March 14, 2015

Should You Get a Prenuptial Agreement?

by Stites & Harbison, PLLC

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Whether or not to get a prenuptial agreement before getting married isn't an easy decision.

The advisability of a prenup turns in large part on whether the default law that will govern the marriage if it ends by death or divorce is agreeable.

If you can live with the default rules, a prenup might not be needed.

If the default rules present problems, then a prenup may make sense.

What are the default rules for marriage, without a prenup? In Kentucky, they fall into four main areas: estate administration, alimony, division of property, and liability for your spouse's debts.

Default Rules of Marriage for Estate Administration

A surviving spouse has the right to serve as administrator of their deceased spouse's intestate estate.

If the deceased spouse dies without a will, the surviving spouse also has the right to receive one-half of their deceased spouse's real and personal property.

If the deceased spouse dies with a will, the surviving spouse has the right to renounce their rights under the deceased spouse's will, and instead receive one-third of the deceased spouse's real property, and one-half of the deceased spouse's personal property.

Default Rules of Marriage for Alimony

In a divorce proceeding, a court may grant a maintenance order for either spouse only if it finds that the spouse seeking maintenance lacks sufficient property (including marital property apportioned that spouse) to provide for the spouse's reasonable needs.

In addition, the spouse receiving maintenance must be unable to support himself or herself through appropriate employment, or be the custodian of a child whose condition or circumstances make it appropriate that the custodian not be required to seek employment outside the home.

The amount and duration of the maintenance order will turn on several factors, including:

The duration of the marriage

The ability of the spouse paying the maintenance to meet his or her needs while meeting those of the spouse receiving the maintenance

The age, physical, and emotional condition of the spouse seeking maintenance

The standard of living established during the marriage

The time necessary to acquire sufficient education or training to enable the party seeking maintenance to find appropriate employment

The financial resources of the party seeking maintenance (including their share of marital property), and his or her ability to meet his or her needs independently, including the extent to which child support payments also include an element of support for that party

Default Rules of Marriage for Division of Property

Upon divorce, each spouse retains his or her separate property.

Separate property includes property acquired by gift, bequest, devise, or descent during the marriage and the income from such property, unless there are significant activities of either spouse that contributed to the increase in value of the property and the income from such property.

Separate property also includes property acquired in exchange for property acquired before the marriage, or in exchange for property acquired by gift, bequest, devise, or descent.

Property acquired by a spouse after a decree of legal separation is separate property. So, too, is the increase in value of property acquired before the marriage to the extent that such increase did not result from the efforts of the parties during marriage.

All other property acquired by either spouse during the marriage is marital property, unless otherwise excluded by a valid agreement of the parties.

All property acquired by either spouse after the marriage and before a decree of legal separation is presumed to be marital property, regardless of whether title to the property is in a spouse's individual name, or in some form of co-ownership such as joint tenancy, tenancy in common, tenancy by the entirety, or community property.

The presumption that property is marital property can be overcome by a showing that the property is actually separate property.

Retirement benefits or accounts of one spouse may be excluded from classification as marital property (or as an economic circumstance relating to the division of property), but only to the extent that a similar amount of retirement benefits or accounts of the other spouse are similarly excluded.

The court will divide marital property without regard to "marital misconduct" in "just" proportions considering "all relevant factors," including:

The duration of the marriage

The value of the property set apart to each spouse

The contribution of each spouse to acquisition of the marital property, including a spouse's contribution as a homemaker

The economic circumstances of each spouse, including the desirability of awarding the family home (or the right to live there for reasonable periods) to the spouse having custody of any children

Default Rules for Marriage for Division of Debts

In contrast to its statutory presumption that property acquired during the marriage is marital property, Kentucky has no statutory presumption about whether debts incurred during a marriage are marital or non-marital.

Similarly, Kentucky does not have a presumption that debts must be divided equally, or in the same proportions as marital property.

Factors in allocation of debts between spouses include who received the benefit relating to the debt, and the extent of a spouse's participation in the debt.

Factors also include whether the debt was incurred to purchase assets designated as marital property, whether the debt as necessary to provide for the family's maintenance and support, and the respective economic ability of each party to assume the debt.

A Prenuptial Agreement Can Change Marriage's Default Rules

Before 1990, Kentucky permitted prenuptial agreements intended to take effect upon death, but did not enforce provisions of prenuptial agreements intended to take effect upon divorce. This rule changed with the Kentucky Supreme Court's opinion in Gentry v. Gentry.

Gentry held that divorce-related provisions of prenuptial agreements were enforceable, subject to three limitations:

Was the agreement obtained through fraud, duress, or mistake, or through misrepresentation or non-disclosure of material facts?

Is the agreement unconscionable at the time enforcement is sought?

Have the facts and circumstances changed since the agreement was executed so as to make its enforcement unfair and unreasonable?

For purposes of prenuptial agreement enforcement, "unconscionable" means "manifestly unfair and unreasonable." The opponent of the agreement has the burden of proving the agreement is invalid, or should be modified.

Kentucky's Supreme Court has found that for a prenuptial agreement to be substantively fair, the circumstances of the parties at the time the marriage is dissolved are not so beyond the contemplation of the parties at the time the contract was entered into as to cause its enforcement to work an injustice.

It has also held that a finding of unconscionability requires a comparison of the situations of the two parties, and that a "gross disparity between the parties' resources" may render a prenuptial agreement unconscionable.

The emphasis of the inquiry, however, relates to the reasonable expectations of the parties as contemplated by the agreement.

Best Practices for Prenuptial Agreements

Holding all other elements equal, a prenuptial agreement will be most enforceable when:

Each spouse has separate, competent, effective legal representation

All assets and liabilities of each spouse are fully disclosed and accurately valued

Neither spouse is rushed in evaluating the agreement

The agreement considers a wide range of financial outcomes for each spouse, and makes reasonable provisions for each spouse under various outcomes

Who Should Obtain a Prenuptial Agreement?

In one way, this question is easy to answer in hindsight: if you're the propertied spouse, and you divorce, you wish you'd obtained a prenup.

For those without a crystal ball for their romantic and economic futures, some situations when a prenup may be especially advisable include:

Marriages in which one or both spouses already have children

Marriages between spouses who likely won't have children together, but who have material assets and different beneficiaries (an example of this could be a childless couple in which each spouse wants to benefit his or her own siblings, nieces, and nephews)

Marriages between people with lopsided wealth

Marriages in which one or both spouses has (or will have) substantial inherited assets that the spouse(s) will manage actively

Owners of businesses that may have a "price pop" type of liquidity event

I think there are rather strong parallels between prudent asset protection planning and premarital agreement planning. In each instance:

No solution is perfect, or guaranteed

Exercising restraint and avoiding the appearance of overreaching can lead to better outcomes

Planning in advance creates options that won't be available if stopgap measures are taken after a problem arises

Trust planning and other estate planning tools can have useful dual (or triple) applications for creditor and/or divorce protection

It goes without saying, however, that the best pre-marriage planning you can do is about your good judgment, not your legal arrangements.

Divorce is a life cycle planning "neutron bomb" and no matter how capable your advisory team, it won't leave you unaffected. Like so many other areas of life, choose wisely!