Overview of Premarital Agreements

By George H. Norton, of Counsel, Lakin · Spears, and Garrett C. Dailey, President, Attorney's Briefcase, Inc.

Reproduced from commentary in Lawgic's California Pre/Post Marital Agreements

A premarital, sometimes also called an antenuptial or prenuptial, agreement, is a written agreement between two people prior to marriage as to what their property and possibly support rights will be when their marriage ends.

The first thing you must understand about these agreements is that they are very important, very powerful, and unless overturned, will control the distribution of property when the marriage ends. See In re Marriage of Higgason (1973) 10 Cal.3d 476, 485, 110 Cal.Rptr. 897, 516 P.2d 289, disapproved on other grounds; In re Marriage of Dawley (1976) 17 Cal.3d 342, 352, 131 Cal.Rptr. 3, 551 P.2d 323, stating: "Antenuptial agreements, if they contain certain essential elements, are favored by the courts."

The next thing to be aware of is that all marriages must end, as a matter of law. If they do not end by an annulment or divorce, they end by the death of one of the spouses. Whether a premarital agreement is appropriate for the parties depends upon their circumstances and the purposes which the agreement is to serve.

With the exception of matters relating to children of the marriage, these agreements may cover almost the entire gamut of the parties' financial relationship. "By careful premarital planning and a willingness to mix realism with romance, the bride and groom can protect their existing assets, assume responsibility for their existing debts, characterize after-acquired property, allocate income earned (actively and passively) during the marriage, address income tax issues that will arise during marriage and in the event of dissolution or death, and cover general testamentary issues as well as those that may exist if there are children from prior marriages." (Quoted from superseded opinion in In re Marriage of Pendleton and Fireman (1998) 62 Cal.App.4th 751, 72 Cal.Rptr.2d 840.)

A premarital agreement is not appropriate for every couple. Initially, most people don't need a premarital agreement, as they start out in life with little in the way of assets and relatively low earning ability. Second marriages or marriages later in life are different. Here, most family law attorneys recommend premarital agreements as they can not only protect premarital property but, in many cases, can greatly reduce the cost of attorney's fees that might be incurred fighting about the character of that property should there be a divorce.

If the purpose of the premarital agreement is to protect property acquired during the marriage from community property claims of a spouse, then an agreement is definitely required. Generally, it will be the party with the higher earning potential and/or more property who will want the agreement. However, this is not always true. A wealthy man or woman who has transferred his or her property into trusts for the benefit of his/her heirs and is living off of their income, may not care about a premarital agreement. In fact, s/he may even resist one, as it would force him/her to fully disclose this to his/her spouse. Here, it might well be the "weaker" party who seeks the protections that could be provided through a premarital agreement.

Protecting one's property for children of a former marriage is a common reason for a premarital agreement. A well-drawn premarital agreement can prevent unseemly and expensive lawsuits between the surviving spouse and the deceased's heirs.

Another important function is protecting against the premarital debts and obligations of one of the spouses. For example, if the husband is coming into the marriage with outstanding tax liabilities, support obligations to a former spouse or children, a pending lawsuit, debts to other creditors, or other such real or potential obligations, a premarital agreement may be helpful in protecting the new spouse's property or earnings from the other spouse's creditors.

Premarital agreements can provide a comprehensive plan for property division or they can deal with just one or a few assets. For example, if the parties want to specify how a house owned by one of them prior to marriage will be dealt with, that would be a proper subject for a premarital agreement. Likewise, if they want to agree how all of their property will be divided in the event of death or divorce, that's okay too.

Premarital agreements can also provide certainty as to the law that will be applied to the property division when the marriage ends. One of the most constant features about California marital property law is that it is constantly in a state of flux. With a premarital agreement, the parties can have certainty in the division of their property by protecting themselves from changes in the law or changes in their attitudes.

Finally, in many states, premarital agreements may limit or eliminate the court's ability to order spousal support in the event of a divorce. While this has been the rule in most states for many years, a California Appellate Court opinion approved such a waiver for the first time in March, 1998. In re Marriage of Pendleton and Fireman, supra. The Supreme Court granted review of this case on June 17, 1998, so we will know whether these provisions are binding in California in about a year. In the meantime, many attorneys will probably include them in the agreements that they draft, presumably with full disclosure as to the unsettled nature of the law.

One important issue to note is that this program assumes that the agreement is entered into under California law and will be enforced under California law. If the parties seek to dissolve their marriage in another jurisdiction, additional uncertainty is introduced. Although, if the jurisdiction applies California law, as it should, the agreement should be enforceable, the courts of the other jurisdiction might choose to ignore this provision and interpret the agreement under its own law. In such event, there is no way of predicting the outcome. Thus, if an agreement is entered into under California law and the parties contemplate moving to another state, it is recommended that the parties have the agreement reviewed by an attorney in the new state for an opinion as to its enforceability in that state.

To be enforceable in any state, the terms of the agreement should be very clear. If you want certain property to remain separate and not subject to division upon divorce, you should list that property precisely and provide that it will remain the separate property of the spouse who owned it prior to marriage and that the other spouse will have no interest in it.

The agreement should deal with all foreseeable issues relating to that property, including the following:

• If the owner spouse spends time during the marriage working on the property, will the community property receive an interest by virtue of those efforts?

• What if the non-owner does the same?

• If the owner spouse uses his or her earnings during marriage to maintain or improve separate property, will the community property be entitled to reimbursement for those funds?

• If a loan is taken out to improve separate property, will the community property get an interest because of that?

It is best that all of these types of issues be dealt with in the agreement. A mere statement in the agreement that this property is and will remain the separate property of the owner spouse does not cover these types of related issues.

The agreement should not attempt to limit either spouse's obligation to pay child support or determine who will have custody of children should the marriage break up. Those types of restrictions are contrary to public policy in all states and are unenforceable. Worse yet, these types of provisions can affect the entire agreement and lead a court to question all of the terms of the agreement.

Other proper provisions for consideration in a premarital agreement include the following:

• Treatment of premarital debts;

• Division of living expenses during marriage;

• Payment of expenses for children of a former marriage;

• Life insurance on one or both of the spouses;

• Payment of taxes on joint earnings and separate earnings;

• Whether amendments may be made orally, or just in writing;

• Treatment of property purchased or acquired in joint names; and

• Choice of law, whereby the parties agree which state's law will apply. This becomes crucial if they move to a different state after signing the agreement.

One of the major uses of a premarital agreement is to provide that the earnings and accumulations of each of the spouses will be the separate property of the acquiring spouse. Without the agreement, the rule is the opposite.

Premarital agreements are very flexible documents. They can be, and should be, drafted to meet the specific needs of the parties, now and in the future. They can be drafted to change over time. For example, assume that a recently divorced wife had to fight to obtain the residence and is nervous about remarrying and later having to do so again if the marriage isn't successful. The agreement might provide that her new husband will obtain no interest in the residence during the parties' first ten years of marriage. Thereafter, he might acquire an interest at the rate of 5% a year such that by their 20th wedding anniversary, he would have acquired a 50% interest in the residence (or 2.5% per year with 50% interest on the 30th anniversary). The point is that these agreements are not an all or nothing proposition. They should be drawn to recognize that terms that are fair during the parties' first five years of marriage may not be fair after 25 years.

The initial tendency of some clients will be to demand that all property remain separate and that there be no community property. This is an easy agreement to draft. However, unless both parties have substantial means, it will also usually be unconscionable and the drafting attorney should try to convince the client that it is better to be more generous. First, the marriage is probably more likely to be successful if there is some economic fairness to it. Second, the agreement is much more likely to be enforced if it is fair. Third, as discussed below, circumstances change and this type of agreement grows more unfair as the years go by.

One should remember that premarital agreements are one of the few types of agreements that people enter into that are very likely to be challenged. This is in part because most of these agreements have no time limits. An agreement that may be fair when the parties are 30 or 40 years old, may not be fair when they are 60 or 70, or at least may have results that the parties would not have desired when it was entered into many years before. Likewise, an agreement that there will be no spousal support may be reasonable when both parties are employed and there are no children. But time has a way of changing expectations and realities. Thus, the agreements are often unfair when the marriage ends and the spouse who is hurt by the agreement will feel that he or she has nothing to lose by challenging it. If the agreement is to be enforced, it is essential that it be drafted correctly, that the proper procedures be observed when it is signed, and that nothing have occurred during the marriage that a court might view to have been a waiver, abandonment, or modification of the agreement.

[Portions reprinted by permission of author from The California Divorce Guide.]