Wills and Trusts

Wyatt, Tarrant & Combs, LLP

Premarital Agreement – An Ounce of Prevention

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Premarital Agreements (also called Antenuptial Agreements, Marital Contracts, etc.) are contracts entered into between two people who are planning to marry.  The contract can set out their rights and obligations (a) during the marriage, (b) in the event of a divorce, and (c) upon their death. Any or all of these areas of concern can be addressed in a Premarital Agreement. The terms are agreed upon and the document is signed prior to the marriage ceremony.  Tennessee, as well as most other states, recognizes and enforces these agreements if they are properly prepared and signed by the parties.  Whether or not a couple ultimately chooses to enter into such an agreement, they should discuss it with one another and with an attorney before taking the marriage vows.

The United States has the highest rates of marriage, divorce and remarriage of any country.  Recent statistics show that after the death of a spouse or after divorce, fewer people remain single today than at any point in this country’s history.  We have the same rate of death as every other country; everyone dies.  It is more important than ever that you consider the legal consequences of marriage and the division of property and support and ultimately what will happen to your property upon your eventual death.

Many couples may discuss who will be expected to do what during the marriage, how debts will be paid, what contributions each will be expected to make (financially or otherwise).  There are several other issues that are important, yet often ignored, by couples who plan to marry.  Younger couples tend to have fewer assets and be less “set in their ways” than older couples.  They can adapt.  Their expectations and habits evolve with the marriage.  Older couples and couples who have been married before often have accumulated separate assets. They may have legal or moral obligations to children which might be complicated by remarriage. They may wish to protect assets for their children in the event of their death or in the event that the marriage ends in divorce.  They also have more definite ideas about what they expect from their partners.

It is often said that “marriage changes things.”  This is especially true in a legal sense.  There are certain rights and obligations that are created as a result of two parties being married.  Those rights and obligations operate: (a) during the marriage, (b) at the death of one of the parties, and (c) upon divorce.  These rights and obligations are set out in the laws created by state and federal government. These laws are interpreted and enforced by the courts.  It is a “government plan” for your life.  The plan is not necessarily what you want or need.  It is often unfair, unreasonable, unjust and totally inappropriate to your situation.

If you wish, you can change or even do away with many parts of the “government plan.”  You and your future spouse can create a plan that is suited to your unique situation.  You can do so with the advice and counsel of professionals who are trained to assist you in considering relevant issues and to offer you workable options.  The Premarital Agreement can and should deal with the possibility of divorce and the inevitability of death.

In Tennessee, if you die while you are married, your widow(er) can choose to take a certain percentage of your estate (the elective share) regardless of what your Will says.  If you have no Will, your surviving spouse is generally entitled to at least one-third of your estate.  Additionally, your surviving spouse is entitled to: (a) take “exempt property” up to a value of Fifty Thousand Dollars ($50,000), (b) take a reasonable allowance of money for the purpose of maintaining his/her life style for a period of one year, and (c) take a homestead exemption of Five Thousand Dollars ($5,000).  These rights are part of Tennessee’s “government plan.”  Other states have similar “government plans.”

Likewise, there is a “government plan” which will dictate what your rights and obligations are in the event of a divorce. Such a plan will define what property, if any, belongs to the individual and what property is “marital property.”  Marital property is generally divided between the two of you.  The fact that the property may be held in your name makes no difference in whether or not it will be considered “marital property.” In divorce situations, property held in one person’s name is often deemed to be “marital property” and divided between the parties. Assets of a business may be divided equally between divorcing parties, rendering all of the assets useless since they are only of value if held together for the purpose of continuing the business.  Classification and division of property, alimony, attorney fees and court costs are all issues that are controlled by the courts in the absence of a Premarital Agreement.

Consider the following example:  Sally is a widow.  She has three children of her former marriage.  Upon her first husband’s death, she ended up with a family business, a house with $300,000 equity, a retirement account with $300,000 and cash in the bank.

Harry has a good job making lots of money, but has recently lost all of his savings in a prolonged and bitter divorce.  He has a house with $10,000 in equity.  He has no children.

Harry and Sally met, fell in love and decided to marry.  Neither considers the possible advantages of a Premarital Agreement. Neither party has a Will.

After their marriage, both of the parties sell their respective houses and use the money to purchase a new house for $310,000.  The home is put in both names.  They consolidate their bank accounts. Each is named the beneficiary of the other’s retirement account.

Ten years into the marriage, Harry begins to drink heavily.  He loses his job, and with it his health insurance benefits.  He treats Sally’s children badly.  Sally’s insurance won’t pay for his rehabilitation attempts because his drinking was a pre-existing condition.  Therefore, the hospital where Harry went to “dry out” looks to Sally to pay several thousand dollars for his failed rehabilitation attempt.

Sally considers a divorce and goes to visit a family attorney.  He advises her that she may well lose one-half of all of the property that has been put in their joint names regardless of the fact that substantially all of it was hers prior to the marriage.  She also learns that she may need to pay Harry temporary alimony prior to the divorce and rehabilitative alimony after the divorce to support him until he can get back on his feet.  Finally, Harry may be entitled to some portion of the family business since it has increased in value during the term of their marriage.  Can Sally afford to divorce Harry?  Will there be enough left for her and her children?

On her way out of the attorney’s office, she is struck by lightening and dies.  In this scenario, Harry gets the house. Harry gets the bank accounts and Harry gets the retirement account.  Because Sally had no Will, Harry gets one-third of “everything else” that his wife owned, including the family business.

What do the kids get?  They each get about 22% (one-third of the remaining two-thirds) of “everything else.”  Of course, a lengthy and expensive court battle might help get the children more of their rightful inheritance.  Then again, it might just waste the little bit they did receive, leaving them with nothing.

In the example of Harry and Sally above, even if Sally had a Will at the time of her death, the consequences would have been bad for her children. Under Tennessee’s “government plan,” Harry would have received 40% of “everything else” and Sally’s kids would have only received 20% each.

Legal consequences of marriage, divorce and death are not the only issues that can be addressed by a Premarital Agreement.  There are certain psychological and emotional concerns that can be alleviated by a properly drafted Premarital Agreement.  This is especially true in the case of second marriages.  Children of a first marriage may feel threatened that their parent is remarrying.  They may fear that their inheritance will be jeopardized by their new step-parent.  Business partners and other family members may have similar concerns.  You or your fiancé may have other concerns which are easily set aside now in the blissful period just prior to marriage, but which may cause a great deal of anxiety later.  Stress factors such as these will greatly increase the likelihood that the marriage will eventually fail.  If they are addressed and resolved prior to the marriage ceremony, much heartache can be avoided.

There are some things that a Premarital Agreement cannot do.  For example, it cannot alter or affect issues regarding children born of (or adopted during) the marraige.  It does not stop you from agreeing to change the Premarital Agreement in the future.  It does not prevent you from discarding it altogether by mutual agreement.

Certain situations cry out for a Premarital Agreement.  Examples include: (a) marriages involving people who have children by prior marriages or relationships; (b) people who are involved in a family business; (c) people who stand to inherit a family business or are partners in a closely held business, (d) marriages where one party has a great deal more wealth than the other party and, (e) marriages in which one party will likely change their current career path to accommodate the career of the other.

Premarital Agreements are often an essential element in estate planning.  They can assure that each spouse will execute and maintain a Last Will and Testament as agreed by the parties prior to their marriage.

In order to create a valid and binding Premarital Agreement, at least two criteria must be met:

(1)       Each party must fully disclose the nature and value of their assets to the other.

(2)       Each party must be given an opportunity to seek the advice of their own attorney or other counsel.

In order to accomplish full disclosure of your assets, assets of any significant value must be identified.  Approximate values should be given.  Each person must give the other enough information so the other may know the nature and value of the assets, or at least be able to determine the nature and value of the assets upon reasonable investigation.  You cannot waive a right to an asset unless you know what the asset is and its value. Therefore, failure to fully disclose any significant assets will, at the very least, take that asset out of the protection of the Premarital Agreement.  If the failure to disclose is in bad faith, it may cause the entire agreement to be void.

A reasonable opportunity to discuss the specific terms of the Premarital Agreement with independent counsel (your own lawyer) is the other indispensable element of a valid Premarital Agreement.  It does no good to set a Premarital Agreement in front of your fiancé the day before the wedding and say “sign it or we won’t get married.”  A Premarital Agreement signed under such duress is not valid. There needs to be time for each party to take the agreement, read it and have it reviewed by their attorney.  It doesn’t matter that they may choose not to have an attorney review it, but  they must have a reasonable amount of time to do so if they wish.

Do You Need a Premarital Agreement?  

The question can best be answered after you talk with a competent professional.  Just as you speak with an estate planning attorney when you make decisions regarding your Will, or a real estate professional when considering purchasing a home, or a CPA when discussing tax issues, a step as important as marriage should be preceded by discussing the legal ramifications with your attorney.  Not everyone needs a Premarital Agreement.  However, most people recognize the advantages of taking care of problems before they arise.

AN OUNCE OF PREVENTION IS WORTH A POUND OF CURE.

Leave a reply. Please note that although this blog may be helpful in informing clients and others who have an interest in information privacy and security, it is not intended to be legal advice. The information on this blog also should not be relied upon to form an attorney-client relationship.

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