What Is a Prenuptial?
The term "prenuptial" refers to before marriage, thus a prenuptial agreement is a contract between two people entering a marriage. The written document addresses what will happen upon dissolution (divorce or death) and seeks to establish order when emotions run high and rational solutions seem to be out the window. Hence, most people understand that prenups are for the adverse events, not the event itself.
However, those people are incorrect. A prenuptial agreement actually precedes the marriage. It assures each person that the effort is reciprocal. Fair prenuptial agreements provide for future dissolution but also imagine and more importantly establish how the relationship will work during the marriage.
"Fairness" is an important goal of a prenup, however it is commonly misunderstood . While there is no black and white definition, fairness is generally described in the legal world as the absence of an unreasonable advantage. Those writing about prenups often state that a fair agreement has the following elements:
- It is adequately explained to you. If you don’t understand what you are signing, and how it uniquely impacts you, do not sign
- You had enough time and opportunity for review and investigation. The drafting attorney must understand your current financial situation and future objectives.
- All pertinent information was provided. The drafting prenuptial attorney needs to be informed about your assets and income and liabilities. The contract must reflect your circumstances to be fair.
Elements of a Fair Prenup
In order for a prenuptial agreement to be considered fair and binding in most jurisdictions, the agreement must have certain core components. First and foremost, both parties must agree to the contents of the document. In other words, the entire agreement should be mutually agreed upon, not just one-sided. If this condition is not met, the prenuptial will usually be considered invalid.
Since a couple’s prenuptial agreement will typically deal with every asset and obligation that each party has, a fair agreement requires full disclosure of assets and obligations by both parties. While one party can seek full disclosure, neither party is required to separately evaluate the marital assets or independently assess the other’s financial situation or evaluate personal property. Such behavior could cause a prenuptial agreement to be thrown out by the courts as the result of fraud or permitting duress, or somehow unfairly binding as to support that is too high or excessive alimony.
Just like with any contract, a fair prenuptial agreement should clearly define all the material provisions. For example, should the prenuptial agreement merely say that the husband waives alimony to the wife in the event of divorce, it needs to indicate how this provision would apply to a divorce. Would the husband’s waiver of alimony apply in the event of death or disablement? What about in the case of a third-party child born to the couple? Without the language and context to reveal the breadth of the waiver, the provision could be considered unfair in some circumstances.
Requirements for Enforceability
Most courts require that any prenuptial agreement be signed, in writing, notarized, and be free of any evidence of undue pressure/duress and that each party has freely signed such an agreement. As to pressure, if either party had not yet had the opportunity to review the provisions of the agreement with their attorney prior to it being signed (it is a smart practice to have your attorney draft the agreement, but this is not a formal requirement), had a lack of knowledge of the financial picture of the other party at the time, or were made to feel as though they had no choice but to sign, those circumstances individually (or collectively) could be evidence of duress that would, ultimately, render the entire agreement a nullity.
While it may be difficult to also prove the voluntariness requirement, as this would usually only be proven circumstantially, the ever-prescient signing date of your prenuptial agreement could be probative evidence. The best way to mollify any concerns of both pressures is to be open with your intended spouse about the details of the agreement or to get an independent audit of anything of value that you may own, jointly or separately, prior to the marriage. It is also a smart strategy to notify your intended spouse that you would be happy and willing to allow them a "cooling off" period prior to signing the agreement (meaning a mutually agreed upon period of time during which one or both parties can review and ask questions of their attorney(s) and, after the initial review takes place, an additional period of time for the parties to review all of the changed terms prior to signing).
Finally, if there are any changes to the agreement after it is drafted, be sure that you have your attorney revise the agreement (and initial next to the changed text in individual separate paragraphs) and then, when you sign the document, make sure to initial only the text/cross through that has been changed since you last saw a draft.
For It to Be Fair Going Either Way
Considerations about the background and relationship of the parties are essential to the crafting of a fair prenuptial agreement. For example, are there significant differences in the parties’ ages? (significant generally can be defined as eight years or more, although countless factors come into play here). Does one person have a substantial financial interest in a business, which must be balanced against the entitlement of the other party to enjoy the fruits of that enterprise? Again, an appropriate and fair valuation of the asset would help in that analysis.
Sometimes the facts will reveal a stark contrast between the present financial status of the parties. A prenuptial agreement may subdivide the net worth of the parties and apply different formulas or principles to the property held by each of them. In a case in which I was consulted, one spouse claimed that he would not sign a prenuptial agreement unless his spouse committed to exclusively share his rare and valuable collection. Upon deeper inquiry it was determined that the spouse had significant assets of her own, so he eventually relented from that demand.
Sometimes one party was married before or had children in a prior relationship. The terms of the prenuptial agreement must take into account any alimony payments that either may be receiving from a prior relationship, or the child support obligations that may be payable to the first family. A prenuptial agreement may also allocate the use of marital assets for alimony and child support, so that the parties will know what they can count on upon divorce.
Another area of fairness is disclosure. Fairness requires that both parties give full disclosure of all of their assets. In several cases, the attorneys involved in the drafting of a prenuptial agreement have discovered significant omissions of assets. After deep digging financial and tax records, many millions of dollars found its way into the norms of distribution of the couple’s assets.
Fairness may also be considered outside of the specific terms of the prenuptial agreement itself. For example, the negotiation process must be fair. It has been my experience that both parties are better served if they use the same attorney to draft the prenuptial agreement. In this manner, each of the parties receives competent legal advice, and then the provision of the prenuptial agreement can be tweaked, so that it is fair to both. I have seen situations where clients insisted on using their own personal lawyers. The prenuptial agreements that were drafted in those cases tend to have a "he said, she said" quality to their negotiation, that is not the norm, or fairness.
Sometimes benefits may be trigged by the duration of a marriage, like bonuses, stock options and pension contributions. The terms of a prenuptial agreement may spell out those conditions, and allow for the periodic adjustment of the percentages and/or payments, based on the amount of time the parties are married.
One example of the areas that may be reviewed to achieve fairness is alimony, or the lack thereof. Laws of every state provide for specific patterns by which alimony may be calculated. A good formula occurs when there is a disparity in the income of the parties, or the roles that they play in the marriage. Sometimes the parties may include provisions for their demographic changes, once again on the premise of fairness and disclosure.
Common Myths About them
Misconceptions are the bane of marital settlement agreements – prenuptial or otherwise. The law espouses and expects full and fair disclosure of each party’s assets and liabilities. But, it is not uncommon for the representation of the extent of assets or their value to be less than candid. In that vein, some common myths and misconceptions about prenups include the following:
Myth: A judge will not enforce a prenup.
While no one in the judicial system can predict any future events, the general concept is if the prenup is fair and equitable at the time it was made, a judge would be unlikely to change that fairness over time. As with any agreement, the enforceability is dependent upon the circumstances surrounding the prenup’s execution. For example, what was the financial situation of each party before the execution? Was there complete honesty about each party’s assets and liabilities? What about assets acquired after the marriage?
Myth: Prenups are not fair.
Parties sign prenups in large part to address the eventuality of divorce so they will have some control over at least that aspect of their lives. Despite some of the unfavorable press pre-marital agreements receive, in general, they are often based on some fairness. Do they represent equal division? Not always. But the parties can negotiate terms they might think are fair to their individual circumstances . Generally speaking, if both parties have independent counsel, there is some evidence of full and fair disclosure, and both parties have had an opportunity to review the agreement and raise any objections with counsel, it would be unusual for a judge to say the agreement is unfair.
Myth: Prenups represent a lack of faith in the relationship.
While prenups represent some lack of faith in the relationship, that is not an inappropriate expectation of reality. Marriage has been around a long time and we know the risks. Having a prenuptial agreement may actually avoid much high conflict litigation.
Myth: Prenups can’t address spousal support.
Prenups can clearly address a variety of economic issues including spousal support. In California, however, the ultimate determination of spousal support is that of the judge. So while parties can agree to various terms of support, courts will generally only allow waivers of spousal support if the parties have independent counsel and there is evidence of full and fair disclosure.
Myth: Prenups are permanent.
Prenups are seen as having permanent effect like periodic support payments although they reflect some changes and circumstances over time. Even though the agreement states that it is in full force and effect regardless of age, health or circumstances, this is not true. If a party can show that the agreement no longer has any relevancy or financial effect due to extreme changes in circumstances, then a judge could declare the prenuptial agreement to be unenforceable.
When to Consult with a Lawyer
The premarital agreement you sign, even if the one you drew up together and perhaps without advice from lawyers, will be interpreted under and enforced according to California law and procedure unless it was negotiated and signed in a different state. Only then would the foreign (i.e., non-California) law be applied to determine the validity of the agreement.
Unless you have expertise in family law and prenuptial agreements or your partner does, it makes sense to retain an attorney who does to help during the drafting of the agreement. This can include determining the appropriate legal approach, negotiation strategies, the "give-and-take" process, valuation requirements, execution formalities and other terms and conditions. While this may involve time, money and some inconvenience on your part, the result could be greater peace of mind and savings later.
Updating and Amending Prenups
Although the financial markets over the past 5 years have been rocky to say the least, those markets are coming back and so many clients feel their balance sheets have been substantially increased in terms of net worth. Because of this, a prenuptial agreement may not be as fair today or simply, a party may want a broader prenuptial agreement today to encompass greater inheritances or wealth than existed when the prenuptial agreement predated the marriage. So, again in the event that the parties wish to amend a prenuptial agreement, we must follow the same formalities under New Jersey law as originally existed when the prenuptial agreement was made. Again, both parties must have had independent counsel and there should be full financial disclosure. Full financial disclosure is the fullest disclosure of one party’s net worth to the other before signing. So, as in any contract, the parties must be fully informed on the net worth of each other. Again, the same requirements exist as simply entering into the initial prenuptial agreement.
Like all contracts, if you have a valid contract, the parties may amend it, but in a prenuptial agreement, the same form requirements as in the initial prenuptial agreement exist. In the event the parties simply wish to amend some terms or conditions of their initial agreement, then the agreement must meet the same requirements of the original, void of duress, fraud or unconscionability. The parties simply need to amend the existing agreement in writing and acknowledge same with each other to preserve the amendment and make it part of the initial prenuptial agreement.
Conclusion: Fair for Both
A well-crafted prenuptial agreement, that strikes an equitable bargain between the parties and protects their respective interests, can be a fitting precursor to a strong interspousal relationship. While some people may perceive any prenuptial agreement as one of imbalance or inequity , the reality is that both parties need to maximize their protection of assets, even against each other, before entering the marriage. Further, as long as prenuptial agreements are fashioned in a way that the parties can understand their potential consequences, they are ultimately enforceable, and not subject to challenge in court.