Below is a summary of some of the issues that are involved in a Pre-Nuptial Agreement, including consideration as to whether or not to enter into a Pre-Nuptial Agreement, how it should be structured and the topics to be addressed by the agreement.
There are three main issues covered by a Pre-Nuptial Agreement:
1. Death of Either Spouse. The first area a Pre-Nuptial Agreement usually addresses is what happens upon the death of either spouse. Under New York law, in the event of the death of a spouse, the surviving spouse is entitled to a certain portion of the net estate of the deceased spouse. This entitlement is called a "right of election" and the amount the surviving spouse is entitled to is called the "elective share amount". The amount of the elective share does not vary depending on the length of the marriage or any other factor. Accordingly, as soon as you are married, if either spouse dies, the surviving spouse is entitled to elect against the Will, regardless of the terms of the Will. Obviously, if the Will provides the surviving spouse with a greater value, the surviving spouse will not exercise the right of election.
In addition to the right of election under New York law provided above, the surviving spouse is entitled to be the primary beneficiary of 100% of any qualified retirement plan benefit, including 401(k) plan, profit-sharing plan and 403(b) plan, etc. This is true regardless of who is actually named as the beneficiary, unless the spouse signs a waiver of this right.
The simplest form of Pre-Nuptial Agreement is often entered into in situations where each spouse has children from a prior marriage, has assets of his or her own and is self-supporting. Under this simple form of Pre-Nuptial Agreement, each spouse mutually waives the right of election. This means that upon the death of either spouse, the surviving spouse will not be entitled to exercise the right of election, and the Will of the deceased spouse can dispose of the assets in any way the deceased spouse determines during his or her lifetime. In addition, the Pre-Nuptial Agreement can require that the parties mutually waive the right to be named 100% beneficiary of each other's qualified retirement plan. In order to effectuate this agreement, after the marriage, both parties need to sign the actual beneficiary form for the qualified retirement plan waiving the right to be named primary beneficiary.
The Pre-Nuptial Agreement can further provide certain affirmative obligations on the part of the spouses. For instance, the couple can agree that any principal residence acquired during the marriage shall be held in both names as "tenants-by-the-entirety" so that the residence passes outright to the surviving spouse at death. The agreement can provide for other benefits to the surviving spouse at death or disability, such as requiring each spouse to acquire and maintain life insurance or long term care insurance.
When spouses mutually waive the right of election in a second marriage, they acknowledge that each of their assets were developed and/or inherited (possibly from the first spouse) prior to the marriage and that the children of the spouse owning such assets should substantially benefit from these assets. Circumstances vary, and the prenuptial agreement should be carefully drafted to consider each spouse's objectives and circumstances. Some of the factors to be considered are: the level of assets and income of each spouse; type of assets, such as whether either spouse owns an interest in a family business or real estate; how assets were acquired, such as whether by gift or from a former spouse; financial needs of each spouse; age of spouses at the time of the marriage; likelihood of acquiring further assets through work or inheritance.
2. Division of Assets Upon Divorce. Another goal of a Pre-Nuptial Agreement is to provide for the division of assets in the event the parties subsequently divorce.
Under New York law, assets owned by the couple are divided into "separate property" and "marital property." Separate property includes assets owned by each of them prior to the marriage, as well as assets that were gifted to a spouse or inherited by a spouse, either before or during the marriage. The term "marital property" means property that was developed or acquired during the marriage and may also include appreciation in value of separate property during the marriage. So, marketable securities, real estate or other assets acquired during the marriage from income earned by a spouse during the marriage would qualify as marital property.
Often a concern is that the appreciation in the value of separate property during the marriage may be construed as marital property. This can be an issue where one spouse owns a business or investment real estate. Accordingly, a Pre-Nuptial Agreement may provide that all separate property, including all appreciation and income earned on such separate property during the course of the marriage, continues as separate property.
Another solution is to provide that all property that is titled to either spouse will remain the separate property of that spouse. The agreement could provide further that any property held as tenants-by-the-entirety or in joint name with right of survivorship be considered marital property and divided on an equal basis between both parties in the event of divorce. For instance, if a couple were to acquire a residence together and hold the title in joint names, in the event of divorce, the agreement could provide that the residence be divided on a 50/50 basis after the payment of any mortgage. Alternatively, the agreement could provide that any residence or other joint property be divided in the same proportion as each spouse contributed to the cost of the property. There are numerous variations that can be tailored to suit a couple's particular objectives and needs.
3. Support in the Event of Divorce. Under New York law, in the event of divorce, one party may be entitled to maintenance or alimony. This award is often based upon the relative earnings of each spouse, the length of the marriage and other factors. Often, in a Pre-Nuptial Agreement where both parties are self-supporting, each waives the right to support or maintenance.
We do not think of marriage as a contract between the spouses, but it operates like a contract. Each state's laws define the couple's rights and obligations. Most of us, when we marry, are not aware of the terms of the contract until there is a dispute or tragic event, such as one party seeking a divorce, dying or becoming disabled. A Pre-Nuptial Agreement merely changes the terms of the contract to meet the couple's needs and circumstances.
Although a marriage does create rights and obligations similar to a contract, the courts are wary of Pre-Nuptial and Post-Nuptial Agreements, especially where one spouse has more power or financial resources than the other. To ensure enforceability of these agreements, each spouse should be separately represented by counsel and there should be full disclosure of each spouse's assets and income.
Another concern upon marriage is each spouse's liability for the long term care costs of the other spouse, such as the cost of a nursing home. Under New York law, spouses have a duty to support each other, and this includes the obligation to cover nursing home costs. It appears this obligation cannot be fully waived in a Pre-Nuptial Agreement, so it is often advisable for a couple to consider obtaining long term care insurance prior to marriage to protect the other from the burden of these costs.
If a couple is considering varying the "marriage contract" by entering into an agreement, it is best accomplished before the parties marry. However, a couple may also enter into an agreement after they are married, often referred to as a "Post-Nuptial Agreement". As with the Pre-Nuptial Agreement, in order to ensure the agreement will be enforceable by the courts, each spouse should be represented by separate counsel and fully disclose to each other their assets and income.