wish to contribute more of their separate assets to the household, but a party who wants to keep his or her
nonmarital property 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. A nonmarital 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 at divorce. 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 for the wealthier party to transfer specific property, such as a home, into the joint names of the parties. It could provide for the wealthier party to make a specified cash gift to the other party upon marriage, or on a specified schedule thereafter, to enable
him or her to build up an investment portfolio for future financial security. There are a variety of ways such an obligation could be structured, limited only by the desires and the imaginations of the parties and their counsel.
• To address the death scenario, one option is the parties could simply retain their rights under state and federal law in the event of death. 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 he or she would if there were no agreement. It would 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 if the parties did not have 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 very far into 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, as discussed above, 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.
• An option parties may wish to consider to provide financial security for the economically weaker spouse under either the death or divorce scenario is an obligation on the part of the wealthier spouse to pay the premiums on a policy of long-term care insurance. Such a policy will provide for at least some of the cost of nursing home care for a spouse who needs such care. 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 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.