Prenuptial Agreements:  A Prudent Approach for Many Clients

Our firm has many clients who contemplate getting married.  If the client has substantial resources, income, or stands to have a significant inheritance, he or she should seriously consider having a prenuptial agreement if a wedding is on the horizon.  This memorandum discusses several major considerations and, hopefully, makes this area of law more approachable.

Under Tennessee law, two types of property exist during a marriage in the absence of a prenuptial agreement.  There is separate property, which is (1) all property you owned prior to the marriage and (2) all property received by gift or inheritance during the marriage.  Second, there is marital property, which includes: (1) all property earned by either spouse during the marriage; (2) all income from separate property during the marriage; and (3) in some instances, appreciation on separate property during the marriage.

When a couple divorces, each party keeps his or her separate property (so long as it was maintained separately during the marriage and not co-mingled with marital funds). If the parties have not reached an agreement, the court is directed to divide the marital property in the proportion that it deems just or fair after considering all relevant factors.

A Prenuptial Agreement Allows Couples to Define Their Own Terms
By means of a prenuptial agreement, you can define separate property to include (or not) all income from and appreciation on your separate property.  Spouses can waive their rights to alimony or maintenance payments in a prenuptial agreement, or they can agree in a prenuptial agreement to a certain amount of maintenance to be paid to the less wealthy spouse in the event of a divorce.  However, if at the time of a divorce the court determines that the spousal maintenance terms in the prenuptial agreement are unconscionable or grossly unfair in the treatment of the less wealthy spouse, the court may disregard that portion of the prenuptial agreement and award reasonable maintenance.  Finally, a prenuptial agreement can allow couples to determine what rights a surviving spouse will have upon the first spouse's death.

Why Enter into a Prenuptial Agreement? 
Many people prefer an amiable separation to courtroom confrontations during a divorce.  Some people simply wish to have certainty as to property rights and maintenance payments upon a potential divorce.  By entering into a prenuptial agreement, they eliminate much of the financial uncertainty associated with a divorce.  A fairly negotiated prenuptial agreement can provide some assurance to the wealthier spouse as to the extent of the financial impact of a divorce, while at the same time, providing the less wealthy spouse with some guarantee of his or her entitlement to a property distribution and/or maintenance upon a divorce.  Whether you have a lot of valuable assets or are just starting out, have or do not have children, there are many reasons a prenuptial agreement can be beneficial to you and your spouse. On the following page, a few of these reasons are listed:

• To determine how you and your spouse define equality in your partnership.
• To establish the value of non-monetary contributions to a marriage, such as being a stay-at-home spouse.
• To cover your pre-marriage nest egg, such as your home, pension plan, stock portfolio, or property with emotional value.
• To protect gifts and inheritances you receive.
• To ensure that in the event of death or divorce, you will avoid difficult disputes over property, such as family businesses, stock options, professional degrees, licenses and practices, pension plans, and copyrights.
• To protect and preserve the rights of children of an earlier marriage.

Enforceability of a Prenuptial Agreement
When one spouse challenges the validity of a prenuptial agreement (generally at the time of a divorce or at the death of the other spouse), the court will look at several factors to determine whether the agreement should be enforced.  In general, there are three basic rules that should be followed before entering into a prenuptial agreement to safeguard your agreement: (1) full and fair disclosure, (2) separate and independent counsel, and (3) ample lead-time before the wedding.

First, the court will look to the adequacy of the financial disclosures.  By far, whether a person has fully disclosed all assets and liabilities is the biggest issue in determining whether a prenuptial agreement will be upheld.  Full disclosure is required prior to the signing of the prenuptial agreement because a party cannot knowingly waive rights unless he or she has sufficient information about the potential value of those rights.  For example, if there is a major business, a trust fund or an upcoming inheritance, the prenuptial agreement must address those items. 

The court will also look at whether the challenging spouse was under duress when he or she signed the agreement.  An issue related to duress is the timing of the execution of the agreement. An agreement signed too close to the wedding date may support a challenge of duress due to the time constraint, because the challenging party can claim he or she did not have sufficient time to consider the ramifications of the agreement.  A court will also look to whether there was any fraud involved in the process of negotiating and signing the agreement.

Finally, the court will consider whether each party had separate counsel to advise them. While this is not required, courts have considered the issue of separate and independent counsel many times and although separate representation rarely been found to be a de facto reason for voiding an agreement, it is certainly considered as an important element to the enforceability of a prenuptial agreement.

Prenuptial Agreement Cannot Address Issues Related to Children
It is important to note that a prenuptial agreement cannot address any issues related to children of the marriage.  Thus, if a divorce were to occur, contested child-related issues, such as custody, visitation, and child support would be decided by a court.

Recommendations If You are Considering a Prenuptial Agreement

• Engage in candid discussions with your potential spouse prior to hiring an attorney. Don't simply spring the idea on your loved one.  The process of negotiating and drafting a prenuptial agreement proceeds more smoothly if the couple has had forthright discussions about the financial implications of their marriage and the general concept of a prenuptial agreement.  Try to avoid, however, negotiating specific terms with your potential spouse prior to seeking legal counsel, so that you are not locked into a promise which, upon guidance of counsel, may not be advisable.
• Enter into the process well in advance of your wedding date.  This avoids the stress of one party later claiming duress due to the pressure created by the time constraint.
• Hire separate counsel.  Each party should have his or her own attorney who can explain spousal property rights upon divorce and death and any waivers of those rights that are made in the agreement.  Both spouses should have a full understanding of their rights upon divorce as well as upon the death of the other spouse, so that any waiver of those rights is made by informed decision.
• Prepare detailed financial disclosure statements. This should include a statement of all assets and liabilities. Each spouse should disclose their annual gross income, interests in family trusts, and potential inheritances.  This helps defend against a challenge by either party that he or she did not understand the value or extent of the financial rights that were waived.
• Keep in mind that the process of negotiating and signing a prenuptial agreement can often lead to tension, even for mature couples.  The most difficult aspect of a prenuptial agreement is that it is essentially a business transaction negotiated between two parties who are in love.  In addition, in order to protect their respective clients, the lawyers involved must negotiate and draft the agreement as if a divorce will occur.  Inevitably, the process of drafting a prenuptial agreement brings up emotional issues for one or both parties. If you decide that you want to have a prenuptial agreement, you, your potential spouse, and your attorney should all be attuned to the potential emotional issues that may surface.

Please do not hesitate to call Dana Perry (423-757-0228) or Judy Hicks, C.P.A. (423-321-0303), if you have any questions about this bulletin, or if we may assist you with a prenuptial agreement.