Basics of a prenuptial agreement

A prenuptial agreement (“prenup”), sometimes referred to as an “antenuptial agreement” or a “premarital agreement”, is an agreement between prospective spouses that becomes effective upon marriage. The contents of a prenup vary widely; among other things, it provides for each party’s rights and responsibilities with respect to spousal support and distribution of property if the marriage ends, with a view to avoiding the need for litigation, a stressful and expensive process.

There are many reasons to consider having a prenup. Common reasons are if one or both parties:

·    has children from a prior relationship;

·    is entering into a second or subsequent marriage;

·    owns a business;

·    acquired assets before the marriage;

·    has significant wealth or will acquire significant wealth via inheritance or gift;

·    will give up some rights upon marriage, such as a change of lifestyle, career or location.

Without a prenup, the divorce and inheritance laws of the state of residence control issues of support, property distribution and rights of inheritance upon death. With a prenup, some or all of those rights, can be waived (i.e., given up), reduced, confirmed or expanded.

Consideration of a prenup promotes financial planning and encourages parties to discuss and better understand their financial rights and obligations before marriage. All couples should approach marriage realistically for many reasons, not least of which is that a significant proportion of marriages end in divorce.

A prenup can cover many issues that can arise if a marriage ends, but it cannot resolve child-related issues (i.e., child support, custody, or parenting schedules).  In New York, the right to attorney’s fees for the less-monied spouse cannot be waived when the issue being litigated includes child support, custody or parenting schedules.

In New York, each party to a prenup should retain her/his own attorney. The cost of having an experienced attorney prepare your prenup is minor when compared to the costs of an average wedding or an average divorce.

A valid prenuptial agreement must address five essential elements. Bear in mind that a challenge to the validity of a prenup may not come for many years. In New York, as in most jurisdictions, there is no statute of limitations for challenging a prenup. As a result, the terms and manner of execution (formal signing) of a prenup must be done carefully. The five essential elements are:

1.  Adequate financial disclosure. The first requirement for a valid prenup is adequate disclosure by both parties. The reason is simple. Suppose the wife at the time of the marriage had $5 million in assets but concealed that information from her soon-to-be husband. If he has relatively little by way of financial resources, he may attack the agreement later by stating that he never would have signed the prenup had he known that she had such wealth. For example, he would not have excused her from paying maintenance (spousal support). He would have a similar argument if she did not disclose her income and he waived maintenance.

Adequate disclosure is critical. If the husband-to-be, in the above example, had full knowledge of the wife’s wealth and income, he could not honestly contend that he would never have signed the agreement had he known of her wealth. The argument for voiding the agreement would not exist if there was adequate disclosure.

Disclosure may take many forms. In some cases, a complete, detailed financial statement is attached to the agreement for each of the parties. In other cases, an outline of each party’s assets, debts and income may be contained in a schedule that is attached to the agreement.

Honest financial disclosure is the first and most important requisite to a valid prenup. The agreement should contain a provision that states that full or adequate disclosure was made. For example, an agreement may contain the following paragraph, which is minimally responsive to the need for disclosure.

Each party was informed of the right to obtain full disclosure of the financial circumstances of the other party, is fully satisfied with the disclosure made, directed that there be no further financial disclosure, and acknowledges that said waiver is made after obtaining the advice of legal counsel and knowledge of the legal consequences thereof.  Further, neither party properly can, and shall not, subsequently assert that this agreement should be impaired or invalidated by reason of any lack of financial disclosure, lack of understanding, or fraud, duress, or coercion. Without limiting the generality of the foregoing, Mary represents that her present net worth is in excess of $10,500,000 and that her annual income is in excess of $975,000. John represents that his assets are presently in excess of $100,000 and that his present annual income is approximately $80,000, which representations by both parties admittedly are not all inclusive and which are not intended to be relied upon by either party. (See annexed financial statements.)

2.  Time.  The time element begins with the start of negotiations and ends with the signing of the prenup. If the time period ends a few days before the wedding, one party may later claim insufficient time to consider all of the legal and other implications of the agreement and that it was signed in haste, without a proper understanding of the legal and practical significance of all of its terms.

In the ideal case, the agreement should be negotiated, completed and signed long before the wedding date. Waiting until the last minute creates pressure on both parties at a time when the tensions of wedding planning are at their height, and a late signing may be viewed, later on, as coercion and duress to sign almost anything so that the wedding may go forward. This type of pressure can very well be the basis for setting aside an agreement that was executed solely “to get it over” and proceed with the wedding.

Documentation of the negotiations, drafts of the proposed agreement, and all other memos, notes, emails, and other records should be maintained indefinitely in order to preserve evidence that the agreement was fully and fairly considered with adequate time to understand all provisions. This information will not be useful until an agreement is challenged, which can be decades later.

The following clause may be inserted in an agreement to indicate that the time factor was adequately considered.

The parties negotiated this agreement over a period of time, and each party had ample time to review all provisions privately and in consultation with an independently selected attorney. Each represents that no pressure, duress, or coercion was exercised against her/him, that each party had sufficient time to review each provision of the agreement with his or her counsel so as to obtain a full and complete understanding of the legal meaning and consequences of every provision, and had enough time to make inquiries, give full and unpressured consideration, and to evaluate fully each and every provision.

3.  Separate legal representation. Best practice in New York is for each party to have separate, independent counsel. Each party should choose an attorney independently and pay the attorney’s fees.  If one party wants to pay all legal expenses, he should give the money to the other party who can pay the attorney directly. There should be no direct contact between one party and the attorney for the other party.

Failure to have separate representation will provoke a concern that the unrepresented party did not fully understand the legal consequences of the agreement and increases the likelihood that a party will later claim: “I didn’t understand the agreement. I was told to sign it, and I did.”  The mere claim that a party did not have proper understanding may be the basis for litigation to set aside the agreement.

Having one attorney represent both parties is an ineffective way to save money and places the agreement at risk because an attorney should not represent parties who have, or may in the future have, conflicting interests. If minimizing the cost of preparing and executing the agreement is the goal, then one party may ask an attorney to prepare the agreement (the “drafting attorney”), and the other party may ask another attorney to review and critique the draft (the “review attorney”).  In this way, the wealthier party may absorb the greater cost of the drafting attorney, and the less-wealthy party may not later claim that he or she did not have a chance to review all legal implications of the agreement with an attorney of his or her choice.

4.  Basic fairness.  As with every enforceable agreement, the prenup must include an element of basic fairness. Although the agreement may favor one side, it should not be structured so that one party has all the rights and the other has none. A basic principle of law is that for an agreement (including a prenup) to be enforced it must be fair when made and not unconscionable at the time of its enforcement.

There have been cases where a signed prenup provided that the wealthier spouse’s income and assets would remain his separate property and that the less wealthy spouse would have no entitlement to his wealth no matter how and when obtained and regardless of the length of the marriage. The prenup also provided that the less wealthy spouse would not receive any maintenance, permanent or temporary, under any circumstances, and that the only sharing of assets would be if the wealthy spouse decided to acquire an asset in joint names, a decision which he alone could make.

The wife, with relatively few assets and no income, mothered several children and became the caretaker of the household and the parties’ homes. Years later, the marriage falls apart and the wife challenges the agreement.  Such an agreement may be deemed so grossly one-sided that it would not be enforced by a court. Therefore, to protect the validity of a prenup it should contain an element of fairness so that it will not be seen as being entirely one-sided. To avoid a successful challenge to a lopsided prenup, it may contain a provision that states that the agreement – in whole or in part - will expire or change after a set period of time (commonly referred to as a “sunset provision”).

5.  Proper acknowledgement.  New York law requires that certain formalities must be followed for the signing of a prenup. The agreement must contain a particular signature acknowledgment signed by a notary. Failure to comply meticulously with this requirement may invalidate the prenup.

Conclusion

This discussion illustrates key considerations in structuring a prenup that will withstand a challenge, even after a period of years. The elements required for a prenup to retain its validity are simple: adequate and honest financial disclosure, adequate time for each party to consider and understand its provisions, separate legal representation, appropriate signing and acknowledgments, together with basic fairness in the financial and other circumstances of the parties.

Barry Abbott, the founder and owner of Abbott Law PLLC, has litigated a variety of divorce and family law cases at the trial and appellate levels over the last 40 years.  Rated “AV Preeminent” and a “Super Lawyer”, Barry confines his practice to the negotiation and preparation of prenuptial and postnuptial agreements, consulting, and alternative dispute resolution.