People ask: “Would we ever have to go to court to enforce a prenuptial agreement?”
There are times that one party challenges the validity of a prenup. If that occurs at the time of a separation or divorce (or sometimes after death), there may be a trial. The judge will weigh the evidence and the credibility of the witnesses before deciding whether to enforce the agreement. These cases are fact-dependent. The judge will decide if the agreement is enforceable only after resolving any disputed facts.
Will state courts uphold prenuptial agreements?
Yes. The right of competent adults to enter into a contract will be respected by a court. Times have changed since the days of Ozzie and Harriet, and prenups are no longer against public policy. Because important rights are being disposed of in a prenup, a party asked to sign one should ask a lawyer to explain exactly what the impact of the agreement is. What property rights or what rights to support would the person have under state law if there were no prenuptial agreement?
A well-drafted prenup will contain a provision that each party has read the agreement and understands the terms of it. It will likely also say that each party was represented by counsel or had the right to be represented, but waived that right. Those “boilerplate” terms will make it difficult or impossible to set aside an agreement once it’s executed. Therefore, it’s very important for each party to know exactly what rights he or she is giving up.
Are all prenuptial agreements enforceable?
No. The facts and circumstances surrounding the execution of a prenup might cause a trial court to invalidate it later. The law of each state will govern whether or not a prenup is valid and enforceable. Some states will enforce a prenup in the same way it enforces any contract; if the terms of the agreement are clear and unambiguous, then a court will enforce it as written, even if it isn’t fair and equitable. In other states, the court may find the agreement clear and unambiguous, but invalidate it because it’s “unfair” or “unconscionable.”
What does Michigan law say about enforcing prenuptial agreements?
A harsh result was reached in a Michigan court where one party sought to invalidate an agreement that allowed the other to walk away with nearly all of the assets that were accumulated during a 26-year marriage. (The pre-marital separate property was worth only about $2,000, but the husband acquired millions in property titled in his name alone during the marriage). Because this is the seminal case that applies to all Michigan prenuptial agreements and is a potential scenario for any prenuptial agreement executed in any state, I will discuss this case in detail.
In Reed v Reed, a case decided by the Michigan court of appeals in 2005, the parties executed an agreement six weeks prior to their marriage. The agreement provided that each party would have “complete control over his or her separate property” acquired “by either of them in their individual capacity.” At the time of the marriage in 1975, their collective net worth was $20,000. The wife worked for a corporation and the husband practiced law, ran some non-profits, and invested in real estate. The incomes of both husband and wife were nearly identical between 1977 and 2000. Late in the marriage, the wife received net proceeds of about $400,000 from settlement of a lawsuit. She used most of this money to pay outstanding marital debts, living expenses for the family, college tuition for their children, and a down payment on a new residence.
The wife filed for divorce in October 2000. The husband claimed that he was entitled to everything he had purchased in his own name or through partnerships over the course of the 26-year marriage. The wife filed a motion asking the trial court to hold that the 1975 prenup was unenforceable because:
(1) The husband had failed to disclose all of his assets at the time it was executed;
(2) The agreement the husband had produced was not the one that she had signed [Hmm. Did she not keep an original? Were there no safeguards as to original copies to permit each party the opportunity to prove the agreement? Here’s a reason why competent counsel would help.], and;
(3) Because of the change in the parties’ circumstances between the time the agreement was executed and the divorce, the agreement was unconscionable and unfair and should not be enforced.
Husband answered this motion by saying the parties had voluntarily entered into the agreement, that all of the assets had been disclosed, that the agreement wasn’t so unconscionable as to make it unenforceable, and that it was necessary to have the agreement because the wife would not save money. The husband further said the parties had lived by the agreement during the marriage: they’d kept separate accounts, purchased property in their own names, and that the wife had executed quit claim deeds to him, extinguishing her dower rights in his real estate. He also said there was nothing to keep the wife from investing her money and from working to earn an income.
The trial court heard the motion and held that the prenup was invalid, primarily because circumstances had changed since its execution, making its enforcement unfair and unreasonable. However, the court of appeals in Michigan reversed the trial court, saying the trial court had erred by finding changed circumstances as justification for invalidating the prenup.
Michigan law at the time Reed was decided, and today, supported invalidating a prenuptial agreement (1) when obtained through fraud, duress, mistake, or misrepresentation or nondisclosure of material fact; (2) if it was unconscionable when executed; or (3) when the facts and circumstances are so changed since the agreement was executed that its enforcement would be unfair and unreasonable. See Rinvelt v Rinvelt, 190 Mich App 372, 475 NW2d 478 (1991).
According to the court of appeals panel deciding Reed, the trial court thought it “should enforce specific terms of the agreement if the circumstances at the time that the marriage ends were what the parties foresaw at the time they entered the prenuptial agreement” and that “given the duration of this marriage, 26 years, the age and financial status of the parties at the time they signed the agreement, and the significant changes in the financial status of both parties since that time, I believe it would be both unfair and unconscionable to enforce an agreement executed 26 years earlier under far different facts and circumstances and certainly with a marital estate that could not have possibly been foreseen to have grown to the proportion that it has by these parties.”
The court of appeals stated the trial court “invalidated the prenuptial agreement because it found that the length of the parties’ marriage and each party’s acquisition of substantial assets during the marriage were unforeseeable changed circumstances rendering it unfair and unreasonable to enforce the parties’ prenuptial agreement.”
The Reed panel approved the trial court’s reliance upon an unpublished case, Kuziemko v Kuziemko, Docket No. 212377 (decided December 4, 2001). In Kuziemko, a prior panel of the court of appeals had held that for “a change in circumstances to be uncontemplated, the event must not have been reasonably foreseen by the parties prior to or at the time of the making of the agreement. This, said the Reed court, “precludes the judiciary from substituting their own subjective views of ‘fairness’ contrary to an express written agreement.”
The Reed panel quoted extensively from Kuziemko:
“Prenuptial agreements . . . provide . . . people with the opportunity to ensure predictability, plan their future with more security, and, most importantly, decide their own destiny. Moreover, allowing couples to think through the financial aspects of their marriage beforehand can only foster strength and permanency in that relationship. In this day and age, judicial recognition of prenuptial agreements most likely ‘encourages rather than discourages marriage.’
“In sum, both the realities of our society and policy reasons favor judicial recognition of prenuptial agreements. . . . [W]e see no logical or compelling reason why public policy should not allow two mature adults to handle their own financial affairs. Therefore, we join those courts that have recognized that prenuptial agreements legally procured and ostensibly fair in result are valid and can be enforced. ‘The reasoning that once found them contrary to public policy has no place in today’s matrimonial law.’ [citations omitted]”
Stating that “courts cannot make contracts. They may only construe them,” the Reed panel said that “parties who negotiate and ratify antenuptial agreements should do this with the confidence that their expressed intent will be upheld and enforced by the courts.”
The court of appeals said that the trial court had misapplied the principles in Kuziemko. Neither the length of the marriage nor what happened to be a benefit to the defendant husband constituted a “change of circumstance” that justified invalidating the agreement. According to the court of appeals:
“A long marriage, which is, indeed, the whole idea of marriage, is as easily foreseen as a short marriage.”
The Reed panel also found error in the trial court’s decision that the growth of the parties’ assets over the years justified voiding their prenuptial agreement. In fact, held the court, this growth was foreseeable. The court said the parties agreed to maintain their separate property as though they were not married, citing this language in the Reeds’ prenuptial agreement:
“Separate Property. Except as herein provided, each party shall have complete control of his or her separate property, and may enjoy and dispose of such property in the same manner as if the marriage had not taken place. The foregoing shall apply to all property now owned by either of the parties and to all property which may hereafter be acquired by either of them in an individual capacity.”
The Reed panel stated:
“In essence, the parties agreed to be captains of their own financial ships and to “decide their own destiny.” [citations omitted] Having agreed to do so, it was clearly foreseeable at the time the agreement was entered that the parties would acquire separate assets over the course of the marriage. Further, that the parties’ separate assets could grow at disparate rates and that one party’s assets might grow significantly more than the other party’s would have been readily apparent. In sum, the fact that the parties’ assets grew significantly over many years can hardly be considered an unforeseeable changed circumstance that justifies voiding the parties’ prenuptial agreement. Similarly, the benefit accruing to one party from the disparate growth of his assets is simply not a changed circumstance rendering the agreement unfair and unreasonable to enforce.”
Thus, the Reed panel reversed the trial court and enforced the prenuptial agreement, stating:
“The parties’ prenuptial agreement is clear and unambiguous; changed circumstances do not render its enforcement unfair and unreasonable. Accordingly, the agreement should be enforced.”
This is why it’s important for you to consult with a family law attorney in your own state who can guide you to make sure the agreement is enforceable in your state. No matter whether you are the party with assets or potential assets to protect, or if you are the weaker party with no assets, but with many years to invest in a marriage, a prenup is a security that should benefit both partners.
You need to have the guidance of an experienced family lawyer to help you decide whether the terms of a proposed prenuptial agreement will protect you or will harm you. And you also need to get clear advice on how the separate assets will be treated. If one party uses income earned during the marriage to purchase separate, titled retirement accounts and the other party uses income earned during the marriage (or separate monies owned prior to the marriage) to pay the majority of the family expenses incurred during the marriage, guess who is going to come out on the short end of the stick if these issues are not thoroughly discussed while the prenup is being drafted and if these issues are not addressed in the prenup.
When will a court generally enforce a prenuptial agreement?
Enforceability and validity will vary from state to state. The following guidelines should be followed to ensure enforceability of a prenuptial agreement:
- The Agreement should be written in clear and unambiguous language, and should fairly and accurately describe what rights and obligations each of the parties has in any of the property owned by either party (or both).
- The Agreement should be specific about determining the rights and obligations with respect to property (and debt) owned prior to the marriage or property (and debt) acquired during the marriage, or both.
- The Agreement should be in writing and signed by both parties prior to the marriage.
- A prenup should not be executed on the day of marriage or even a week before the marriage. It’s important to establish that both parties have had ample time to review the agreement with a lawyer prior to the marriage.
- Both parties to the prenuptial agreement should have separate legal counsel.
- The prenuptial agreement should be entered into voluntarily; it should not be unconscionable. In other words, it should not be so one-sided and oppressive that no person in his or her right mind would sign it without duress, coercion, or fraud.
- Each party should provide a specific disclosure of his or her financial information. Some courts will enforce a prenuptial agreement if the parties have waived that disclosure. The disclosure should be in writing, attached to the agreement, and incorporated by reference within the agreement.
- Enforceability is more certain when the prenuptial agreement does not harshly and unfairly eliminate a party’s rights to property acquired during the marriage.
- How long does it take to draft and sign a prenuptial agreement?
The amount of time that it takes to draft and sign a prenuptial agreement depends upon several things, mainly how complex the parties’ estates are and whether they have children from a former marriage. It can be time-consuming if substantial negotiation is required.
Is it a good idea to buy a pre-printed generic prenuptial agreement from a website and fill in the blanks? Will this protect us?
No. As you’ve seen in the discussion above, active involvement of an attorney or attorneys to represent each party is important. Finding a lawyer whose practice is focused on family law will ensure that the lawyers drafting the agreement are familiar with how the laws of the state will look at enforceability of the agreement to uphold the parties’ intent. A specialist in family law will be intimately familiar with current law in the state where you live. Moreover, there are numerous complexities that should not be attempted to be resolved with a “one-size-fits-all” generic agreement. Additionally, when choosing a specialist in family law, you’ll benefit by knowing the personal reputation of the lawyer you choose. You’d have no way of knowing the identity, the experience, the educational background, the level of expertise, or the reputation of the person who prepared a generic prenuptial agreement. You’ll have no way of knowing whether the generic agreement has taken into consideration the current state of the law in your locale.
Is it a good idea to address the issue of “commingling” of separate property in a prenup?
Yes. In most marriages commingling of assets occurs. Sometimes people have a prenup and they simply fail to understand that the prenup will not protect them as was intended if it doesn’t carefully address the issue of commingling. For example, if one of the parties uses his or her separate assets to pay marital bills, the laws of most states will consider that they have intended to gift the other spouse by those expenditures and there will be no reimbursement if the marriage ends by death, separation, or divorce.
If separate monies are used for a down payment on a house or other property that is titled jointly, laws in some states will allow traceable assets to be considered as separate property. But in other states, the law will consider those separate monies to be “commingled” with marital assets, and will consider that the monies are “transmuted” or changed into joint marital property or community property. If the parties intend that they may use some separate property to acquire other different property that they will title jointly and that in doing so they will not lose their right to claim that the monies invested in this different property are still their separate property, then they should make that clear in a prenup.
Failure to have the prenup specifically address these issues may lead to prolongation of litigation at the time or separation or divorce and may cause serious problems if one party predeceases the other, and each party intends for his or her estate to benefit surviving children from a former marriage, the jointly titled property will pass as a matter of law to the surviving spouse. Unless each party’s interests have been clearly defined, assets intended to remain separate can end up, ultimately, in the hands of the non-owner spouse’s children. For this reason, it’s important to set forth the intent of the parties clearly in the prenuptial agreement.
What is meant by “separate” assets vs. “marital” assets?
Separate property is what each spouse owned at the time of the marriage, and should include liabilities at that time as well. Generally speaking, marital property is everything that is accumulated during the marriage from the joint efforts of each party, each acting in his or her respective roles.
When a couple divorces in some states, each party keeps his or her separate property owned prior to the marriage so long as it was maintained in the property owner’s sole name during the marriage and not commingled with marital assets. Some states will allow some commingling and still protect separate assets if they can be “traced” or specifically identified as, for example, “the down payment for the house.” for example.
It’s becoming more common in these days of upscale living that both parties work, bringing in two incomes to support the family’s lifestyle. However, it remains true today, as it did 20 or 30 years ago, that if a wife (or husband as the case may be) is a stay-at-home parent who cares for the parties’ children and home, and who facilitates the other spouse in his or her career endeavors by making it possible for the working spouse to be free to do what it takes to build a business or advance a career, that a court will consider that the “non-working spouse” is contributing in his or her respective role to the accumulation of marital assets. Therefore, the term “joint effort of the parties” doesn’t necessarily mean that one spouse is contributing money to the family coffers. That spouse will generally be awarded half of whatever is earned and accumulated between the date of the marriage and the date of separation or divorce.
If the parties have not reached an agreement when divorcing, the court divides the marital property in the proportion that it deems “just” after considering all relevant factors. If you entered the marriage with a house or investment portfolio or an inheritance, and kept title to those assets separate during the marriage, these assets will be considered your separate assets and not subject to division. There are two exceptions to this rule, however.
The increase in value in separate assets during the marriage may be considered joint if your spouse contributed to its appreciation. Usually the court considers passive appreciation separate property, but active appreciation is subject to division. Sometimes assets purchased with income from your original assets, will be considered marital property and subject to division upon divorce.
Moreover, some states, Michigan for example, have statutes that allow a court to award a portion of separate property to the other spouse. This exception to the rule that a party leaves the marriage with his or her separate assets comes into play if the court decides that, after division of the marital assets, “the estate and effects awarded to either party are insufficient for the suitable support and maintenance” of that party.
If my intended asks me to consider a prenuptial agreement, what should I be concerned about?
Keep in mind as well, that income contributed during the marriage to a retirement plan (such as a 401(k) would be considered marital property. Consequently, upon divorce, the court could grant your spouse certain rights to your retirement plan account accumulated during the marriage. The parties should address some element of fairness in the prenup. It wouldn’t be fair, for example, if one party were permitted by the agreement to protect income earned during the marriage by building up equity in a separately titled property while, under the agreement, the other party’s income is allocated for paying general family expenses. If this were the case, then if the parties separate or divorce, the first party would end up with substantial equity while the other’s wealth would have been poured down a rat hole.
A prenuptial agreement allows the engaged couple to alter the definitions of separate and marital assets in order to protect their assets and control distribution of assets upon death or divorce. It’s important that both parties exercise tact and are fair with each other. Don’t sign a prenup that seems unfair. Let your lawyer negotiate an agreement that levels the playing field and protects your interests.
Does my prenup need to address liability for debts incurred in connection with the ownership of separate property before or after the marriage?
It can and it should.
Does a prenuptial agreement mean the parties don’t trust each other?
Maybe, but a prenuptial agreement usually is grounded in realism rather than a lack of trust. For older couples who are marrying a second time, the parties simply want to protect their children. Younger couples may simply feel that a prenuptial will save expense later if the marriage does not work out.
It is important to approach marriage as a partnership and to approach a prenup with a sense of fairness. It’s not uncommon for one spouse to be the wage-earner, while the other is a stay-at-home parent and/or the cheerleader for the spouse who is building a career or a business. While the marriage may seem like a partnership, things can and do get ugly in a divorce. On the one hand, the worker bee may feel that it’s unfair that he or she (usually he) has to split his hard-earned pension or the value of a business built during a marriage. On the other hand, if the stay-at-home spouse hadn’t been there building and caring for the nest, freeing up the worker bee for career-promoting travel and development, then the business prospects might not have panned out so well.
Retirement accounts are really only deferred income — income that would be marital if it had otherwise come into the marriage as savings or had been used to purchase a jointly titled asset. It’s not fair to penalize the stay-at-home spouse by allowing one spouse to leave the marriage with assets that are truly marital in character, if not title.
Thus, it is important when discussing the terms of a prenup that parties have reasonable and fair expectations. Think of marriage as a partnership and build incentive for both partners to contribute to the well-being of the partnership. For sure, it will be easier to be fair at the beginning of a marriage than after the relationship has turned sour. This is why both parties should have separate legal representations to protect their interests.
You may read Reed v Reed here. If you are contemplating a prenup, it’s
important to understand the specifics, and seeing how the court of appeals
handled the Reed case will help you understand the flaws in their prenup and
perhaps to avoid those mistakes.
Post-nuptial Agreements. These are a different thing from Prenups. I’ll be writing about them in my next post, to alert you to the importance of differences in how Michigan courts enforce postnuptial agreements.
Jeanne M. Hannah is experienced in the drafting of prenuptial, postnuptial, and cohabitation agreements. If you have any questions that haven’t been answered by this second article about prenuptial agreements, please leave your questions or comments below, of email Jeanne at firstname.lastname@example.org
To schedule an initial meeting with Jeanne Hannah or just ask a question, call or send an e-mail today. Contact Traverse City, Michigan child custody lawyer, Jeanne Hannah at 231-223-7864 Email Jeanne M Hannah.